A housing market analysis, also referred to as a real estate market analysis, is simply an evaluation of the investment potential of a housing market in a specific neighborhood. Real estate agents often conduct a real estate market analysis for their clients to help them decide where to buy an investment property. The analysis includes examining the area demographics, neighborhood quality, and potential rate of return on a rental property. While you could enlist the help of a real estate agent at this stage in your market research, you could also conduct a housing market analysis all on your own. You just need to know a few key steps as well as have access to the right data and tools. Here is an overview of the steps for conducting a comprehensive housing market analysis:
Check the Area Demographics
The demographics of a neighborhood can have a major influence on real estate trends. Understanding the demographics of an area will show you whether buying investment property in a certain location would be a good idea or not.
Here are some of the demographic factors you need to consider:
- Population growth – Usually, population growth happens due to other factors such as an affordable cost of living, high employment rates, and the establishment of industries. If many people are settling in the area, it means that there will be a higher demand for housing. Besides earning a good rental income, there is also a high chance that your income property will appreciate quickly.
- Age – Different age groups have different housing priorities. For instance, people below 25 years of age might not be very interested in homeownership. Their priority the moment is to pay affordable rent and have access to Wi-Fi. Understanding the age categories in the neighborhood will help you choose an appropriate real estate investment strategy.
- Income and employment – Job growth is a very crucial factor when selecting which housing market to invest in. If the level of employment is low, then people may not be able to pay rent or buy a house in that location. As a real estate investor, take time to study the income and employment trends in and around the area you would want to invest in. Research major employers in the location and learn about their expansion plans, relocation plans, or employee layoff plans. Finally, find out which new employers are planning to move into the area in the coming months.
- Move-up or latent demand – Move-up demand in an area occurs when lower-income households move to a higher economic position. This demand can be identified by looking at the rent-to-income ratio of the residents of a location. Latent demand, on the other hand, is demand that arises due to under-building in a location. If the number of new rental properties being constructed doesn’t keep up with the population growth, then there is probably latent demand in that market. Local real estate agents can offer useful information about move-up or latent demand in an area.
Besides consulting with a real estate agent, data for analyzing projected and current housing demand in an area can be obtained from community and regional planners, private data firms, and the US Census Bureau.
Conduct a Full Neighborhood Analysis
The next thing you need to do in a housing market analysis is to assess the quality of the neighborhood where you intend to buy an investment property. There are two parts to a neighborhood analysis.
The first basically involves looking at the negative and positive features of a neighborhood before deciding where to buy investment property. Though online tools like Google Street View can be useful for housing market analysis in 2020, driving through the neighborhood would be a better idea. Here are some of the things you should look for:
- Proximity to amenities such as schools, parks, and beaches
- Proximity to undesirable features such as railroad tracks, industrial facilities, garbage dumps or anything else that would lower the value of homes
- Notable curb appeal problems
- Good looking blocks vs unattractive blocks
The second involves a deep dive into the numbers. How much do investment properties for sale cost in the neighborhood? What kind of rental income can you generate? What about cash on cash return? Which is the better rental strategy: Airbnb or traditional? A great tool for this aspect of neighborhood research is Mashvisor’s heatmap analysis tool. This real estate investment app will help you find the best places to invest in real estate based on reliable housing market data. You can use housing market analytics such as listing price, cash on cash return, rental income, and Airbnb occupancy rate.
For example, you could easily complete a Dallas housing market analysis in minutes to find a high return neighborhood. If you select the traditional cash on cash return filter, top neighborhoods with Dallas income properties for sale would be highlighted in green. Take a look:
Always Follow Up a Housing Market Analysis with a Thorough Property Analysis
Although you may have found a great real estate market to invest in, not every investment property for sale in that location will be profitable. So even though your housing market analysis may be complete, it’s super important to follow it up with an in-depth investment property analysis. This is why we have included it here. Here’s a quick breakdown of what you’ll have to do:
Gather as much property data as possible about the investment property for sale you are thinking of buying. The more you know about your income property, the more informed your purchase will be.
Here is some of the data you will need to gather:
- Location (county, municipality, neighborhood, street)
- Year built
- Acreage (if privately owned)
- Property type (condo, single family home, apartment, townhouse, multi family home, etc.)
- Number of bathrooms
- Number of bedrooms
- Other rooms
- Size or square footage
- Number of floors
- Recent or notable renovations
- Parking spaces
- Amenities and features (like a fireplace, gym, deck, balcony, garden, swimming pool, etc.)
- Distance to major roads
- Proximity to local amenities (like schools, parks, hospitals, public transportation, etc.)
You should also gather information about the home’s previous listing and sale. This could include data such as listing price, days on market, final sale price, and price adjustments.
Along with that property information, you will need to gather return on investment data including:
- Potential rental income
- Monthly rental property expenses
- Rental property cash flow
- Cap rate
- Cash on cash return
- Investment payback balance
You will also need real estate comps at this stage. While you can get the majority of the first set of property information from the seller and by driving around the neighborhood, the second set requires a real estate investment calculator. Mashvisor’s provides everything listed above and more. Check it out here.
Conducting a housing market analysis can appear intimidating, especially for beginner real estate investors. This step-by-step guide will make it easy for anyone to accurately determine the potential profitability of a neighborhood. And don’t forget to follow it up by analyzing the investment property itself!
To conduct your own housing market analysis using Mashvisor’s real estate investment tools, click here.