Key Ingredient: Local Vacancy Rates

Finding national or statewide vacancy rates is not difficult. But as a real estate investor, what should concern you the most is the local vacancy rate.

This is one of the fundamentals worth paying attention to, because if vacancy rates are too high, cash flow will not work in the short term; and that spells disaster.

Check local stats by comparing current and past construction trends, rental occupancy and any other emerging news and information. Local real estate brokers, lenders, and management companies have this information, and doing the research is essential in order to judge the market. The fundamentals are easily overlooked with emphasis on property values, but this can ignore what could be the most important aspect of investing: Can you find a tenant and keep the investment property occupied?

On a national basis, the level of rentals (versus home buyers) has been growing, no doubt a reflection of concerns about the health of the housing market. With more rental demand, market rents have risen even as housing values fall. This is a positive trend for investors -- cheaper properties and higher rents.

The danger in relying on national averages is that they tell you nothing about what is going on locally. You need to investigate your town or city to truly understand what you face as an investor.

Cash flow is the greatest priority in this effort. Emphasis often is placed on investment value. So a new investor might think the time is right to buy investment homes because prices are on the rise. But investment value is a long-term concern. Of more immediate concern is the more urgent question of cash flow. To cover all of your investment costs, you need low vacancy rates. These include the mortgage payment, insurance, utilities, and maintenance.

Just as stock market investors are advised to pay attention to the fundamentals (profits, dividends, debt management, etc.) real estate investors should apply the same standards. The fundamentals do matter, and the local vacancy rate is among the most important.