Factors in Finding Top Real Estate Investment Markets

Everyone has heard that location is the most important factor when investing in real estate, right? However, what does that really mean? What factors should you know about a location before buying a rental property? Buying a property just because you live nearby, or because your brother lives in the same town and can look after it for you, are the wrong reasons.

Buying in a location with poor returns will make building your real estate business much more challenging. In fact, you are better off buying properties out-of-state than staying local if there is a better possibility for strong returns. The essential strategy for any business is to limit your exposure to risk while maximizing profits. Don’t you agree?

Thanks to the combination of the internet and generally inexpensive travel, more and more real estate investors are seeking opportunities outside their local markets. This is especially true for investors from areas like Southern California, where the price-to-rent ratios often don’t create a good, positive cash-flow. Consequently, many of these investors inevitably start researching places like Ohio, West Virginia, Western Pennsylvania, and other areas of the country for properties to buy and hold.

When it comes to real estate investing, it is all about simple economic concepts, like supply and demand. As with any business, and no matter what your strategy, there needs to be ample demand for the product. This does not mean finding a “hot market” or a “boom town.” It simply requires finding a location in which demand is stronger than the supply. Below are listed several factors you should consider when evaluating buying within a particular real estate market:

1. Future Development Plans – While current housing availability may create a healthy price-to-rent ratio, it is a good idea to investigate future competition from new development. In many areas, investors and builders are competing for the renters. New construction can create an oversupply of housing. This then can push up vacancies and drive down rental rates.
2. Employment and Economic Growth – It is a good idea to find a location with strong employment rates. However, another good indicator of positive economic growth is employment across multiple economic sectors. In many areas of the U.S., towns are built around one company or industry. These locations can appear attractive when prosperous but do come with added risk.
3. Expanding or Decreasing Population – It is a good idea to check out area population trends. People often move to where they can find employment. Areas that are experiencing a downturn and population loss may need to be looked at more closely. On the other hand, those areas with increasing populations will have lower vacancy rates and an increased demand for housing.
4. Days on Market– An area with a high demand and a low vacancy rate does not automatically translate into being able to find tenants for your rental property. The Days on Market (DOM) is the total number of days that an average rental sits on the market before acquiring a tenant. A hot market will have rental properties listed only for a few weeks. Conversely, a slow market is one in which properties languish for 30 days or more.
5. The Local Legal Climate – The final factor is likely the most overlooked when investing in out-of-state properties. Each state and local government will have a different interpretation of contract law, evictions, and tenants rights. You don’t want to find yourself in a situation where a tenant can essentially live rent-free indefinitely while you deal with a burdensome and overly involved legal process.

Of course, the above list should not be your sole determining factors when investing in rental real estate. Nevertheless, they should be used in conjunction with other measures and metrics. This will boost your confidence in any new out-of-state investment property. Regardless, the most important factor in any real estate market is stability. An ideal location will have historical trends that show low volatility, but with a current economic and population growth upswing.