How to Select a Target Market

As a real estate Investor, whether in single family rentals, multifamily apartments, commercial business properties, storage units, or whatever, one of the first questions to answer is…where? Where do I look to find my investment property?

Of course, Investor or not, we’ve heard all our lives that the number one rule in real estate is, “location, location, location!” But what does “location” actually mean? The deeper you get into real estate investing, you learn that location can actually get very technical and analytical.

But at the highest level, location means your target market area. That is, the overall geographic area, or market, where you will focus your real estate investing activities.

Smart real estate Investors identify their target markets first, and then search for their target investments within those markets. So how do we determine if a particular geographic area is a good market for real estate investing? We want to look for growth markets. That is, cities and metro areas where the economy and life are growing.

Here are four characteristics to review when looking at potential real estate markets:

1. Population Growth – We want a market in which the population growth is steady and ideally increasing. Definitely not decreasing! Basically, are people moving into this area or away from it? If you think about it, this is really a no-brainer. Why would you invest in housing in a city where people are moving out?

2. Employment Growth – Look at the employment trend in the area. Has unemployment been on the rise or has it been decreasing over the last 5 years? In other words, is there solid job growth? Positive trends in employment are a good sign of a growth market.

3. Diversity in Industry – What are the major economic industries in the city? Who are the major businesses, corporations and employers? Ideally, we want to see a variety of major industries and employers within the market, along with business moving into the area, as this is a positive sign that job creation and growth will likely continue. We will generally want to stay away from areas that are dominated by only one industry or only a few major employers.

4. Rental Trends – What have the last 3-5 years experienced in terms of rental trends in the city? Are rental vacancies increasing or decreasing? Is the city experiencing a growth in apartment buildings, or is it slowing down? Of course, for investing in rental real estate, we want markets with lower vacancies and ongoing demand.

The bottom line is that for a great real estate investment market, we want to invest in areas where the data show signs of current and continued healthy growth.

A few sources to find the data mentioned above include City-Data.com and censusreporter.org.

When analyzing markets and digging into the criteria described above, it can be a lot of data and sometimes start to seem a bit complicated. But keeping a “big picture” perspective can help us stay on track and hopefully avoid analysis paralysis.

In this regard, it helps to remember that real estate is a business with the core product or service being rental property. In any business, we want a market with a growing demand for our product. In this business, more people with more jobs brings more demand for places to live and rent.

Additionally, while market analysis can get very detailed, keep in mind that at its most basic level its just a review of one core question – “Where do people want to live?”

Conclusion

When looking for a target market, our criteria is based fundamentally on what we already know as real life issues, including…is this city a good place to live, work, and grow? Therefore, the key items we’re looking for in a good rental real estate market are population growth, job growth, industry diversity, and rental growth. And when all these factors align, then we may have found a great market for real estate investing.