Investing in real estate can be a profitable endeavor— if you go about it the right way. One of the core elements of REI success is finding the right market in which to invest in a property. At a higher level, this means choosing the right city or region. Then, a skilled investor will drill down to look at the attributes of individual neighborhoods before making a decision.
Here are some helpful tips to help you choose the right real estate investment market to reach your long-term goals.
Tips for Choosing the Right City
The first step in finding the right market is to look at the city— or region if you have a suburban or rural niche. Most beginner investors will start with a city or region that’s physically close to them out of pure convenience. However, it’s worth broadening your scope to find the ideal market.
Here are some factors to consider when seeking the right city for your investment.
Current Real Estate Market
Take a look at the current real estate market, minding both historical trends and forecasting. If you’re planning on investing right away, it’s vital to know what’s happening in the local market and whether it’s a buyers’ market or sellers’ market. While the market status will evolve over time, often alternating between buyers’ and sellers’ every few years, it’s important to know what you’re working with.
Generally speaking, a sellers’ market will drive property prices skyward, making it an unideal time to buy. However, this decision ultimately depends on your niche and overall investment strategy. If you’re buying and flipping, a sellers’ market can be a great way to increase your ROI. If you’re buying and holding, it’s better to purchase in a buyers’ market and sell in a sellers’ market.
A sellers’ market can also be beneficial for investors who plan on offering short or long-term rentals. If you’re operating in a sellers’ market, there may be buyers who are forced to rent as they wait to find a property to purchase. For example, Denver real estate prices have been steadily increasing for years as a result of decreased supply and increased demand. As such, the demand for rental properties has also increased, making this city a prime investment location.
Options Within Your Budget
While you might be gung ho to jump into a hot market, it’s not always a feasible option. Setting and sticking to a budget is paramount for success with real estate investing. Look for a city that offers options within your budget that has the potential for a high return. In other words, don’t buy worthless property in a booming city because it’s cheap.
Local Economic Growth
When determining which city is best for your investment, take a deep dive into economic growth. Consider everything from the cost of living to the unemployment rates, and read the trends to determine if the economy is growing or in a state of decline.
This research is particularly important for investors with a buy-and-hold strategy, as you want to choose a market that will continue to sustain you for years to come.
Local Population Growth
You’ll also want to look at if people are moving to or away from the city you’re considering. People moving in means more demand for rentals and properties. People moving out means that you could struggle to fill your investment property with tenants in the coming years.
Not all investors have their eyes on long-term rentals. If your strategy is to have short-term rentals through Airbnb, you need to take a look at the local tourism statistics. Is this an area that people want to travel to for leisure? How has COVID-19 impacted tourism in this city? Does this city have legislation against short-term rentals? These are important considerations for short-term rental investment properties.
Rent to Price Ratio
Another important consideration is the price-to-rent ratio. Many aspiring homeowners use this ratio to determine whether it’s cheaper to rent or buy a home in their city. As an investor, you can use it to decide whether or not it’s worth investing in a rental property.
Tips for Choosing the Right Neighborhood
Once you find the right city, the next step is to determine which neighborhood is right for your goals. Here are some key considerations when shopping around.
Evaluating the Local Trends
Hone in your research to evaluate hyper-local trends in a given neighborhood. Ideally, you’re looking for a place that’s experiencing gentrification or growth after a period of decline. If people are trying to move into this neighborhood, this is where you want to be.
Consider what assets are nearby when choosing a neighborhood. For example, you might consider access to public transportation or high-quality schools. Look at the proximity of grocery stores, gas stations, and other convenient amenities that attract people.
When evaluating the rent to price ratio and the local housing market, don’t forget to look at your neighborhood’s property taxes. Generally speaking, a place with more amenities nearby will have higher property taxes. However, growing areas and recently gentrified neighborhoods often have lower rates.
As this is a recurring cost that impacts your property’s value, it should always be assessed when looking for a neighborhood.
Appearance and Surroundings
The majority of your decisions when choosing a real estate investment property should be data-driven. Ample research from local Chambers of Commerce or archives can provide invaluable insights when choosing the right location for an investment.
However, when most people choose a home, their emotions play a pivotal role. As such, it can be helpful to put yourself in their shoes.
Stand outside in the neighborhood you’re considering and take a look around, picturing this location through the eyes of someone who wants to make a home. Think of how the area looks and feels, using all of your senses. Are there birds singing in the trees on a beautiful avenue, or are there big piles of garbage everywhere?
The more visually and emotionally appealing the neighborhood, the better your chances of finding your ideal tenants.
Find Your Perfect Investment
Use these guidelines to narrow down the ideal location for your next investment property. Remember to build a network of informed professionals and do your research when deciding where to invest.