The real estate market as we know it seems to be settling into a “new normal,” where sellers recognize their need to make concessions and price adjustments and buyers have reluctantly accepted higher mortgage rates. That’s not to say that things won’t change – the market will continue to correct, albeit slowly.
Investors, however, can’t afford to “wait and see” if the market turns more in their favor. Instead of hoping for the market to change, cultivate your portfolio strategically – starting with where you invest!
Watch Out for Unaffordable Housing Markets
Your market matters. We’ve stressed the importance of targeting investment markets that are affordable relative to where you are and your budget. While the pandemic created quite a frenzy around Sunbelt markets, they remain among the more affordable options out there.
Even if median home prices have gone up in these areas, other economic factors, like the cost of living and median income, keep them in check. So we’ll say it – these southern cities are still the best places to invest.
Despite the shake-up in the real estate market over the past few years, the most unaffordable markets are predictable. San Francisco maintained the unaffordability award with a 66.7% housing payment-to-income ratio in November 2022. Except for one Florida market and a North Carolina entry, the most unaffordable U.S. housing markets were overwhelmingly on the West Coast.
Primary markets will almost always contend with affordability challenges. But how do real estate investors know where to invest as trends change and profit margins shrink?
Helpful Criteria for Choosing Your Investment Markets
1. Historic Performance
When choosing an investment market, you’re not necessarily after the cheapest option. You’re looking for stability. When looking at historical market trends, you want to see changes that are slow and predictable. The higher the volatility, the more there is to worry about! Markets that shift rapidly may seem exciting, but they carry considerable risk compared to their more predictable counterparts.
2. Population Growth
One of the best indicators of real estate market health is population growth. When the population increases, housing demand follows. It points to fewer vacancies and increased housing demand. Again, though, steady changes over time are preferable to sudden, dramatic migratory shifts. After all, as a buy-and-hold investor, your priority is long-term potential. Huge shifts in population can throw the supply/demand balance off-kilter!
3. Economic Diversity
Economic diversity – that is, the variety of businesses and industries in any given market – directly impacts the long-term health of its housing market. Just as portfolio diversification softens the blow of setbacks, economic diversification keeps markets from changing too much when crises hit. Let’s revisit an example from one of our investment markets, Houston, Texas.
Historically, Houston has relied on the oil and energy industry. When a market hinges on the success of a single industry, its failure can be catastrophic. That’s what happened in the 1980s oil bust. The impact on the economy was so great that banks went under, tent cities became commonplace, and job loss was rampant.
But Houston learned from their mistake. In the years since, their economy has diversified – leading it to become one of the most stable markets through the Great Recession and each fluctuation in the oil industry. Many times, Houston’s downfall was predicted due to troubling oil industry trends. But it never happened…thanks to economic diversity!
For the real estate investor, economic diversity ensures strength and stability through unpredictable market challenges.
4. Relative Affordability
Every investor has a budget. When you’re considering where to invest, keep that budget at the forefront! Which markets have a median home price that will facilitate regular portfolio growth? Again, the goal is not to go cheap, but to capitalize on affordable, quality properties so that you can more quickly scale and strengthen your portfolio.
5. Inventory Potential
Housing inventory has challenged the market for over a decade. A lack of properties on the market squeezes demand and drives prices up. Investors can benefit from this trend, of course, but it can also create the challenges of bidding wars and few worthwhile investment properties.
One of the reasons San Francisco is so unaffordable is that there’s a distinct lack of inventory, and significant obstacles preventing that inventory from increasing. Zoning laws and a lack of available land prevent new construction efforts from keeping up with demand. In a market like Houston, by contrast, there is ample opportunity – and room – to build new properties.
This makes relieving pressure on supply considerably more feasible. Pay attention to patterns in the construction sector!
6. Price-to-Rent Ratio
Finally, investors must investigate the relationship between property prices and rental rates. Ideally, rental demand allows you to maximize your earning potential. It’s easy to focus solely on the rental rate you can charge, but that rate must be put in context with what you paid for the property. Remember, too, that you can improve this ratio by securing a better interest rate and putting more money down.
That’s not to mention the fact that top-tier renovations and premium services and amenities increase rental value.
Finding a balanced, stable real estate market worth investing in can be a challenge. Just remember that it’s not about where the hype is: it’s about establishing long-term, reliable investments.
We've done the hard work of identifying promising SFR markets.
Are you ready to find your next investment?
