Real estate investors are always on the lookout for the most promising locations to invest in. But sometimes these locations will be found in cities and regions that are far away from the investor’s location. As an investor, when you are presented with an opportunity to buy property in far-off cities with the potential for high returns, what should you do?
There are only two ways to respond. You can stay with the familiar or you can teach yourself to analyze real estate markets from a distance. Investors who stay with the familiar may choose this path because they want to avoid risk. But concentrating your investments in a single location can also be risky. Your entire portfolio could be wiped out in an economic downturn or in a disaster.
On the other hand, buying in far off locations gives resilience to your portfolio because you will minimize your exposure to the threats in your current location. But the question is how do you evaluate the potential of property investments in an unfamiliar city? Is there a reliable method for assessing the viability of their property markets from distance?
The answer is yes. You can successfully buy property in distant cities if you understand how to evaluate the potential of each city.
Upkeep Media Inc., a property management marketing agency, explains factors to look out for in a potential investment location.
#1: Number of Fortune 1000 companies in the city
The Fortune 1000 are the top one thousand companies in the United States, by revenue, as listed by Fortune magazine. These companies are viewed as the most influential players in the American economy and their presence in a city suggests that the location has a viable economy. The number of these companies headquartered in a location is a good indication of the economic diversity and resilience of the area.
#2: Median household income
This divides the population of a city into two halves, with one half earning more than the median income and the other half earning less than the median income. The higher the median income, the more prosperous the citizens are. This measure gives an indication of the financial resources available to families. And household income is one of the best pointers of the average educational levels of people in an area.
#3: Home value appreciation in the last 10 years
Trends in the prices of homes over a ten-year period show the direction and strength of the housing demand in an area. In cities where the economy is booming, with more people migrating to the location in search of opportunities, there will be pressure on existing housing. This forces the value of homes to go up. Historical housing price data offers insight into the kind of capital gains investors can expect over a given period.
#4: Home value appreciation in the last 12 months
Short-term appreciation in the value of homes often happens in response to immediate developments within an area. Home values will surge upward if a major highway or rail line is planned for an area. Home prices also respond to the creation of new school districts and if a major corporation announces plans to site facilities within a city. Home value appreciations over a twelve-month period indicate slowing or accelerating growth.
#5: Median home value
Half of the homes in a city are priced above the median home value, while the other half is priced below it. This is not the same as the average price of homes in an area. Median home value is a better indicator of the performance of an area’s real estate market. This is because the presence of a few homes with unusually low or high prices can skew the average property values in the area. Median home price does not suffer from this problem.
#6: Average rent on 3-bedroom apartments
The reason to focus on homes with three bedrooms is because they rent faster than homes with fewer rooms. Since there is a stronger demand for three-bedroom apartments, they fetch higher rents. And people who rent three-bedroom homes tend to stay longer than those who rent fewer rooms. The average rent for a three-bedroom apartment offers a window into the health of the rental market.
#7: Cost of living index
The cost of living index gives insight into the disposable income of people in a city. It also gives the investor an idea of their operating costs in one city versus their costs in another city. The cost of living influences migration rates in and out of a city. People will generally move to cities with a lower cost of living if it offers the same economic opportunities. But locations with the most opportunities also tend to have a higher cost of living.
Finally, these numbers are nothing in themselves; they only become significant when used as a means of comparing one location against another. For instance, if two cities show the same promise of economic growth but property prices are lower in one city, the city with lower property prices offers better opportunities. That’s because there may still be a lot of room for home values to appreciate in that location.
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