When we consider the opportunity of real estate, we have to ask ourselves: can we do this anywhere? After all, there is a rental market just about anywhere we go. If this is true, surely we can crack any market and find success and passive income as an investor in any and every market. There's an opportunity for portfolio diversification everywhere around us!
This is where we need to step back and be more methodical in our approach to investing in real estate. As much as we would like to believe that we can invest anywhere solely based on a market's potential to rent, there are many factors at play in making a market viable as a long-term player in a real estate investment portfolio.
4 Factors that Make a Market Worth Investing In
When investing in real estate, price should always factor into one's decision-making—though not necessarily in the way one would imagine. Savvy real estate investors are not looking for the cheapest properties on the market, but they are looking for properties that have the highest rental potential relative to their own markets.
What do we mean?
Here's the dilemma. For most investors, their own local markets are not conducive to investing. This is usually because the local real estate market is too expensive and the yield would not make financial sense. So when we look beyond to out-of-state markets, we are seeking out markets that are well-priced and allow our money to go a lot further.
But again, when buying an investment property it is not about looking for the cheapest property on the block. It is beneficial to seek out markets that have options in a range that can be offered to lower-middle and middle-class residents post-renovation. These properties are easier to maintain over time, appreciate better, tend to have higher quality residents, and generate more cash flow.
The economy plays a major role in the success or failure of a real estate market. When we look at the economy in a market, we want to see not only growth in what already exists but expansion moving forward into the future. That means a surge of new businesses, new building projects, new demand, and a growing population to support these endeavors.
When you have economic and population growth, it is followed by real estate demand. This creates a need for supply: not only in terms of new home construction but new rentals as well. This is particularly true of more urban markets.
A Diverse Market
More than growth alone, these markets must be diverse. When we talk about market growth, there must be growth in the right direction. By that, we mean growth that supports a market in the long-term. In order to hedge against economic risk, these investment markets must diversify their industries.
We've seen how market diversity has rescued markets that, at one time, crashed under the collapse of a single industry. In the past, it happened to Houston due to oil industry woes. Now, with a diversified economy, they have emerged stronger not only against the ups and downs of the oil industry but against natural disasters, too.
Supportive Local Bodies
One of the often overlooked important factors in a stable and successful investment market is the local governing bodies of that said market. A local government can help or hurt an investor. This doesn't necessarily involve laws or ordinances related to real estate, though that can be part of the equation.
No, the biggest impact on real estate investors by the local government comes in their effectiveness in attracting new businesses, industry, and people to their cities. This can happen through incentive programs for small businesses or large ones, revitalization efforts, or other legislative efforts.
These are far from the only factors that real estate investors should look for in an ideal investment market. However, they are a few factors to consider. It's why we at Memphis Invest don't invest just anywhere. Our seven investment markets have been carefully and thoroughly assessed to ensure not only present opportunity but future growth potential.
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