How to go about knowing my Market??
Duplex Investor · Cleveland, OH · Member since 2013 · 22 posts · 2 votes
How to go about knowing my Market??
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Real Estate Investor · Suquamish, WA · Member since 2013 · 24 posts · 8 votes
12yIf you concern yourself with cap rates then what's most important is WHY you have the cape rate you do. Cap rates are simply ratios that compare operating efficiency (NOI) to comparable sales, stated as a rate. As long as you understand the economic environment in which you operate, then cap rates can be useful tool for quick screening. What this calculation doesn't tell you, which in my opinion is most important, is the opportunity or future potential a particular property has over others. Cap rates are also used for valuation, but let's face it, valuations are purely ASSUMPTIONS. You have to then ask yourself if your assumptions about the future are in-line with others. If not, an opportunity may exist.
Mortgage rates are pretty much out of your control and are influenced by the supply/demand for MBS or other other long-term debt. It's also influenced by the federal reserves interest rate policy so you just have to go with whatever the market gives you or just work around it. Mortgage interest has nothing to do with operating efficiency anyway, it only impacts your cash and overall debt load. What's most important for income producing properties is operating efficiency. This is the value and potential your property has over others and you can expect a high price for it if you choose to sell.
Anyway, back to your question. This idea of knowing your market is really a two tier approach, both on a macro and micro level. On the macro level, we look at government policies and if they are conducive to growth in real property ownership. We also look at the business cycle, which is driven by employment, fiscal policy (govt spending) and monetary policy (cost of capital, basically interest rates). On the micro level you can look at similar things within your state: employment, education, industry, wages, crime, population and development. Notice that by keeping up with market rents, which is essential to knowing your market, you are essentially gauging the growth/decline in trends for all of the points previously mentioned. In other words, employment, education, industry, wages, crime, population and development directly cause rise/decline in rental income. You can track rental income to ensure it's in-line with other properties so to avoid opportunity costs, but the bigger more important question is whether or not rental income will continue to rise. This question is at the heart of market analysis.
5 Replies
- Real Estate Broker · Chicago, IL · Member since 2013 · 6k+ posts · 5k+ votes12y
I would suggest studying your market by looking at homes on the MLS. Set up alerts within your price range and start running investment numbers on each. After awhile you will be able to glance at a listing and know if the pricing is a good deal for that area. also study rent rates - look at sites like hotpads or zillow to see what the average rents are.
I have been studying my market for about 4 years. every property that comes up I know if it is over/under priced and what rents I could really get for it. This allows me to make quick decisions on if I am going to go after a property or not - and even if I am not looking to buy anything, I still look at all new properties so I can start seeing fluctuations in the market.
Second City Real Estate4.821 Reviews - Rental Property Investor · Where we are parked · Member since 2013 · 584 posts · 178 votes12y
Hi Cornelius and welcome to BP!
There are many different things you need to do to learn your market. Mortgage rates don't really have to do with your market as those are pretty much standard everywhere, unless you go through your local bank.
You definitely need to know what average rents are for the property you are evaluating. And you need to get as specific as possible. I don't know your area but I know that just about every city has areas where the rents can vary widely from one block to the next. To get an idea you can search Zillow, Craigslist or Realtor.com for other rentals in the area you are looking in. You should also find a property manager who currently manages properties in that area. Get their opinion on fair market rent, find out how many vacancies they currently have and how long it typically takes to get a unit rented in that area. If there are a lot of vacancies you'll have a lot of competition.
You need to know if people are moving to the area or leaving the area. Is it a high crime area? What's the average income for the area? Is the unemployment rate in that area high? You can find a lot of this information at www.city-data.com.
To get the cap rate you need to know what all of the expenses for a specific property will be, including mortgage, taxes, insurance, property management fees, utilities, maintenance, etc. You also need to know what the property will rent for. Once you have all of that information you subtract the annual expenses from the annual rent to get the net operating income. Then divide the net operating income by the purchase price of the property.
For example, if you bought an apartment complex for $300,000 and the net income after expenses is $24,000 per year. You would divide 24,000 by 300,000 and get a cap rate of .08, or 8%.
As for how to know if it's a good deal or a bad deal? That's in the numbers. And your opinion of a good deal might be different from mine. For it to be a good deal for me it has to cash flow from the day I buy it and it has to rent for at least 1% of the purchase price. I live in California so 1% is good. I own rentals in other states however and my minimum is 2% in those states. That means, if I buy a property for $100,000 then it must rent for at least $1,000 per month to meet the 1% rule, or $2,000 per month to meet the 2% rule.
Best of luck!
- Investor · PA · Member since 2013 · 1k+ posts · 602 votes12y
I go by the 2% rule in good to decent neighborhoods and the 4+% rule in gang-run to war-zone neighborhoods. Rehab costs will be lower in the war-zone neighborhoods if you wear the appropriate attire and bring beer to the painting party.
- Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes12y
Strategies will make a difference in what due diligence you need to perform, however, a key factor you need no matter what is local area inventory levels. How many properties are for sale today compared to 6 months ago, 12 months ago, etc. and of that inventory, how many are REO, short sales, probates, and standard sales.
- Real Estate Investor · Suquamish, WA · Member since 2013 · 24 posts · 8 votes12yIf you concern yourself with cap rates then what's most important is WHY you have the cape rate you do. Cap rates are simply ratios that compare operating efficiency (NOI) to comparable sales, stated as a rate. As long as you understand the economic environment in which you operate, then cap rates can be useful tool for quick screening. What this calculation doesn't tell you, which in my opinion is most important, is the opportunity or future potential a particular property has over others. Cap rates are also used for valuation, but let's face it, valuations are purely ASSUMPTIONS. You have to then ask yourself if your assumptions about the future are in-line with others. If not, an opportunity may exist. Mortgage rates are pretty much out of your control and are influenced by the supply/demand for MBS or other other long-term debt. It's also influenced by the federal reserves interest rate policy so you just have to go with whatever the market gives you or just work around it. Mortgage interest has nothing to do with operating efficiency anyway, it only impacts your cash and overall debt load. What's most important for income producing properties is operating efficiency. This is the value and potential your property has over others and you can expect a high price for it if you choose to sell. Anyway, back to your question. This idea of knowing your market is really a two tier approach, both on a macro and micro level. On the macro level, we look at government policies and if they are conducive to growth in real property ownership. We also look at the business cycle, which is driven by employment, fiscal policy (govt spending) and monetary policy (cost of capital, basically interest rates). On the micro level you can look at similar things within your state: employment, education, industry, wages, crime, population and development. Notice that by keeping up with market rents, which is essential to knowing your market, you are essentially gauging the growth/decline in trends for all of the points previously mentioned. In other words, employment, education, industry, wages, crime, population and development directly cause rise/decline in rental income. You can track rental income to ensure it's in-line with other properties so to avoid opportunity costs, but the bigger more important question is whether or not rental income will continue to rise. This question is at the heart of market analysis.
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