Selecting a Real Estate Market for Investment

by Christopher Levarek

“He who would search for pearls must dive below.”

- John Dryden

I found myself at another real estate meetup, the third this month, late on a Monday night after working my full-time job all day. For me, it was always a fight to make it out to these meetups and network in hopes of finding inspiration, partners and success of some kind. Once I did make it to the event however, I usually snapped into a rhythm and enjoyed the process of sharing real estate strategies and adventures.

As it were, here I was listening to another real estate investor discuss their investing strategy on this especially cold Arizona night, as we huddled on an outside patio on the chilly metal restaurant pavilion chairs under tall gas flaming outside heaters at a local pub.

I heard him mention, “I’m looking to flip something in Flagstaff. I’m going to be a flipper.”

“Why Flagstaff?" I asked, “Is that where you live?”

“No, I live in Tempe, but I went to school in Flagstaff and still have a few friends still up there.” he said, and then continued after a pause, “ It would be cool to flip something there.”

“Well what’s the market like? Is it expanding? What’s unemployment look like?” I continued, searching to understand his reasoning.

“I’m not sure on unemployment, but everything in Arizona is blowing up.”, was his reply.

Now, I’ve heard very similar responses from many different ambitious investors at many late night real estate meetups. Most of these responses center around choosing a real estate market because it’s familiar, nearby in distance, “know a guy” or heard a rumor about “insert city topic here”. This makes sense to seek the familiar or the edge, but selecting a real estate market should be backed by fundamentals first and foremost.

Let’s look into how to select a real estate market for investment in an easy 3 step process.

Step 1 - Select your top 5 choices or interested markets.

This is the easy part. Simply pick the top most preferred choices. They can be based on any of the above reasons or just a city of interest. I advise picking some markets which are out of state to add variation rather than selecting 5 cities local to you.

If you are looking for inspiration, you can always review some market reports from real estate market industry leaders. For example, the following reports are some which offer market insights :

IRR.JPG

There are many other sources to choose from to include RealPage, Marcus & Millichap and CBRE depending on your strategy.

Step 2 - Review Your Top 5

With your top 5 markets selected, you want to compare how these cities rank according to the National Average and each other. Rankings should be based on the following :

#1 Unemployment

This information can be gathered from Census.gov for any city on the list for a set period of time. It’s important to look for trends over time as they can predict what is likely to follow. Specially, look out for a increasing or high rate, which should be avoided. The U.S. Bureau of Labor Statistics also provides this data at a detailed view.

#2 Age

Knowing the average age of the population in the given city is useful to match up to your strategy. If you plan on student housing but your target market demonstrate more aged individuals, perhaps assisted living facilities might be a better option. This data can be gathered from the census.gov website, see “Populations & People”, as well or using the website bestplaces.net.

#3 Population

population.JPG

An increasing population shows a market in expansion. Find the population data over the last 3 years and look for a favorable trend in growth in population. Again the census.gov can be a resource for this information.

TIP : Another great strategy is typing into Google “columbus ohio population” for Columbus Ohio, for example and Google will output the last 7 years of data in a graph!


#4 Job Diversity

It’s important to select markets with good job diversity or multiple employers. If you buy in a market dependent on one employer and that employer closes shop, where does that leave your investment or rental demand? Again, this can be found on census.gov or even with Google search “Top employers in insert city”. Another method is using http://www.city-data.com/ , which can show information about any city and employment by industry.

#5 Vacancy Rate

Understanding the demand in the city can be important if you are offering a product to meet demand, aka. a rental property. To see supply and demand for rentals, one can look at the vacancy rate in the given city over a period of time and determine if it is increasing or decreasing.

An increasing vacancy rate, is showing a lack of demand while a decreasing vacancy rate would indicate an increase in demand. Optimally, you would like to see a vacancy rate that is high decreasing over time. Or an already existing low vacancy rate which is decreasing would also be a positive indicator.

This data can be found again at https://data.census.gov/ website under the “Housing” section. Use the filter options to hone in on the location and information.

Step 3 - Compare the Data

real estate market report

Review the collected data on your Top 5 markets. Narrow down your selection to the top 1-2 markets out of these 5. Which ones have increasing population, multiple employers and a decreasing unemployment? Which ones have in increased demand for rental units or even increased construction demand?

Rank the markets based the above criteria and you will end up with 1-2 that rank the highest which makes the ultimate market choice much easier to make.

In Final

With all the data at our fingertips, selecting a market is easier then ever before. Just ensure to do the research and not throw a dart on the wall. You are investing for the long term in the property, the team and the market.

Whether investing passively or actively, understanding why you like the market is key. Happy Investing!

Chris LevarekValkere Investment Group