What Makes a Good Real Estate Market for Investors?
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Real estate is all about location, and local market conditions can bolster or drag down your return on investment. Standard real estate market evaluation metrics are relatively unchanging, but social, economic, and political developments can impact these metrics. A nuanced interplay between each factor pushes some markets to the top of the investor list while others fall from prominence.
Spotting these trends is vital for any investor who wants to time their acquisitions and disposition just right to maximize returns, optimize their investment strategies, and successfully enter a new market.
There’s no perfect formula for evaluating a real estate market, but these are core signifiers of an excellent real estate market every investor should examine:
- Price Appreciation
- Population Growth
- Job Stability
Positive price appreciation makes renting or selling a house easier and impacts long-term profit potential, whether it’s a dream home you live in, a rental property, or a flip.
Markets with continually positive appreciation often see rent price growth as well. According to the Federal Reserve Bank of Dallas, soaring house prices of the past two years have steadily pushed up rent and owners’ equivalent rent (OER). The forecasts for rent inflation in 2023 predict acceleration and then moderation in mid-2023.
Historic and steady appreciation signals to future buyers that the market will continue to grow. It also makes selling easier because there’s a strong correlation between price growth and home sales. As total sales numbers increase in an area, average home sale prices rise, but inventory can restrain or fuel a market’s price appreciation growth rate.
Limited housing stock in a city with high homebuyer demand can sharply raise home prices. As we witnessed shortly after the onset of the pandemic, a perfect storm of homebuyer demand and migration pushed the price per square foot of a new single-family home by 11% in only two years.
If an area becomes overdeveloped, it will likely lead to hyper-supply and eventual price depreciation. So, investors, especially those who plan to buy and hold, must continually evaluate their portfolios based on emerging market trends.
The rent-price ratio is one metric relevant to evaluating whether a high price for a house is a sign of a strong market or a pending bubble. This measures the relationship between what renters are willing to pay versus home much homebuyers are willing to spend.
According to the Federal Reserve Board, this metric can help predict changes in real rents and real prices over three years. When home prices are high relative to rents, it may indicate that homes in the area are overpriced, making it an excellent time to sell before a housing bubble peaks and prices sharply decline.
Related Reading: How to Buy Real Estate in a New Market
When price appreciation in a local market outpaces national averages, it may become cost-prohibitive for some buyers, but it doesn’t mean it’s not affordable.
Affordability isn’t always about rock-bottom prices; it’s relative to the local demographic’s income. The best cash flow markets have home values two to three times the average incomes.
For instance, Naples, Florida continues to see massive price appreciation growth, with a median sale price of $712,500 as of November 2022. The typical homebuyer may find that price tag outrageous and out of budget, but with an average household income of $234,446, that price is manageable for residents. Despite having housing costs much higher than the national average, potential cash flow opportunities still exist because those costs are roughly three times a resident’s average income.
The same principle applies to renters. An ideal rent-to-income ratio is at or under 30%. Although steady rent growth is tremendous for cash flow, landlords should be cautious of areas with a high rent burden as it may impact a tenant’s ability to keep up with their bills and reduce the pool of qualified renters.
Additionally, depending on other factors like the rent-price ratio, the cost of capital, after-repair value, and strategy, purchasing property in a market with higher-than-average housing prices may still be a good investment choice.
A well-priced home doesn’t matter if there’s no one to buy or rent it. Population growth sustains investor opportunities. Capitalizing on the influx of people to the hottest new market requires understanding renter and homebuyer expectations.
In the past, buying near a major metropolitan area guaranteed steady population growth, but migration trends have changed drastically since the pandemic.
A recent migration trend report from rent.com shows the South and the Midwest saw the biggest increases in inbound renters, with North Dakota, New Jersey, Louisiana, New Hampshire, and Mississippi seeing the largest influxes. Similarly, homebuyers are looking to move to the Sun Belt, especially Florida. According to Redfin, five of the top ten metros for homebuyers are in the Sunshine State, including Miami, Tampa, Cape Coral, North Port-Sarasota, and Orlando.
Depending on whether your strategy appeals to renters or buyers, your list of target markets is likely to change.
A new job or the opportunity to work remotely is a significant driver of renter and buyer migration in the United States. Job growth is another crucial factor when evaluating a real estate market.
Traditionally, this required researching the number of employers in the area, workforce education levels, and employment rates. Today, another factor is the emergence of “Zoomtowns,” dubbed so for the video conferencing tool used by white-collar knowledge workers moving into areas with more affordable rents and home prices. Another draw of Zoomtowns, primarily located in the Sunbelt, is the ample land, fewer restrictions on homebuilding, low to no income taxes, and homestead exemptions.
The shift away from densely populated coastal cities to smaller midwest and southern towns began before the pandemic, but once the office became optional, rents and home prices exploded in places like Boise, Idaho, Phoenix, Arizona, and Charlotte, North Carolina.
However, the question remains if employers will remain amenable to these arrangements or ask employees to return to the office, even if only part-time. Employers may feel entitled to restrict remote options if the economy weakens and job opportunities stall. On the other hand, they may see the benefits of reducing operating costs by eliminating or reducing office space.
A survey from Upwork reports that 22% of professionals will be remote in 2025. That’s a significant increase from pre-pandemic rates, but much lower than the 41.8% of remote workers nine months into the pandemic.
Depending on how remote work pans out, booming Zoomtowns may go bust.
A Closing Experience that Fits Your Strategy in Every Market
Those who buy and sell real estate as an investment asset have different goals, financing structures, and expectations than an average homebuyer. As you plan for the new year and a changing real estate market, Blueprint can help meet your real estate business goals with a title and closing experience built for innovative single-family residential investors. Our team understands your needs, and we’ve created a process and product to align with them.
Learn more about Blueprint by scheduling a demo.