“6 Key Real Estate Market Factors to Consider When Investing” is our fifth in a series of blog posts on real estate investing. To read more, download our entire eBook, “The Real Estate Investor’s Checklist.”
The first step to finding the right real estate investment market is narrowing down your choices. For buy and hold properties in particular, it is imperative to find a market that will be profitable.
Yes, there will always be trade-offs. You can get a great price in a market forecasting high returns, but the risk will be equally high. Or you can purchase an expensive property with lower returns, but also less risk. Here are some key factors that will help you strike your own risk/reward balance.
The Price-to-Rent Ratio
For rental buy and hold investments in particular, the the price-to-rent ratio is paramount. Simply put, you have to be able to rent your property for enough money to cover its cost and expenses—and hopefully have enough money left over to generate a small profit. In general, you only want to be looking at markets that have good price-to-rent ratios.
Cash is king. If there is no potential to generate cash flow, there is no point in investing. Markets with decent price-to-rent ratios are expected to have positive cash flows. Therefore, you should narrow down your choices by studying the varying degrees of positive cash flow in each market you’re considering.
The Age of the Property
The older the property, the higher the maintenance costs. If you have two equally priced markets to invest in, you will want to factor in the age of the property.
Some markets are less expensive than others, and some may have very high entry prices. A good price is something that is determined by the risk to return ratio. However, as an investor you may be limited by the amount of capital you have available, so price is a deciding factor.
A top challenge of real estate investors everywhere is mitigating the risk and uncertainty in both known and unknown neighborhoods and markets. While you should not make an investment decision solely on appreciation potential, some markets have significantly more potential for growth than others.
A Vibrant Economy
Finally, make sure that the real estate markets you’re considering have relatively vibrant, diverse economies to support population sustainment and growth. If you buy real estate in a market that has only one major industry, your investment is at a higher risk of loss if that industry declines over time.