How do you evaluate markets?

Question

Hi everyone,

I'm in the early stages of deciding where I want to focus my initial efforts in REI. Specifically, I want to evaluate a few markets for the purpose of buy-and-hold, cash-flow investment in residential properties (single-family houses or 2- to 4-unit multi-family properties), so I'm curious about the process employed by other investors to assess and contrast a handful of markets when determining where to invest. In particular:

Exactly which factors/data did you consider?

How did you prioritize this information?

Why did you adopt this particular approach?

Would you do things differently today?

Please note, I understand that ...

There is no 'one-size-fits-all' methodology.

Opinions will differ widely with respect to which factors one should consider, and the relative importance of each.

Circumstances and objectives will vary from investor-to-investor, and from market-to-market.

A high-level analysis of a city's real-estate market has limited utility since 'all real estate is local' and opportunity exists in most every city.

That said, I still think it would be instructive to learn about the thought process and methodology employed by others when analyzing the potential of various real-estate markets. From what I've read thus far, REI authors touch on this subject in only the most general terms -- i.e. to evaluate a market, one should consider population growth, economic conditions, infrastructure, average cap rates, housing supply and demand, the legal environment, etc. While such guidelines are a good starting point, hearing a few examples would be helpful.

Thanks,

Scott...

Note: I don't think it's relevant to the question, but if you're curious, the markets I'm interested in contrasting are as follows:
Phoenix AZ
Tucson AZ
Charlotte NC
Charleston SC
Portland OR
Vancouver WA
Dallas TX

Donna Blanchette · Answer

When I evaluate a market, I look at it's economic base for future growth (i.e. industries, military, tourism) - obviously, the potential for strong future growth will usually translate into stronger demand for real estate... I also look RE growth potential contrasted to what has inhibited past growth - for example, it the community land locked, controlled by environmental regs, lack of water, etc...

Allyssa McCleery · Answer

@Elizabeth Wilson Okay thank you!

Arthur Lyons · Answer

Allyssa Mccleery good question. I wouldn't say it's a bad or good thing, it could be either based on a bunch of other factors. Yeah I know thanks a lot Art for that profound answer haha. My opinion is there are a ton of factors in areas with high foreclosures... sometimes those areas turn more into good rental areas. People couldn't afford to keep their homes and need affordable places to rent. In some other cases investors swoop in and buy the foreclosures fix them up above their previous condition and are able to resale. My favorite metric to determine if a high foreclosure area can be a good rental or flip is to look at the days on market of both the foreclosure and after an investor may have tried to rehab and flip. Look at those DOM's. If the days on market are high I would stay away as a flip. THEN take a look at the days on market for the rentals.. of those are low then you found yourself a good rental area. Then there are just those desolate towns where foreclosures are super high and everybody has left the area. Stay away from those also. Hope that helps.

Elizabeth Wilson · Answer

@Allyssa Mccleery - I completely agree with what @Arthur Lyons and add that at least from what we've been seeing in the Tennessee foreclosure space is that there have been a definitely trend in the number of foreclosures diminishing and the number of new people wanting to buy at the courthouse. There are still lots of foreclosures but at least as a trend it isn't surprising considering how hot the RE market in general is.

Allyssa McCleery · Answer

Okay much more complicated than I thought. Thank you for the input!@Arthur Lyons

Allyssa McCleery · Answer

I know this was posted a long time ago but hopefully will get some response... When it comes to foreclosure rates and the percentage of vacant homes, is a high number bad for investing?

Joseph Smith · Answer

I am into fix and flip. So I usually get a realtor in my area to pull some information in the areas I am interested in and see if houses are selling in the areas fast and usually at what price and etc.

Scott Sutton · Answer

Donna and Realty Dude, thanks for sharing. Just fyi for those who might be interested -- in another thread, someone recommended city-data.com for statistics on various US markets. The forum on that site also appears to be a voluminous source of (mostly subjective) commentary. Jon H and J Scott also pointed me to two books that get into some detail on the subject of market evaluation. (I have as yet to check out either.) "Emerging Real Estate Markets: How to Find and Profit from Up-and-Coming Areas," by Dave Lindahl "How to Buy and Sell Apartment Buildings," by Eugene Vollucci

Dale Osborn · Answer

Our initial goal was to have 15 free and clear homes. The price for a home was around $65K and rents were $500/month. A 27 unit apartment was for sale for $20K per unit with $400/month rents (all 2-bedrooms) so we moved into apartments. After 10 years we got burnt out on apartments and moved into mobile home parks. When we get burned out on these - who knows what will be available. The cost involved along with rental market rates was a determining factor for us.