Top tips for evaluating local real estate markets

By Dustin Graham

One of the core tasks for both new and experienced investors is to determine the geographic location(s) they want to invest in.

There’s a host of elements that may make one particular location more suitable than another, but here’s four attributes every investor should consider:

1. What is the economic state of the city? Is the local market growing, stabilizing or declining? As we saw in 2008, no city is immune to a potential downturn. However, some cities may be able to withstand more financial pressure than others. Understanding what economic factors are propping up a particular market is a valuable source of information to help predict future trends.

2. Evaluate the ratio between owned versus rented property. A market that is, or will be, saturated with rental properties will likely experience a fall in rental rates. The more options tenants have to choose from, the less they will be willing to pay. Simply put, the law of supply and demand is always applicable. However, this is not to say an investor should choose a market with very low rental rates because this may signify a relative lack of potential tenants. Finding balance is important.

3. Does the local market contain the type of tenant you want to attract? In most large cities, there will be a mixture of tenant types and housing (i.e. students, families, luxury property, vacation rentals, etc.). Obviously, knowing what type of tenant you want will also help you choose the type of property.   

4. It’s all about money! At the end of the day, we’re in this business to increase equity and create cash flow so we achieve our own personal goals. There’s not enough space here to discuss this critical element, but luckily there’s an abundance of information out there on evaluating individual markets and property from a financial perspective. Read as much as you can and surround yourself with trusted advisors. If you don’t know what ROI, NOI and cap rate mean, you’re not ready – yet.

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