How to Choose a Real Estate Market to Invest In

Trying to decide on where to invest in real estate? Well, it doesn’t have to feel like you’re throwing a dart at a map and seeing where it lands. And although it may be easier to assume that the best real estate markets to invest in are close to home, that’s not always a safe bet. Choosing a real estate market is actually somewhat of a process. It requires research, access to real estate market data, and analysis.

How to Choose a Real Estate Market to Invest In — The Right Way

There are two main steps when it comes to how to choose a real estate market:

  1. You need to decide on a city.
  2. You’ll have to find a profitable neighborhood within that city to buy a rental property.

Where should you start your real estate market research? As it turns out, a lot of the best places to invest in real estate have similar characteristics. If you know what real estate market trends and statistics to look for during your research, you’re much more likely to find a good housing market. You’ll essentially be reducing a major risk of real estate investing- ending up with an investment property in a terrible location that you can’t rent out or sell.

Let’s break down the main things you should look for in a target city as well as a neighborhood. In addition to this list, I will show you a few shortcuts you can take when trying to find the best places to buy investment property in the US housing market. These shortcuts are reliable and will help you choose a profitable location for a real estate investment with confidence.

Finding the Best Cities for Real Estate Investment: What to Look For

So as to not be repetitive, it’s important to note that a lot of this information, for both cities and neighborhoods, can be found online. And with this list, it will be easier to find the market information you need since you’ll know exactly what to look for.

A Median Property Price That Fits Your Budget

The very first thing you’ll want to figure out is your budget. You should have an idea of:

Cities across the US housing market, even those in the same state, have median property prices ranging from very cheap to super expensive. And although you can almost always find affordable neighborhoods in any city and cheap investment property for sale, it’s easier to start your property search in a city with a median property price that fits your budget.

Once you know your budget, you’ll have to dig a little online to find out this real estate information. Most real estate websites will have data on property prices. To give you an idea, here is Mashvisor’s data on median property prices in 50 major US cities:

Check out the data table here.

Start your search for an investment property right now in a city that fits your budget.

So, do you have the budget to invest in the Los Angeles housing market or does the price of Houston income properties make more sense for you? It’s best to make a list of a few different cities that fit your budget for real estate investing. This will help narrow down your options right from the start. That way, you won’t have to carry out real estate market analysis on so many cities but rather just a few that you can actually afford to buy an investment property in.

Average Performance of Traditional and Airbnb Rental Properties

Before you dive any further into your real estate market analysis, you’ll want to look at some more real estate market data for the cities left on your list. Specifically, you’ll want to find out how the average traditional or Airbnb rental property performs in each location. You’ll need the following property data by city depending on your rental strategy:

  • Traditional Rental Income
  • Traditional Cap Rate
  • Airbnb Daily Rate
  • Airbnb Rental Income
  • Airbnb Cap Rate
  • Airbnb Occupancy Rate

How should you choose a real estate market based on this data? Because the market data will be broad and will include all the investment properties in a location, the values will be lower than they would be for a single investment property. For example, a good cap rate for rental property is somewhere between 8% and 12%. But most major cities that are actually good locations for real estate investing have a cap rate closer to 2%-3%, sometimes even lower. Keeping this in mind, you still want to select locations that have comparatively higher cap rates, higher rental income, and a higher occupancy rate.

Narrow down your list even further by taking a look at Mashvisor’s traditional and Airbnb data for rental properties in the same 50 major cities:

Check out the traditional data table here.

Find and analyze the best investment properties for sale now in the city of your choice.

Check out the Airbnb data table here.

Find a Profitable Airbnb Investment Property

A Growing Economy and a Diverse Job Market

The next step of how to research real estate markets involves looking at the local economy and job market.

It’s important to know that if a city’s economy is in a bad state, then it’s likely that the real estate market is suffering as a result. The economy can impact things like local house prices and demand from buyers and tenants. When the economy is thriving, you’ll find that the local housing market is also doing well. This will be thanks to the fact that the median household income is on the rise and there are better job opportunities that attract tenants, resulting in higher demand for rental properties. As a real estate investor, this means that you can charge an attractive rental rate that local tenants can afford which simultaneously provides you with positive cash flow. It’s all connected.

One element of the economy that you may want to investigate is tourism. This is if you’re interested in buying an Airbnb rental property. Short-term rental properties can only generate a good return on investment if they are located in a city that attracts tourists regularly. You’ll want to find out:

  • Is the city a hot tourist destination? And is it an important sector of the economy?
  • How many tourists have visited the city on an annual basis in the last few years?
  • How many tourists are expected to visit in the next year?
  • What are the major tourist attractions and are they likely to stay popular for years to come?

Besides reviewing the general economic outlook for the next few years, you’ll want to look into the job market specifically:

  • What is the current unemployment rate?
  • How does it compare to the national unemployment rate (3.6% January 2020)?
  • What have been the historic trends in unemployment? Has it been increasing or decreasing over the last few years?
  • Are there plenty of job opportunities in a diverse range of industries?
  • What’s the job market outlook for the next few years?

Remember that it’s key to look into the job and economic forecasts. When buying a rental property, you’ll likely be implementing a buy and hold real estate investment strategy. So it’s not only important to choose a location that has a supportive environment now, but one that will continue to help your rental property succeed for years to come.

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