Attributes of a Strong Real Estate Market
Even though I view real estate as a passive kind of income, there may be some initial labor required before the amount of time you invest becomes disproportionate to the amount of money you make. A large portion of that initial labor consists of in-depth investigation—also known as due diligence—on a specific property or market. Here are some basic things to look for when you and your team of experts and the investing community evaluate a given market.
Rent-to-mortgage ratio.
The price-to-rent ratio is a measure of a property’s potential return on investment, comparing the monthly mortgage cost to the expected rental income. It suggests that rent should cover the mortgage and generate passive income. A higher ratio indicates a more favorable market, and it can also be calculated using annual prices.
High occupancy
The occupancy rate, also known as vacancy rate, is a crucial indicator of a market’s supply and demand. Cities typically have a 6.8% vacancy rate for multifamily properties, while suburbs have a 5.9% rate. A higher vacancy rate indicates less demand, leading to lower rent and increased turnover. High turnover can result in lost rental revenue due to additional leasing and maintenance costs. It’s important to note that vacancy rates vary for each asset class, so if you plan to invest in single-family properties, check the rates for that asset class. High occupancy rates also indicate economic strength and a potential tenant pool’s ability to pay rent.
Low default rate
When searching for a rental market, consider factors such as high occupancy and low default rates. State-based default rates are easy to find, but city and local markets can be more challenging. Contact local real estate agents and professionals for more information. Default rates are often linked to an individual’s credit score, with those with higher scores tending to default less. A low default rate indicates a robust economic situation and potential steady tenants for the future. Delegating landlord duties to a property manager can also help.
Market growth
Over the past five years, national real estate prices have significantly shifted due to factors such as the COVID-19 pandemic, inflation, and Fed rate hikes. These factors have impacted the appreciation of property value, which typically increases at a steady pace. Local markets are still in an adjustment period, with some markets increasing and others decreasing. As the dust settles, some markets are correcting from overpriced conditions, while others are still growing and thriving. Real estate investing is ideal in growing markets, as market growth is tracked by accredited institutions like the National Realator’s Association.
Affordability
Assessing a market’s median home price is crucial for determining its suitability for investment. However, not all real estate investments require full ownership. If the median home price is too high, consider smaller investments through syndications, funds, or REITs, as not all investments require full ownership.
Seven Growing Real Estate Markets (in Q2 2023)
Using market growth to identify appreciation home values and investment affordability as the primary factors, let’s identify seven real estate markets that may be worth researching further. (Data used indicates the price and growth in Q2 of 2023.)
Tallahassee, Florida
Median Home Price: $332,000
%Change: 7.1Oklahoma City, Oklahoma
Median Home Price: $247,600
%Change: 6.8Worcester, Massachusetts
Median Home Price: $452,000
%Change: 6.3Cincinnati, Ohio
Median Home Price: $294,200
%Change: 5.9Albuquerque, New Mexico
Median Home Price: $361,400
%Change: 4.6Portland, Maine
Median Home Price: $538,700
%Change: 9.1Milwaukee, Wisconsin
Median Home Price: $387,400
%Change: 6.3