In order to find the best real estate investments, make money in real estate, and experience financial growth, you must first find the best markets and submarkets. By now you have identified a few markets worthy of your investment dollars. Is it time to go real estate shopping? Not just yet.
REMOTE SUBMARKET ANALYSIS
Markets can be broken down into several submarkets. There are business districts, historical districts, industrial areas and unfortunately, “war zone” areas filled with gang members and other undesirables. Just like all markets are not created equal, all submarkets are also not created equal.
While there are many things to consider with submarket analysis, two biggies are schools and crime. I personally prefer to invest in submarkets with better than average public schools and lower than average violent and property crime. These tend to be the better areas of an MSA and are filled with people who care about safety and the quality of education their children receive. In general, I find these residents to be the ideal tenant type.
That is not to say that you cannot make money in more suspect areas of town. Just be prepared for more management headaches, like property crime, evictions, skips, etc. Failure to rise to the challenges that come with undesirable markets, submarkets, and tenants, can leave you a broke and unhappy slumlord.
Some other key factors to look at when evaluating a real estate submarket are:
-Home Values (your competition – are they appreciating, depreciating or remaining stagnant)
-House Payments versus Rents (look for areas where rents are less than house payments)
-Occupancy Rates (varies by submarket and class of property)
-Rent Surveys (what are the going rents for a given class of property in a given submarket)
-Rent Growth (are rents growing annually and if so, at what percent increase over time)
The above items can all be discovered via a series of phone calls and internet searches. However, the day will come when boots on the ground are required.
ONSIGHT SUBMARKET ANALYSIS
During the acquisition phase, due diligence will require you to visit the property. While you are on site, you should do further submarket analysis. This analysis is crucial for you to make money in real estate, find the best real estate investments, and experience financial growth.
Key Point: 80% of your rental pool will already live within five miles of your property.
Consequently, prior to arrival, you should know the demographics within that five mile radius. What is the population density? What is the median household income? What is the ethnic makeup? What is the average age? What is the average educational level? What percentage of families versus single persons, live within that area? These are all things you should already know. Now you are going to confirm those items and shop your competition.
Start at your potential property. How does it look? What is the condition of the property? What types of cars are in the parking lot? Take notes the entire time. Drive up to five miles in every direction from the property and note what you see. Are there ladies jogging at night, or are there just ladies of the night? When you pass retail, is it Subway and Starbucks, or is it tattoo parlors, same-day lending shops, and adult bookstores?
See your property and the neighborhood during all hours of the day and night and on the weekend too. Ideally, the parking lot will be relatively empty during working hours and not full with late model vehicles from tenants who may be unemployed. You need to think about your tenants and how close grocery stores, restaurants, and other convenience items are. You’ve already determined that this is a reasonably good area. You are now either confirming that, or finding unwelcome surprises that will necessitate you walk away or negotiate a better price.
SHOP THE COMPETITION
Lastly, it is important to shop your competition. What other properties exist within that five mile radius? What price per square foot are they getting for their units? What amenities do they have that you don’t have? Why would somebody pick their property over yours and vice versa?
You now have a better idea of the submarket your property is in. You can make an informed decision as to whether this property will work for you.
What else should you be looking for when evaluating a submarket? Please leave your comments.
P.S. In order to make money in real estate and find the best real estate investments, you should familiarize yourself with submarket analysis so that your financial growth can skyrocket.
Want to learn more?
Download your free copy of Evidence Based Investing and learn why it’s a preferred asset class.
Great overview of the major issues to avoid and the nuggets that potential real estate investors should focus on. I especially appreciate your perspective of understanding not only the general market or submarket, but also understanding the close radius of a potential property. Thanks for advice on diving in to understand the details around an investment!
Thanks for the comment Jon. Submarket analysis is a critical component in real estate acquisitions.