Trying to find the right market to invest in can be a monumental and confusing task. Remember, the goal of market analysis is to minimize the risk of your investment while maximizing the opportunity for you to earn a higher return. Below is a list of Seven Steps I perform whenever I am looking to invest in any market. (This post has steps 1-4)
Step #1: Find the Market:
In order to find the market to invest in, I start with basic economics. I look at the supply versus the demand.
To Determine the Demand I look to see:
- - Who are the Users?
- - Where are they located in comparison to the subject property?
- - What is the income level in comparison to the rental amount charged or the tenant mix of the property? It does not make sense to locate a designer boutique retailer near section 8 housing. Likewise, if your income level of your potential tenants is around $12,000 per year, you can not expect to charge $800 a month for rent.
- - Who are the main employers? This is critical because jobs bring people to an area and people like to live and shop near where they work.
- - What are the commuting patterns? If your potential tenants need public transportation, then you need to focus on a property that has convenient access to bus routes. Also, accessibility to major highways is always a positive attribute to a property location.
- - Lastly, to determine demand I look at the overall demographics. If your target population is families with 1.5 children, then buying an apartment with all one bedrooms is not going to be a wise decision.
To Determine the Supply I look to see:
- - Who is my Competition? I want to not only look at the current competition but I want to find out who is planning on coming on line in the future. If I am looking at a retail strip center and next year a new highway exit is going to open up. I need to research what impact that will have on my potential property. If I find that immediately off that highway exit is a new strip center that all potential customers for my tenants will have to drive by in order to get to my location, this will be important information as to my ability to lease my space.
- - Find out what is the current market vacancy. If the potential property has a vacancy of 25%, initially I might think there is great up-side potential. However, when I do my research on the market vacancy I find that market vacancy is actually 30%. Now I know that the property is performing above the competition and there may be little room for improvement.
- - You want to find out the types of tenants. As I mentioned earlier, if you have all families in the market area, one bedroom units will not meet their need.
- - You also need to determine what amenities your property has to offer versus the competition. If all of your competition has on site work out rooms then maybe you need to convert a unit to a work out facility or make arrangements with a local gym for your tenants. It is always a positive if you can differentiate from your competition.
Step #2: Gather Data and Verify Information
It is important to not just go off your gut instinct or what the broker is telling you. Remember the broker’s goal is to close the sale. They are not going to mention to you the new competitor up the street and may even bring you to the property from a different direction just so you don’t see it. I use sources like the US Census Bureau, The Economic Department of National Associations of Home Builders, The National Housing Center Library, The Chamber of Commerce, I will meet with the Economic Development Director, and I will utilize the internet searching on the market area.
Step #3: Pick An Area
The next step that I take after I verify supply and demand information is to pick a site or pick the area I am interested in investing in. When finding a city to invest in I look for Population growth, vacancy rates, growth in the economic base and the population mix. The next thing I do is to pick the target sector. I determine if I will be investing downtown, in the neighborhoods, and what I want to be located near. Do I want to be near colleges, retail, highways, etc? Some retailers will only locate near other larger retailers. This is because they know that they have the same demographic requirements and that they target similar markets. Next time you are shopping at Target, make note of the other tenants in the plaza. I am sure you will see a lot of the same ones no matter what Target you shop at.
Step #4: Determine Your Timeline
Now it is time to figure the timeline for meeting the investment objective. If it will take me 18-24 months to renovate the property, then I need to determine where the market will be in 18-24 months. If 400 units are coming on line two years from now I know that I need to have my units completed prior to that so that I can get my building filled prior to the newer units coming available. I also need to know that I may need to offer concessions or lower my rental rate in order to keep the tenants that I will have. What ever the case, the timeline of your project is a very important aspect of any Market Analysis and is often the most overlooked or forgotten all together.