With the ever changing and dynamic nature of real estate markets, how do you know what types of properties to invest in and which markets will yield the greatest returns? Knowing when it’s the right time to invest is half the battle, but where and what to invest also matters. When the deals appear hot and major red-flags aren’t waving, what strategies can you take to choose the best real estate investment market?
Leading players
First, if you plan to be a real estate investor, it’s a good idea to have a general knowledge of the three main markets. You have growth markets, stable markets, and declining markets.
In GROWTH MARKETS there is a rising trend. As the name implies, the market is booming as the population moves upwards and demand increases.
STABLE MARKETS are like the chill middle brother; stable, consistent, reliable. They don’t see much fluctuation up or down and tend to maintain just enough growth to keep up with inflation. This occurrence is often times found in midwest markets
You’ll have to get a grip on DECLINING MARKETS, as they are going to take a downward trip. If you notice jobs declining and the population decreasing, it’s a smart idea to be careful with this market.
What’s the deal?
You may be wondering at this point what the differences are between these three markets. We can start with the most obvious differences of industry, job opportunities, and overall desirability. From personal experience, the stable markets are a good go-to simply due to when a downturn happens (which it will). These more stable markets are affected very minimally, versus in the other two categories, you can get into trouble, in a big way, if you’re not careful on buying right.
The upside you encounter with the growth market is the appreciation element, but even that is speculative. With the declining markets, there are (generally) corporations leaving the market, along with people. This can be found in Detroit, which some people swear is on the upswing, but it’s too far behind for me to personally see that happening.
Direction affects ownership
By understanding the main types of real estate markets, let’s get to discussing how the direction of the market can affect the ownership of investment properties— particularly when it comes to profits and rentability.
Profits— When considering profitability, you may want to ask yourself some questions. What do you hope to achieve with your investment property? Are you expecting to sell in the future? There are probably a variety of reasons why you want to break into real estate investing, ranging from gaining profits through appreciation or receiving property cash flow. Regardless of your end goal, the direction of the market will have a major effect on your real estate investing goals. If the market is declining, this will lead to an overall decrease in value. Falling markets can have a ‘snowball effect,’ causing adverse changes to appreciation value, loss in resale value, and the potential of decreasing rental rates. Which leads to the discussion of rentability…
Rentability— If you are lucky to land in a growth market, you will be rewarded with a constant stream of high-quality tenants for your property. Granted, the tenant quality will be dependent upon the neighborhood, but you will see a positive trend. On the flip-side, if you catch yourself interested in a property in a declining market, take into account the potential problem of a lack of great renters found amidst the decreased selection.
Wise move?
It’s important to be a person who takes the initiative, but equally important is that an elite real estate investor takes into account what the market is doing and where it is headed.
The general population trend will give you a good idea of what the market is doing? Is the population increasing or decreasing? If the population is growing, demand will also be increasing, as properties available will be less.
The amount of jobs available also has an impact on the market. If a city has large corporations, a variety of sports teams or culture activities, and an increasing amount of jobs, this is a good indication that the market is robust.
When one takes a look at the market, consider if anyone actually would like to live there. Is this location desirable? This seems like the most obvious bit of advice, but it’s often the simple things that somehow are overlooked. If no one wants to live there, it’s probably not the place you will want to invest.
Summary
When selecting a market, choose the one that is closest aligned with your goals as an investor. If you are the type who only wants to go for the cash-flow, as opposed to the value of appreciation, you will do better with a more stable market. It's hard to determine if a certain market is a wise investment. There are simply no guarantees, however, if you follow these steps mentioned and think clearly about your decisions, you are sure to make profitable investments and see success.