Do you want to make money in real estate using the best real estate investments? Your financial growth depends on your ability to choose the right market. Market analysis is crucial for investors and can make the difference between making money in real estate and losing money. Finding the best real estate investments starts with finding the right markets.
INTRODUCTION TO MARKET ANALYSIS
The U.S. Office of Management and Budget defines 374 Metropolitan Statistical Areas and 581 Micropolitan Statistical Areas. A Metropolitan Statistical Area (MSA) is a population dense (> 50,000 people) geographic region usually centered around one or two big cities and includes the surrounding suburbs. Minneapolis-Saint Paul is an example of one such MSA. A Micropolitan Statistical Area has between 10,000 and 50,000 people.
Why are MSA’s important to real estate investors?
The government collects and records a myriad of statistics concerning MSA’s. We can use these stats to our advantage to find the best markets to make money in real estate. In fact, I use several different stats for determining the best financial growth markets. Let’s discuss some of these stats here.
POPULATION GROWTH AND JOBS
The two most important stats for multifamily investors are population growth and employment. Some follow unemployment as it mirrors employment numbers relatively closely. Unfortunately, prolonged unemployment leads to the government removing these individuals from their stats. This can cause an artificial under-reporting of true unemployment.
While exploding population growth can make for a great investment environment, it is not an absolute requirement. Steady consistent population growth is a sign of a healthy market. Most importantly, avoid declining markets. Places like Detroit, for example, are generally bad markets for investment.
OTHER NUMBERS TO CONSIDER
While this is not intended to be a comprehensive list, other stats to consider in market analysis are:
– Vacancy Rates (average percentage of units not occupied in a given area)
– Home Price Appreciation (MSA’s with consistent appreciation are good for multifamily investing)
– Rents vs. Home Prices (people are more likely to buy if house payments are similar to rents)
-Affordability Index (how affordable homes are to a median income earning family)
-Absorption (how quickly newly built units become occupied / indicates if a market is overbuilt)
– Barriers to Entry (obstacles preventing new supply / inhibits competition)
An example of Barriers to Entry can be seen in Albuquerque, New Mexico. Albuquerque sits at the base of the Sandia Mountain range inhibiting growth to the east. The Sandia Pueblo Indian Reservation lies just north of the city and to the south is Kirtland Air Force Base. This leaves the city proper largely built out. There is growth to the west of the Rio Grande River, but there are only seven bridges that cross that river and lead into the city. These Barriers of Entry allow established owners to enjoy less competition within the city boundaries.
When looking at any of these MSA statistics, it is a mistake to evaluate the numbers in isolation. I like to trend them over a ten year period and compare them to U.S. and State averages.
A common mistake many real estate investors make is investing in a property that is close to home for convenience sake. All markets are not created equally and investing blindly in a market can seriously inhibit your financial growth. If you want to find the best real estate investments, don’t leave it to chance. Find growing markets with robust employment. These are the markets that will make you money in real estate.
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