HOW TO QUICKLY EVALUATE ANY MARKET USING KPIs
Location, Location, Location, even those that are not seasoned in the real estate world have heard this idiom, and well because it is true, well mostly true...
Do not get me wrong, location is always a major determining factor when choosing a market, but depending on the individual Investors' goals there may be some areas more desirable to buy than others, and for reasons, you might not expect.
Factors such as; construction costs, median sale price, market rent, cost of living, crime, population and job growth, or proximity to major metropolitan areas all need to be taken into account when you are selecting a market.
Where do you start? What is the first statistic or metric you should lookup? When first starting out this can all be very daunting, especially if you are investing long-distance. Well, you are in luck, today I am going to highlight some Key Performance Indicators that will help you evaluate any real estate market!
All Investments require a proper amount of due diligence, but if we went into full underwriting for every potential asset that we came across we would never get anything done. So in the name of efficiency, here are some KPIs that will help you quickly qualify or discard any market.
Before we dive in, what are Key Performance Indicators ( KPIs )? KPIs are quick metrics that are tracked over a period of time to give you a general sense of the trends of a given subject. KPIs are used for a fast evaluation when brevity is important in the delivery of information.
LOCATION:
...location, location. Sorry, it's hard to not say it 3x.
We will start with location, and when evaluating a market it is best you start by knowing where this market is. The question seems simple but if someone asked you about the market you are investing in or evaluating, how much could you tell them? It is easier to answer this on a micro level in a city or town, sure that neighborhood or street is better than that one, bam location right!? Not exactly what we are going for in the sense of this Macro evaluation, we will get to Micro evaluations in time.
Here is a couple of Quick KPIs for geographical data evaluation:
- Urban, Suburban, or Rural
- State, County, and Municipality information ( i.e. taxes, zoning, laws, permits... )
- Nearest cities with populations of 50,000+, 200,000+, or 1,000,000+
- Climate & Weather
POPULATION:
"Historically a major population center, Detroit has undergone a considerable reduction in population with the city losing over 60% of its population since 1950. Detroit reached its population peak in the 1950 census at over 1.8 million people, and its population has decreased in each subsequent census. As of the 2010 census, the city has just over 700,000 residents, a total loss of 61% of its 1950 population." -Williams, Joseph (January 22, 2020). "A Tale of Two Motor Cities". US News.-
Population trends affect all niches of Real Estate Investing, knowing and understanding the data given by the population trends of a given geographical area is essential in Real Estate Investing, especially if you aren't investing in your "own backyard".
There are many different REI niches, all have a specific target customer affected by population trends that impact your decision. Just as it would not make sense to pay a premium for 50,000 sq ft in the Hollywood Hills to build a self-storage facility, it would also not make sense to build a $25,000,000 luxury estate in Shreveport, LA.
Your goal with evaluating the population is to try and see a trend, is the area shrinking or growing? Is it a college town or retirement community? Small town or City? SFR vs Retail?
Here is a couple of Quick KPIs for population evaluation:
- Total Population
- Population Change over 10,5,2 years
- Median Age / Average Age
- Male vs Female %
EMPLOYMENT:
As illustrated by the previous begging excerpt about the city of Detroit, we can see how important it is to understand and track the employment date of a given area. If jobs go away then tenants go away, and no tenants equal no revenue, no revenue equals no business.
Here is a couple of Quick KPIs for Employment evaluation:
- Median & Average Household Income.
- Unemployment Rate
- Poverty Rate
- Major Industries
- Major Employers
- % of the workforce that are residents of the market
REAL ESTATE:
Obviously, at some point you are going to look at the Real Estate in a given area, this is probably what led you to select the market in the first place. Although all Investors have their own criteria when doing quick evaluations of markets, here are a few of my favorites that will allow you to quickly decide whether to move forward with underwriting or not.
*note; I use SFR data for 3/2 bedroom homes as they are usually the easiest to find data on, and remember the purpose of this article is a quick evaluation to see if you will move forward with more in-depth underwriting.
Here is a couple of Quick KPIs for Real Estate evaluation:
- Average rent amount
- Average Sale Price
- 1% Rule ( Rent/Sale Price )
- Rent vs. Own %
- New construction vs existing home sales %
CRIME:
Crime rate is a major driving factor in the quality and desirability of a given market. Crime stats are readily available and fairly easy to interpret. The less crime the better, rising property crime trends usually lead to a rise in crimes against persons, leading to a general decline of the area.
Here is a couple of Quick KPIs for Crime evaluation:
- Crime Rate
- Crime Rate compared to National Average
- Property Crime
- Crimes Against Persons
- Violent Crime
- Murder Rate
- Safety Rate
- Likelihood of being a victim of a crime as %
Thank you to everyone that read this article. I hope it was helpful and will help everyone with their future evaluations.
If you have any questions I am always available to answer please feel free to reach anytime:
- 831-402-2950
- [email protected]
- IG @cotyjdolan
BONUS!
Here is a list of some websites I like to use to get data for market analysis:
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