5 Signs of a Questionable Real Estate Market

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There's good news and bad news when it comes to the real estate market. The good news is that there are always opportunities to make money—no matter how hot or cold the market is. The bad news is that some markets may offer you significantly fewer returns and a ton more headaches to deal with.

We've listed down the key indicating factors of a bad real estate market, so you have a quick checklist to shortlist your location options before purchasing a property. Take a look below.

5 Signs the Real Estate Market is a Bad One

Just because the real estate market you’re eyeing has one of these factors doesn’t automatically mean that it’ll be bad for your investment. However, if there is a combination of several of these factors, we strongly suggest that you look elsewhere for better opportunities.

1. A Stagnating Population

One of the major signs of a bad housing market is if there are no new people moving to the area. As a real estate investor, no new people means there won’t be a consistent demand for homes and rental properties—where their stagnation equates to yours.

In contrast, areas where the population keeps on increasing provide a reliable anchor to the local real estate and rental market. You won’t have to worry about the lack of buyers or high vacancy rates, you’ll get to enjoy increased property values for equity gains and relatively stable cash flow.

2. A Poor Economy

While a struggling economy doesn’t always point to a bubbling housing market crash, betting on “potential” or possible recovery is a high-risk strategy. After all, none of us can accurately predict economic and housing market trends, so you’re better off with areas that have a strong economy.

Moreover, you’ll want to steer clear of local economies that are hinged on a single industry or “putting all your eggs in one basket.” Instead, you want to invest where there are several successful industries, so they balance each other through the ebb and flow of the market.

The key things you want to focus on are the area’s gross domestic product, employee rate, and job growth. If these things are on an uptrend, then the area has a relatively well-performing economy for you to leverage your real estate investments.

3. A High Crime Rate

Naturally, a high crime rate is a sign of a bad housing market.

Not only will you have a difficult time attracting quality tenants to your rental properties and getting them to pay on time, but you’ll also have a hard time selling your property when you need to—nobody wants a property nested in crimes. You’ll also have to deal with the increased likelihood of your property getting vandalized or illegally occupied if you leave it vacant for too long.

Instead, for the majority of your options, you’ll want to ensure that there is a low crime rate on two levels: city-level and neighborhood-level. For highly diverse areas like Metro Detroit and the City of Detroit, you’ll want to further your research by scanning the crime rate at a street level, too.

4. An Unfavorable Rent-to-Price Ratio

For traditional rental property investors, another indicator of a bad housing market is a low rent-to-price ratio among properties, which is a figure that falls below 1%. Instead, you want that ratio to be 1% or higher to secure positive cash flow. Here’s the formula for you to use:

The industry states that the lower the ratio, the lower the home prices, where residents will most likely purchase instead of renting a home. This isn’t good news for you, as it results in a smaller tenant pool and higher vacancy rates to manage. Moreover, you’ll have difficulty generating a cash flow that’s strong enough to recuperate your initial investment and maintain the home long-term.

5. A Strong Seller’s Market

Now, a seller’s market doesn’t automatically mean a bad housing market. In fact, many of the hottest markets in the nation are seller’s markets, and finding a buyer’s market is like finding a rare gem.

That being said, you should generally avoid any market that favors the seller too much, or you’ll find yourself struggling with high prices, intense competition, and more. And if you still want to invest in a seller’s market, ensure that it has a wide range of characteristics that leans towards your advantage. You’ll also need to have good negotiation skills and in-depth knowledge of real estate transactions.

But, of course, if you’ve already found an excellent investment deal, it won’t necessarily matter anymore if the market is a buyer’s or seller’s market. After all, there’s still money to be made in seller’s markets, although it won’t be as easy as investing in its counterpart.

Spot the Good Ones by Weeding Out Bad Ones

Avoiding bad real estate markets will be second nature to you once you’ve familiarized yourself with their tell-tale signs. So take your time to analyze every facet of a given market with our list above, and only invest when the data is in your favor.

Should you need more help searching for the best place to invest in real estate and rental properties, with our team today. We have been operating as a property management company for more than two decades, and have everything you need to know about investing for success.