When identifying the best real estate markets to invest in, it is vitally important to know what a good investment market looks like. An investor should be able to do some basic research and determine if the market meets certain criteria. Below is the price factor that can help you determine if the area you are considering is a good market to invest in.
After decades of investing in real estate, I know the price factors that truly matter. Take a look at them below and consider how your investments line up.
Consider these Price Factors When Investing in Real Estate
Prices are not more than 3 to 4 times median income.
This was the problem when real estate crashed from August 2007 through 2011. We had properties selling in some markets for 15 times the median income, like in Las Vegas and Phoenix. What that is telling us is that the locals were not buying the real estate. It was investors from the outside with deeper pockets than the locals. Real estate prices will always come back to 3 to 4 times the median income of an area unless it is an exclusive vacation area and then the national economy will determine the health of the market, not the local economy.
It is simple to determine what I am talking about. Google the median income of Colorado Springs. Google the median price of single-family housing in Colorado Springs. If it is more than 4 times then more than likely the market is overpriced. I had students in one of my business classes recently research Colorado Springs. It was interesting that at the time the median price was 3.5 times the median income. That meant that the market was not an overpriced market and possibly a good place for investment.
Research Rental Income in the Area
The next way to identify a good market is to research how strong the rents in the area are and what’s driving it. The monthly rents must be no less than 1-1.5% of the purchase price. So, for a $100,000 house, the least amount you want to get for rent is $1,000. You want to go as high up in property value as you can go in the current market. I would rather buy a higher end property if I can afford it and get a 1% gross return than I would a lower end property and get a 1.5% return, all things being equal.
The next way to make sure you’re investing in the best real estate markets is housing supply. A good market should have about six months’ worth, where supply means the number of houses listed. This means it’s got the right amount of buyers and sellers in the market. In order to calculate supply, take the number of houses that are currently for sale, and divide that by the number of houses that sold last month. The result is the number of months that it would take to sell the inventory of houses currently for sale. Three months of inventory is a hot market (seller’s market). Six months of inventory is a balanced market (equal for buyers and sellers). Nine months of inventory means the market is soft (buyers market). I like to buy when the trend is moving from a soft market to a balanced market.
These are seriously the tips that I use to determine if the price is right in order to begin investing in the best real estate markets. If you are interested in learning more about real estate, I am hosting a conference next weekend in Denver, CO! You can find more information and purchase tickets here.