Picking the right investment market can be tricky. There are tons of factors that contribute to an area’s potential…or downfall. Real estate investors know the power of location – but picking the right places to own property isn’t always easy. Sometimes, seemingly beneficial qualities, like rapid property appreciation, can backfire when the market becomes untenable to buyers and renters.
So, how do investors know the right choice when the facts can be so muddy? Here are six red flags you can be on the lookout for. While these qualities may not demand you completely write off opportunities in the area, they require extra scrutiny!
No surprise here. High vacancy rates mean people aren’t renting. Many vacant properties signal low demand, economic decline, or oversupply in the market. Investors can deal with vacancies occasionally, but frequent trouble finding and retaining residents spells disaster for your cash flow. You may encounter higher vacancies when you see a population decline. Pay attention – you may see conditions improve in suburbs or neighboring cities.
Real estate is already a comparatively illiquid asset. There’s a longer process to tap into cash value, whether selling or refinancing. Illiquidity in an investment market means you’ll have a harder time selling the property. And believe it or not, that doesn’t especially have to do with the price point. Instead, look at the health of the local government. Pay attention to tax trends, especially for property taxes. If the local authorities are fiscally irresponsible or otherwise short on budget, they may look to hike these rates, which can discourage people from buying properties within their jurisdictions.
Generally speaking, real estate investors are looking for a deal. Now, we’ve warned in the past about buying cheap properties. On the other hand, high property prices can make profit margins impossible to meet, contribute to high maintenance costs, and hinder sales. Consider this jaw-dropping fact: more than a dozen “affordable” housing projects in California are costing $1,000,000 to build – per apartment.
For average people and investors, the price tags aren’t worth it in these markets, especially compared to property conditions. While high-value properties can indicate demand, it also creates a plethora of issues. Ideally, investors look for balanced, reasonable value growth over time – not huge spikes.
We’ve mentioned previously that numerous major insurance companies have pulled out of Florida. The ones that stay have dramatically hiked their prices up. Why? For several reasons, but the threat of natural disasters is the big one. The frequency of hurricane, flood, and storm damage was bad for their bottom line. And, of course, that means property owners pay the price.
Before you buy a property, consider risk exposure to natural disasters. Nowhere will be hazard-free, but some are riskier than others.
Further Reading: The Underlooked Criteria for an Ideal Investment Market
A weak economy makes for a weak rental market. Remember, industries and economies are all connected. You can’t divorce real estate from the local GDP, government policies, or job growth. Are local small businesses flourishing? Are there job opportunities bringing in new people? Diversification is a factor, too. Markets heavily reliant on a single industry are vulnerable to economic shocks if that industry faces downturns or relocations.
Lack of investment in public transportation, roads, utilities, and other infrastructure can hinder economic growth and property value appreciation. Keep an eye on who manages and maintains these projects – city, county, state, or private entities. Not only can these issues impact the value of a property, they can discourage people from moving to the area.
These are far from the only red flags to watch for. The best thing an investor can do is be thorough and diligent when exploring their options and opportunities. If that sounds overwhelming, we have some good news – you don’t have to vet investment markets all on your own.
Your REI Nation portfolio advisor is ready and waiting to help you make the right choice for your next SFR property acquisition!
Our clients fall anywhere and everywhere on the spectrum between new and tenured real estate investors. We'll meet you where you are!