Investing in real estate is not without risks. In fact, you can easily find yourself navigating a bad real estate market if you are not careful enough. Investment properties that are located in such markets can quickly turn into money pits and real estate investors who insist on operating in these areas are unlikely to see a good return on their investment. Needless to say, the only way to avoid this situation is to thoroughly research real estate markets before making an investment. So how does one avoid a bad housing market? This article will provide you with a detailed answer to this question and share with you some of the general characteristics of a bad housing market.
Related: How to Identify the Best Places to Invest in Real Estate?
How to Spot a Bad Housing Market
Finding a good housing market to buy an investment property in is a top priority for every real estate investor. While the process of identifying the best places to invest in real estate is not particularly difficult, you still need to be able to spot a bad housing market and stay clear of it. Here are the characteristics you should focus on when you’re trying to identify the best places to invest in rental property.
1- A stagnating population
A major sign of a bad housing market is the stagnation of the local population. In fact, this factor is very important since population growth is what ensures consistent demand for homes and rental properties. By contrast, areas whose population has stagnated won’t be able to provide a reliable anchor to the rental market. So when you are trying to determine where to buy investment property, real estate markets with little to no population growth should be the first to cross off your list.
2- A bad economy
A struggling economy does not automatically disqualify an area nor should it be seen as a sign of an inevitable housing market crash. Having said that, betting on a potential recovery is a very risky strategy. Economic and housing market trends are not always easy to decipher and real estate investors are better off sticking to areas that boast a strong local economy. Some examples of the variables that you should focus on when assessing economic strength include gross domestic product, employment rate, and job growth among many other metrics.
3- Lack of a diverse job sector
The employment rate is not the only thing you should look at when doing a real estate market analysis. In fact, the diversity of the job sector is just as important. A housing market that boasts a wide range of employment sectors is inherently more stable and less dependent on a single large employer. As you would expect, a market that relies on one source of employment can quickly turn into a bad housing market the moment the employer closes down or leaves.
4- High crime rate
It goes without saying, a high crime rate is a major sign of a bad housing market. Naturally, you will have a lot of trouble attracting tenants to such areas. Moreover, cities with a high crime rate present a danger to your income property as break-ins are quite common. Analyzing the crime rate in a particular rental investment market is done at two levels; the city as a whole and the neighborhood that you want to invest in. Ideally, you want a low crime rate in both.
5- A very low price to rent ratio
Another indicator of a bad housing market could be a very low price to rent ratio. Generally speaking, a low price to rent ratio means home prices in the real estate market are low enough that residents will opt to buy rather than rent. Needless to say, this will not bode well for real estate investors who are planning on implementing a traditional rental strategy.
Keep in mind that this metric is not so black and white. You should also check out what percentage of the population rents vs owns their own home. Another property metric to look at is local occupancy rates. If a housing market has a low price to rent ratio but a very high rental occupancy rate, then it could make for a good location for rental property investment. Learn more by reading: What Is a Good Price to Rent Ratio for Real Estate Investments?
6- Lack of tourism
Tourism is not necessarily a sign of a bad housing market. However, it is an extremely important factor when it comes to short-term rentals. The lack of tourism will severely affect your Airbnb occupancy rate and prevent you from generating a decent rate of return on rental property. As a general rule, make sure to avoid cities that don’t attract a steady stream of visitors.
7- A strong seller’s market
Again, a seller’s market is not always a sign of a bad housing market. In fact, most of the hottest markets in the country are seller’s markets, and finding a buyer’s market in this climate is not an easy task. With that being said, real estate investors should avoid markets that favor the seller too much. If you have to invest in a seller’s market, make sure that it also boasts a wide range of good characteristics that benefit real estate investors. And remember, if you can find a good real estate deal, it won’t necessarily matter if it’s a buyer’s or seller’s market.
Related: What Is a Buyer’s Market and How to Find One?
Now that you are familiar with some of the signs of a bad housing market, let’s get into how you can identify a good market in the simplest way possible.
How Mashvisor Can Help You Identify the Ideal Real Estate Market
Thanks to Mashvisor, finding the perfect real estate market has never been easier. By using the real estate heatmap, you will be able to identify the most profitable areas in a matter of minutes. This advanced real estate investment software employs both traditional and Airbnb analytics and allows investors to pinpoint the top-performing areas on a map. Moreover, it features a set of filters that enable you to sort neighborhoods in terms of real estate market data. This includes listing price, cash on cash return, rental income, and Airbnb occupancy rate.
Related: Heatmap Analysis: The Secret to Successful Real Estate Investing
The Bottom Line
Avoiding a bad housing market is easy once you know the characteristics that you need to watch out for. Take time to analyze every facet of a given market and only invest when the data backs your decision. To learn more about choosing a real estate market, check out our blog.
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