8 Signs to Look for in a Real Estate Market

8 Signs to Look for in RE Market

In this post, I want to share 8 signs for identifying an out-of-state real estate market to invest in. Truthfully, these are positive signs to identify a good market anywhere, whether local or not.

By market, I’m talking about a large metropolitan area like Atlanta, Denver, or Memphis. So the tips in this post will focus on higher level macro factors to help you evaluate a large city. Factors such as school ratings, crime statistics, and other demographics won’t be covered here since they are more relevant to identifying sub-markets (i.e. neighborhoods) within the larger market.

Here are 8 signs to look for when identifying an out-of-state real estate market to invest in.

Growth.1. Increasing Population

Invest in a city or metro area where the population is increasing over time. An increasing population simply means more demand for housing. If a population is trending downward, that’s not a good sign for any real estate investor. Whether you’re looking into residential or commercial real estate, an increasing population is desired.

2. Increasing Jobs 

Invest in a city with increasing jobs. One of the biggest drivers of population growth is economic opportunity. That economic opportunity most often comes in the form of increased hiring. Both an employer that’s adding new jobs and new employers that move into a market will fuel net migration into that market.

And what’s the one thing this influx of new workers will all need? You guessed it. Housing.

Hiring Jobs3. Low & Decreasing Unemployment Rates

Invest in an area with low unemployment rates below the national average. Also, study the unemployment rate over recent years and months to identify the trends. In what direction is it heading? A downward trending unemployment rate is indicative of a growing local economy. On the other hand, a rising unemployment rate where more employees are finding themselves out of work is typical of a sluggish or contracting economy. Finding qualified renters to fill a vacancy in a rising unemployment market may be more challenging.

4. Business Friendly Environment 

Look to invest in a business friendly market. States with business friendly policies, regulations, and tax incentives will continue to attract major employers and new startups. This business friendly environment translates into new jobs, which stimulates the local economy, and ultimately promotes further population growth. All big positives for anyone investing in that real estate market.

5. Employment Diversity

Invest in a market where several industries and employers are represented. The local economy should be well balanced and supported by many different industries and employers. A market that is heavily employed by a single industry or employer increases the risk to your real estate investment should something happen. Take for example, the collapse of the automotive industry in Detroit drove (pun intended) the city into a downward spiral because there was very little economic diversity.

Doctor.6. Jobs That Won’t Be Outsourced

Invest in a market where the jobs are unlikely to be outsourced. Some industries remain fairly stable regardless of how the economy is doing. Jobs in education, government, and healthcare tend to be resilient to hard times like a recession.  Every major city will need teachers, health care professionals, and a local government to function. While other jobs, are indifferent to location and are highly influenced by labor costs. For instance, if a significant portion of a town’s jobs are in manufacturing, then there’s a chance that the employer may someday find a lower cost labor force either in another state or abroad.

So investing in a real estate market where the majority of jobs there won’t be outsourced offers stability and lower risk to the real estate investor.

Open House7. Affordable Housing

As a real estate investor, look for markets that are not overpriced where you can acquire properties that are still affordable and will provide the biggest bang for your buck.

So you’ve found a market where the population is growing, the local economy is booming with new jobs, and the job market spans across diverse industries. So do you invest there? It depends. What you’ve probably come across is a desirable market to work in. You could very well be at the peak of the market cycle. Buying homes at a premium price can really hurt your cash flow and returns. While buying at the peak of the market does not mean you can’t cash flow, it’s certainly not the best time to buy. 

8. High Rent-to-Price Ratios

For the cash flow investor, look to invest in a market where the rents are high relative to the home price. In other words, look for high rent-to-price ratios. The rent-to-price ratio is the monthly rent divided by the price (purchase + rehab) of the property. Markets with higher rent-to-price ratios will tend to offer more opportunities for investors to find a positive cash flowing rental property. For instance, where I live in Los Angeles, it is not a strong cash flow market with a median rent-to-price of 0.47%. However, Cleveland has many opportunities to find cash flowing properties with a median rent-to-price of 1%.

Your Personal Advantage

Now this last point is not a requirement. It’s the frosting on a cake— a nice addition.

VacationIf you’re planning to invest in a distant market, then it certainly helps to have some personal benefits to investing there. I’m talking about investing in a market where one or more of the following applies:

  • Family or friends live there
  • Favorite vacation spot
  • Frequent business trips there
  • Regularly attend conferences there

However, I do not recommend investing anywhere based solely on these personal reasons. Like I said, it’s a nice perk to be able to mix personal travel with business.

Do you have friends or family that you visit often in a potential real estate market? Maybe a vacation spot or business trip you take each year? Perhaps you attend a conference every year like the International Brotherhood of Real Bearded Santas, which took place in Branson, MO. Yeah, that’s a real thing.

Whatever the reason, you may have personal advantages to investing in a distant market that should be taken into consideration when selecting a real estate market.

Conclusion

Selecting a real estate market to invest in is no easy task. Though focusing on strong fundamentals can help identify which markets are the most attractive to meet your goals. In this post, I listed 8 signs to help identify a strong real estate market, whether out-of-state or not.

Look for a real estate market with the following positive traits:

  1. Increasing population
  2. Increasing jobs
  3. Low and decreasing unemployment rate
  4. Business friendly environment
  5. Employment diversity
  6. Jobs That Won’t be Outsourced
  7. Affordable housing
  8. High rent-to-price ratios

Lastly, while not a requirement, it certainly helps if you have some personal connection to that market. Whether it be family, friends, work-related, or something else.

I hope this post helps you the next time you’re evaluating a new real estate market.

What markets are you currently interested in today and is it for any of these reasons listed here? 

I’d love to hear from you. Leave a comment below.

9 thoughts on “8 Signs to Look for in a Real Estate Market

  1. I’m glad you mentioned the personal connection bonus because it’s often overlooked. My fiancé and I have family in the midwest so we’ve always considered investing in real estate property there. We’d probably have help fixing up the rentals which is a huge bonus! Great post!

    • Thanks Julie! Having an extra set of eyes that you can trust is a huge advantage. Sounds like your family is handy too so that can really save on your initial rehab costs!

  2. Hey, OB, where do you find statistics for some of these things? I’d love to evaluate markets that I’m unfamiliar with based on these criteria, and then to get more familiar with the top-scoring metro areas afterward. I’ve used city-data.com to get demographics for different areas, but I’m not sure if they have data on the rent-to-price ratios. Do you search for available rental properties and compare sales comps to calculate that yourself, or is there some helpful online resource you’ve found that has those stats? Thanks!

    • A great way to get an overview of a most major markets is to first check out both Marcus & Millichap’s and IRR Viewpoint’s market reports. While they both tend to focus on multifamily apartments and commercial (retail, office, storage, etc.), much of the same metrics you’d be interested in is nicely summed up in a report for you. You’ll get a snapshot on the local economy (unemployment rates and added jobs), as well as construction trends, home price trends, vacancy rates, and where rents are.

      Though if you really want to get into the data itself, I’d go download the raw data from the Bureau of Labor Statistics and the US Census Bureau. The economy numbers (unemployment rates, jobs added/lost, types of jobs, net migration patterns, etc.) are all here. When it comes to initial market research on rent-to-price ratios, I like to just use Zillow’s price-to-rent ratio. They publish price over 12 months rent, which you can easily convert to a 1 month rent-to-price ratio (e.g. 1%). It’s based on Zillow’s price and rent estimates so take that for what it’s worth. Though I find them to be extremely helpful when comparing many markets from strictly a cash flow perspective.

      I’ve been working on a series of posts that goes into analyzing different markets and using this publicly available data. So stay tuned 🙂

  3. These are fantastic tips. I just bookmarked this under my “real-estate” folder because I want to get absolutely educated in everything real estate before my grand plan of purchasing a property within the next 5 years. Thanks for the list!!

    • That’s awesome to hear! Many markets have seen home prices at or surpassed their previous 2007 peak. So in waiting sometime in the next 5 years, I’m confident you’ll see a major buying opportunity. Glad I could be of help!

  4. OB check out the Baltimore Metropolitan area. It seems like it fits # 8 on your list. There are a lot of healthcare and government jobs here too so there is a lot of stable employment. The more adventurous investors are picking up properties in the City for $15 – $30K and getting Section 8 renters at $700 – $1100 per month. These are rough houses in rough neighborhoods but there is serious cash flow opportunity. I am looking to pick up a property for about $75K which will bring in that same monthly amount but the area isn’t as scary and the property is in good condition. I can put you in contact with a couple wholesalers in the area if you are interested.

    • 3.7 – 4.7% rent-to-price ratios?!! That would be great for any local investor who doesn’t mind dealing with all the headaches and stress those properties would entail. I haven’t looked into Baltimore personally and have never even been there. Thanks for the offer though. I’ll need to research Baltimore first. Are you self-managing your rentals?

  5. I don’t self manage because I love using property managers. I wrote a post about it on my site. Love reading your blog – thanks

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