An accurate market analysis is crucial in the Real Estate world. It is essential to go beyond a Comparative Market Analysis (CMA), an analysis of current market values of properties compared to a property you are looking to buy or sell. By conducting a CMA, you value a property based on the price of recently sold similar properties. A proper Real Estate market analysis needs to account for several other characteristics of the area in which the property is located, such as economic and education factors, education, and social and political issues.
An essential and often forgotten step you must accomplish before starting a market analysis is to have a clear goal. Otherwise, your research has no purpose or direction. This goal must be realistic and attainable and should, as in any area, be part of a long-term strategy, which sometimes means passing on great opportunities just because they do not match your plan. This goal can be, for instance, acquiring a duplex and living in one of the units while renting the other to pay for the property expenses. Another example is buying a 100-unit condo. It simply depends on your strategy, financial capacity, and determination.
This article will provide you with a simple but explicit guide on conducting an accurate and reliable Real Estate market analysis whilst explaining the three research levels you must go through as an investor.
Level One Research
After defining your goal, it is time to move on to the first phase of the research. Despite being intensive, if conducted efficiently, it can be completed considerably fast and, most importantly, it can be executed entirely from home.
This part of the market evaluation aims to discover everything about the city in question since everything matters in real estate. The first step is to find and read all the newspapers and business journals related to the town, and thankfully this information is all available online. One thing to take into account, in this first step, is to follow in-depth every lead or interesting story that might help draw a picture of the market and know what is going on. Another great source of information is government websites, trade organizations, and even social media groups where residents share problems, ideas, and future projects to be implemented in the city.
When visiting all these sources, it is essential to know what to look for and what truly impacts the market. One of the significant factors that characterize a market and that will help you analyze it is the supply and demand, indicated by employment and population. However, there are many other essential things to have in consideration.
To achieve an accurate perception of supply and demand, it is essential to know these concepts' basic definition. We can define supply as the number of rental properties available in the market and demand as the number of individuals or families looking to rent a house. Ideally, supply should be low, and demand should be high. But how do we measure or quantify these analytics? To find the supply, you will need to access the number of properties available for renting and analyze it, considering the market or submarket size.
On the other hand, demand can be obtained by looking at occupancy rates in the area. Another great way is by looking at rent prices and deals: if there are too many move-in specials, advertises or incentives. Also, if the price in rents has decreased considerably, it might indicate that demand has also decreased.
Also, to help you determine these metrics, you should look at the population and employment situation. However, there is no need to be an expert to conduct this analysis correctly. It is known that jobs drive residency, so it is helpful to look at this indicator. The perfect scenario is a city with lots of employment opportunities and reputable companies with good products and services that have growing demand. This indicates a stable employment scenario. However, it is crucial to do a thorough evaluation because sometimes, even a city with lots of jobs can be overbuilt. If a city's employment is too dependent on a specific company and the company relocates, the market will probably plunge. The second indicator that will help you determine supply and demand is population. Here, the question you should ask yourself is, what makes people move to a city? Obviously, you want to invest in a town with lots of people and characteristics that go along with your goal. For instance, if your goal is to buy multi-family units, you want a young and growing population. A good way to quantify and know the area's population is by contacting the city officials or checking their website. Nevertheless, you want a city with a specific persona or living experience built into the area, and this might be a famous place or a more reserved but prodigious area. A recently redeveloped area is also an excellent opportunity and is considered to be a population magnet.
After having defined the significant factors, you need to go in deep and find future projects, major events, neighbourhood facilities, among others. To accomplish these tasks, the local newspapers and government websites are handy sources. In your search, you may find that there will be a new highway construction that will impact the traffic patterns and transform areas, and this can make isolated neighbourhoods more attractive and ultimately change them. Other vital constructions are new sports stadiums and arenas and universities, since they bring tens of thousands of people to the area and, in the second case, an annual steady stream of students, professors and staff. Moreover, regional airports and military bases can make an area appealing to invest in since they can bring more people and businesses to the site. Not all military personnel live on the base, so that they will need a house nearby. Although, it might not be the most secure investment since the base can close. Finally, company relocations and major events can positively affect a city and completely revitalize it by creating numerous new jobs and migration of lots of employees, along with a massive injection of new money.
After all this research, you will be armed to move to the second phase, but it is fundamental to inspect three things:
If the market can withstand ups and downs and is not heavily reliant on one of the factors.
To recognize an excellent economic diversity, the market doesn't fall due to one industry sector's failure.
To determine the affordability of housing in the chosen market: as an investor, you should look for markets where the cost of homeownership far exceeds the cost of renting.
Level Two research
The second phase of the market evaluation process is to verify, in person, whether the collected information and assumptions are accurate or not. The first step should be contacting and arranging meetings with property managers, commercial brokers, banks, city officials, and business people such as the local apartment guide publisher. These people will help you determine if it is a vibrant and progressive city, as you might have concluded in your evaluation, or perhaps if that's not the case and you are looking at a risky scenario. During this stage, you will contact many people from different areas that can become a part of your team; on top of that, you still can ask them for a recommendation of lawyers, property managers, or accountants to complete your team. These people will also guide you in the narrowing process until you have selected a specific submarket.
You should have a vivid picture of the market and several target properties by the end of it. Moreover, you should use this trip to get a good look around some of the neighbourhoods and get to know the local stores, public facilities, and get a sense of the area's life.
Level Three research
On this level, you, the investor, should contact, again, all the team referrals previously involved in the process and ask them other questions. These team referrals should be able to provide you with useful insights and opinions that can help you reach a decision, as well as suggest websites, analyst newsletters, economic development offices, city government contracts, and other business people from the area in which the property(ies) is(are) located, so that they can keep you informed on what is happening in the area, as long as it is necessary. This process helps you decide whom you want on your team. Signing up for free newsletters, receiving emails from real estate agents, commercial brokers, loan officers, and other professionals are extremely helpful. It allows you to receive most of the information automatically and thus save time by not having to research it yourself. It should be noted that the Internet is the critical factor to successful research since nowadays everything is online and available.
This process of contacting people and meeting some in person has some costs associated, mainly travel expenses and accommodation. However, these costs are not that high once you realize the time-saving and free information received during the whole process. And above all, your perspective and objectivity are maintained and emphasized.
Market research allows you to improve your projects by expanding your vision: you get to redevelop the area you are investing in and give the people exactly what they want and need. Research is mandatory even if you feel like you know the area well: there is always something to learn and, most importantly, there is always something changing, be it the market itself or new infrastructures, among many others.
Conclusion
By following and applying this three-part method, you will be able to conduct a thorough and precise evaluation, which will ultimately allow you to have an overall perspective of the market and help you find properties that align with your goals and objectives as an investor.
An meaningful note to have in mind is that this market analysis is not enough: after finding a property, a financial analysis will be crucial to ensure a successful investment.
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