Although many people often inquire about the best time to invest, a wise investor will question which market provides the best overall return on investment. Obviously, not all markets are created equally. Which begs the question; how can you tell a good investment market from a bad one? Today, we will share the top 4 factors to help you make the best decision!
Before we dive into the nitty-gritty, it is important to first explain the different types of markets that you will come across:
- Declining Markets. When you see the population trends and job market begin to slope downward, run for the hills. These are the markets where you can lose your shirt as a real estate investor.
- Stable Markets. Just as it sounds, these are the markets that aren’t really wavering up or down. They’re steady and consistent. Hopefully, there will be at least enough growth to keep up with inflation but don’t expect any crazy profits (or losses) in these markets.
- Growth Markets. This is what you’re on the hunt for. In a growth market, you will see an incline in population, jobs, and the overall strength of the local economy. Growth markets are where the real money is made.
The factors that we will discuss today are what determine whether a real estate market is declining, stable, or growing. They are exactly what you need to use to measure the potential of any real estate investment.
1. Population Trends
As a real estate investor in pursuit of cash cow buy and hold rental properties, population trends are extremely important. Before you even consider investing in a market, you need to know if people are moving to or from the area. The beauty of a market where the population is increasing faster than the development of housing is good ‘ol supply and demand. These are the markets where you will be able to ask for higher rents and won’t have to worry about vacancy eating into your cash flow. In recent years, we have seen these trends in cities that house large tech companies like Seattle and Dallas.
2. Purchase Prices vs. Rental Rates
One number that will play a big role in your life as a real estate investor is the ratio of the purchase price of the property to the amount you can charge for rent, frequently referred to as the Gross Rent Multiplier (GRM). To calculate this number, all you have to do is divide the purchase price of the property by the gross income you expect it to earn. At the end of the day, you can’t use this number as the sole indicator of a valuable investment, but it does provide a high-level insight.
Here is an example to better illustrate how the GRM works. Let’s say you are torn between investing in buy and hold properties in either Seattle or Tampa. Now, let’s imagine an investment property in Seattle is $300,000 and you could charge $1,500 in monthly rent. This would give you a GRM of 200. In the Tampa market, an investment property could be picked up for just $80,000 and you could expect $1,000 in rent. The Tampa property GRM would be only 80; much stronger than the one in Seattle.
3. Strength Of The Job Market
Put simply, if people don’t have jobs or jobs that pay well, you can’t expect positive cash flow from a real estate investment in that market. Just as you want to find a market where the population is on a steady incline, you want one where the industry is booming. These two generally go hand-in-hand because a strong job market typically sparks the population increase. In addition to being home to large companies, universities and major sports teams are also indicators in the strength of the economy and job market. Again, one of the main reasons that cities like Seattle, Dallas, Atlanta, and Tampa have become such gold mines for real estate investors is because of major corporations like Amazon and Microsoft placing their plants and headquarters there; leading to high-paying jobs which resulted in population booms.
4. Landlord-Friendly Laws
One factor that many green real estate investors fail to consider is the local laws as they pertain to landlords. Laws can vary a great deal from one city, county, or state to the next. Things like eviction time frames, lawsuits, and interpretations of leases or contracts can be handled very differently in different markets. While no investor wants to think about evictions or lawsuits, the reality is you should position yourself favorably just in case. Whether you are thinking about investing locally or out of state, you need to first familiarize yourself with the legal climate of that market so that you can fully prepare yourself for any situation. Just like with anything, this is a case of knowledge being power, as well as, profit.
These four factors are not the only things that you need to take into consideration before you invest in a buy and hold property. However, combined with your personal circumstances and preferences, they can certainly steer you in the right direction. Furthermore, they are a practical way of measuring one market against another to determine the strength of each before narrowing your search for the right property for your portfolio.
Are you looking to build or further diversify your real estate portfolio? Connect with a Portfolio Specialist today and learn how Passive Wealth Builders can help!