10 Key Factors to Consider in Deciding What Market to Invest In

by | Sep 24, 2021 | Investing Process, Real Estate Investing 101 | 0 comments

Once you decide to invest outside your local area, the possibilities are limitless. This can be both exciting and intimidating, all at once.

A flood of thoughts may come to mind immediately. Should you consider a busy city or metro area? You may think back to a vacation you enjoyed and the buildings and parks you saw there.   

It’s easy to do a deep dive online, cross-referencing “best real estate market” lists, trying to make sense of current population trends, and even looking up news local to areas you’re interested in. But honestly, this won’t really help you draw any conclusions, and you’ll spend a ton of time and energy.  

Instead, I recommending starting by assessing your personal investing goals. Maybe you want to invest in a growing market that also provides decent cash flow. Using that basic framework, this research checklist will help narrow things down: 

  1. Job Growth
  2. Population Growth 
  3. Job Diversity 
  4. Landlord/Tenant Laws 
  5. Taxes 
  6. Geographical Features 
  7. Cost of Living 
  8. Local News 
  9. Local Government 
  10. Whether You Have an Unfair Advantage

Job Growth 

Since steady job growth indicates a healthy local economy that’s attractive to new businesses, developers, and residents to the area, this is the most important metric to evaluate in each market.

Job growth is a leading indicator of population growth. The more jobs, the more residents, and the more likely the area will maintain a strong tenant base. When more people are attracted to an area, the demand for housing increases, which drives up rent and real estate prices, as long as it isn’t outpaced by new supply
(i.e., new construction).  

Population Growth 

 Since the population in a certain area could be affected by natural disasters, migration patterns, and more, you always want to research it after job growth.  

Finding an area with long-term upward population growth trends (not just a temporary increase) is key, and a major factor supporting that trend is job growth in the area. 

These two metrics provide a good picture of the health and future of a given market.   

Job Diversity

You want to find an area with a variety of industries supporting the local economy. Strong job growth is much less encouraging if you discover that most of the area’s jobs are in the tourism industry, for example. 

A recession or a negative news story (or perhaps, a global pandemic?) could significantly impact the number of tourists, and therefore, the job growth and the population trend. A diversified job market is much more attractive since a hiccup in any single industry wouldn’t be likely to affect the area as a whole.

Landlord/Tenant Laws 

Beyond the top 3 factors – Job Growth, Population Growth, and Job Diversity, the next best factor to learn about has to do with the laws governing rental properties. 

For example, rent control is great for tenants, but makes it incredibly challenging for landlords to make a return on an investment in an area where the costs of contractors, pest control, and property management are all increasing.  

As an investor, you want some insight from local property managers who are intimately familiar with these laws so you can identify landlord-friendly markets. 

Taxes 

While taxes are usually the last thing on investors’ minds, they can make a huge difference on the bottom line.  

Property taxes can be a big part of your operating budget, so they affect your overall returns. Property tax structures and the events that trigger reassessment vary from state to state, and some can cause properties to have unexpected tax increases that can decrease profits. Each state has a different tax structure, and it’s good to understand what you’d potentially be getting into so you won’t be surprised later.  

Geographic Features 

Use Google Maps to check out the physical landscape of the area. Look for physical barriers like a body of water, a mountain range, or other geographical features that could inhibit the area’s physical development.   

Coastal cities, as an example, are limited by the ocean. Development can only get so close to the water, which forces them to build upward or expand into the suburbs. This drives up the value of centralized real estate, especially in a time of job and population growth. 

Cost of Living 

By seeking out an area where the cost of living is low, especially in comparison to the median income in the area (i.e., greater affordability), you’re more likely to experience growth. If people can afford to live in the area easily, there is room for the cost of living (i.e., rent) to rise as more jobs and people move into the area.  

Local News 

While the other, previously listed factors are much more important, once you’re pretty “sold” on a certain area, you may want to track a few local news stories.  

It’s great to have some heads-up about new companies moving to (or away from) the area, local announcements, community developments, and anything else that would allow better understanding of the local economy and the potential future of that market.  

Local Government  

Just as with the local news, the local government is indicative of the area’s future standing. It’s a good idea to invest in areas with strong local leaders who support new initiatives, an expanding local economy, and who’s vision includes making the market vibrant and welcoming.   

Strong leadership from the local government is attractive to corporations, which supports job growth continuing. 

 

Whether You Have an Unfair Advantage  

There’s always the chance that you have greater insight into a certain area compared to other investors. Maybe you have a cousin or a friend who lives there, or you grew up or went to college there.   

Any time you possess an unfair advantage, it should give that market more weight. Local connections or a little history with a particular area can put you leaps and bounds ahead of other investors.  

What About Investing Passively in a Real Estate Syndication?  

As a passive investor, you’ll most likely focus on finding a strong sponsor first, not searching for a market. Once a vetted sponsor lets you know about potential deals, you can use these 10 factors, in combination with your personal criteria and goals, to conduct your own thorough research while avoiding feeling intimidated.   

Further reading: 5 Undeniable Reasons to Invest Outside Your Local Market