One of the first things that you must do to get started as a real estate investor is to know what is taking place in your market. You must know what is happening in your market so that you can tailor your investing strategy to your market. You need to approach your real estate investing business as a business. Think about this idea for a moment…
When a new major retailer (Walmart, Home Depot etc.) is looking to open a brand new facility in the area, they will do market research beforehand. They are going to do some demographic research to see if the store would be able to sustain itself before they move forward. In a similar manner, you are going to need to do a little bit of research to ensure that you are using the right techniques with your real estate investing business.
Once you know what is happening in your market, you can adjust your strategy accordingly. Based on what is going on in your area, will seller financing be a good strategy? What about wholesaling or lease options? Each of these strategies are more effective under certain market conditions and when you align your strategy with your market conditions, you will increase your success significantly.
So, the real key is to know which indicators will provide you with the most useful information.
Key Indicators
Jobs – Employment s a key factor that drives the real estate market. Generally speaking, people will want to live nearby their employment. So, as jobs are moving into an area, this will increase the demand for housing and rentals. If the area does not have many jobs coming in, you will also see a decreased demand. Since the real estate market is controlled by supply and demand, the number of jobs coming in to an area gives you a very good idea of the demand. You have to know this to know what is going on in your area.
You can obtain a lot of information from the city planner. They can tell you about new companies that are moving into the area, how many jobs they are creating, and the income range for those jobs. This is valuable information to have as a real estate investor.
Occupancy Rate – A factor to understand the demand for rental properties in the area is the occupancy rate. Vacancy is a key factor to know whether rental properties are in demand in your area or not. This is another perfect example of why you must know your market prior to investing. If vacancy rates are very high for your area, investing in rental properties is probably not the best idea for you. You would have a harder time finding a tenant. The property would be vacant for a while and you would continue to make mortgage payments. This is why it is critical for you to start your investing business by knowing your market. This will save you a lot of time, money, and heartache later on.
Property management companies are a good place to obtain occupancy rates. Call them and let them know that you are an investor and considering several properties in the area. They will see you as a potential client and they will usually be happy to provide you with the information that you are seeking. Another alternative is to look in the newspaper each week to see the homes for rent section. Over time, this section will give you an idea of what the demand for rentals is for your market.
Rent Incentives – Rent incentives can be a key indicator of the balance between the supply and demand for rental properties. As a general rule of thumb, the fewer rent incentives you see, the more demand there is over the supply. When the supply of rental properties is greater than the demand, you will see many landlords offering some sort of incentive or promotion. They are trying to give a potential tenant a reason to choose their property over the rest of the competition. So, when you see a lot of rent incentives, it means that the supply of properties is greater than the demand for rentals. You will see incentives like a low deposit, a few months of free rent, cash towards buying a home, or some other sort of offer to get them in the property.
Incentives are easy to spot as you are looking at properties on the Internet, in the newspaper, or any other method where you can find them. The important part is that you see a lot of incentives. It will not just be one here or there.
New Units Permitted – When someone is going to build a home, they must obtain a building permit from the city. Your city will have information on the number of new building permits that have been issued over the last month and the last year. Every home that is built adds to the inventory. Since supply and demand are the factors that are driving the market, the building permits add to the supply.
As an investor, if you see that there are a lot of jobs coming in (demand) and there are not very many units permitted (supply), then that means that you have found a hole in the market. You could start looking at developing some land and building new houses to meet the incoming demand. See how this information can help you get started on the right foot and see the opportunities in your market?
The city planner has the information on the number of new units that have been permitted. As you might have noticed, the city planner is an extremely valuable resource for you as an investor. Most real estate investors overlook the value of what the city planner can offer. It is highly recommended that you spend a little time with your city planner to know what is happening in your area. You can make a lot of money using their market knowledge coupled with your investing strategy.
Inventory for Sale – This indicator refers to the existing homes that are currently on the market. We are trying to measure the supply and demand in the area. The supply is going to be the total of new units that have been permitted and the existing homes for sale.
The existing homes for sale are an easy indicator to measure. Any real estate agent with access to the Multiple Listing Service can tell you how many homes are currently for sale in the area. I highly recommend tracking this on a monthly and yearly basis. This will help you measure whether inventory is rising or falling.
Average Days on Market – The days on the market will tell you how long (on average) it is taking for homes to sell in your market. This will give you an idea of the activity taking place in your area and how quickly a home will sell. Market activity affects the balance between the supply and demand. The days on the market (DOM) can help you know how long it will take for the demand to catch up to the supply and vice versa.
The days on the market can also be obtained from your real estate agent that has MLS access. Let them know the areas that you want to focus on and it can give you that information. You will also want to track this monthly so that you can see changes going on in the market.
Summary
Now you can use this information to begin your real estate investing business. To be successful, you must know what is taking place in your area. These key indicators will help you understand supply and demand in your market. You will also be able to see opportunities in your market.
If you are tracking these indicators over time, you can also see changes that are occurring in your market. You will then be able to adjust your strategy to match the changing trend. Doing this research is very profitable, and it will make the difference between an average investor, and a great investor.