Certain Ways to Analyze New Real Estate Markets

It seems like evaluating a new real estate market, a challenging task.

Well, it is. As the majority of the beginners in real estate investing start dealing with the local markets. But not all local markets present the best opportunities. It is important to understand that there are way more options outside the local markets than you could ever imagine.

However, coming outside of the comfort zone is not everybody’s forte. But you can learn and practice it.

You see, there are various articles that talk about looking into the same metrics like population growth, household income growth, and employment growth, etc. They are helpful in evaluating markets but why not experiment with new concepts. This helps you in developing a mindset where analyzing a market won’t be a daunting task.

So here are a few suggestions for the real estate opportunists.

First, you should Identify the Best Markets

Now, before jumping into the type of properties, we must first understand the term “Best Market”. It basically means identifying those cities that are both resilient and growing. Since we all are opportunists so we will be looking for the best markets.

But just because we’re opportunists that do not mean you can start blindly purchasing real estate assets. One has to keep the fundamentals of investing in his mind.

Let’s begin!

1: Look After How Diverse Employment Is in the Region

Employment diversity is a crucial indicator of understanding the resiliency of the market. A diverse city is more resilient to cyclical downturns in a particular industry. Apart from employment growth and household median income growth, it is also important to understand the employment diversity of the market.

(Find out who are the major employers in the area)

The COVID environment can be an example to prove the point. Many industries such as education, restaurants, hospitality, retail, tourism, etc have hit hard due to the pandemic crisis. Meanwhile, polices such as social distancing and lockdowns have done further damage. (Consumption crises)

So it is advisable to avoid such cities that are totally reliant on these types of employment. Until the pandemic is gone only then you opt for such cities.

The question is: When will it get over?

We really don’t know. So, why to opt for such uncertain markets.

In order to analyze and evaluate the diversity, compare the percentage of local occupation to that of the nation. The larger the percentage related to the national average, the more reliant the local market is on that particular industry.

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2: Find Out the Root Cause of Driving Demand for Property

Now keeping diversity in mind, we must proceed further with assessing a city as a whole. Differentiating cities that are less diverse then others (who are more diverse) can help us in finding the best markets. Before making a move you must dive deeper into researching the areas of the city.

The next thing to look at is the main drivers for your property’s demand. It can be a region that is reliant to a large corporation or any other single institution.

But you cannot make a decision on the basis of such drivers only. As large organizations can move their location to another city anytime.

Another driver could be student housing. You see, this investment opportunity is only lucrative when the economy is flourishing. However, looking at the current scenario we are not sure about what the future might hold. It is better to have risk mitigation strategies in order to prepare for the worst, especially in real estate investing.

3: Choose between the Suburbs or the Cities

Now before you choose either Suburbs or Cities, it is very important to understand the behavior and preferences of the population. Currently, the largest generations in the United States consists of Millennials and Generation Z (as per CNN). So you should understand the target audience. (Research about their consumption w.r.t real estate investing)

The next thing is to ask yourself a bunch of questions:

Whether the audience/population prefer cities or suburbs. What type of property majority of them opts for? Is the location/city to which they have owned the property sustainable? These questions are part of brainstorming that can help you in finding ways

You see, there are enough contradicting results out there (online), where a certain percentage of millennials prefer to stay in suburbs (40% live in suburbs) and others (30%) in cities.

However, one thing is for sure that millennials are now moving out of cosmopolitan cities like New York, Los Angeles, etc as they cannot afford expensive family-sized homes anymore. They prefer more affordable metro regions like Arizona, Phoenix, etc.

In suburbs, houses are not that expensive as compared to the posh cities. Also, environmental pollution is another factor that needs to be considered.

It is advisable to invest in affordable regions/cities. This can be done by looking at the income-to-rent ratio. (There are various metrics for evaluation of a region).

I believe that investing in a smart and sustainable city that focuses on pedestrian and public transportation makes more sense. Although the majority of the population in the United States prefers cars I believe that this new concept will have exponential growth in future. So let’s hope for the best.

Could you think of any other practical ways to evaluate a market?

Prashant Kumar, CCIM

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