Taking the time to thoroughly evaluate an interesting market can be tedious, but it’s well worth the investment. Here are a few of the benefits of evaluating a real estate market before buying property.

Deepens your understanding of local trends. Each local real estate market is different, and market dynamics can vary widely. Evaluating a market on the granular level, down to the specific neighborhoods or developments you’re considering, will deepen your understanding of how housing and rental markets operate throughout the year and over longer periods of time.

Helps you identify your target tenants. When you take the time to learn about the demographics of your potential market, it's more obvious which kinds of tenants you could seek out in that area. This can help you narrow your passive screening approach and focus on tenants who would most likely be interested in your properties.

Manages your expectations. If you’re only ever heard great things about an area, you may be surprised upon investing there that things weren’t entirely as great as you heard. Rather than taking someone’s word for it, take the time to evaluate the market yourself.

Helps you predict future problems and concerns. While no market analyst can predict the future, many have accurate insights about the current problems plaguing specific markets and potential issues to look out for in the future. Over time, you can learn to recognize red flags to keep an eye on should you decide to invest in that market.

Which factors should you consider in your market analysis? Let’s look at a few of the most important:

Local Economy

Learning about the local economy of a market is a good place to start. In your research, find out the median household income, income/job growth in the area, population trends, the unemployment rate, the largest industries or companies in the area, and the town’s net migration. Each of these factors influence the housing market and are important considerations to track over time to observe trends.

Location Characteristics

Now it’s time to develop a more in-depth characterization of the market. This could include more detailed demographics as well as local amenities and laws, which affect property value in the area.

Be sure to consider the median age of residents in the town, the crime rate, local public school system, the homeownership rate, and the regulatory environment (for instance, find out whether local rent control laws apply and if so, the current cap or restriction).

Housing Market

When researching the housing market specifically, key statistics like the median home sale price, the median days on market (DOM), and the number of months’ of housing supply the market currently has will be helpful in your analysis. These stats will tell you about the fair market value of homes in the area, whether they’re appreciating and how quickly, how quickly homes are sold in the market, and the overall demand for homes. Information about property taxes and insurance rates in the neighborhoods you’re looking at is also helpful.

Rental Market

Although the housing and rental markets are linked, real estate investors must pay extra attention to factors like the median rent, demand for rentals in the area, and the average rent-to-income ratio in the area. The eviction rate might also be helpful information to compare with employment trends. The goal is to learn about the behavior, wants, and needs of typical tenants in the area, which will help you decide if the market suits your picture of who an ideal tenant for your new property would be.

After you have an idea of the overall rental market, you can zoom in on a particular property to perform a rental property analysis. For example, you can also use your market research to conduct an expected cash flow analysis or estimate statistics like net operating income or gross rental income for a particular property based on the average monthly rent in the area.

Conclusion

Identifying the best markets for real estate investing can be an involved endeavor. However, breaking your options down by the above characteristics can help you evaluate each market systematically and objectively. Completing this worksheet and moving forward with a comparative market analysis will help you see the big picture of a market, allowing you to recognize strengths, pitfalls, and considerations of each option. Start by downloading a copy of our How to Evaluate a Real Estate Market Worksheet above.