Choosing The Best Real Estate Markets
Technology has removed many of the geographic barriers for individuals who want to invest in real estate. Investors now have access to real-time market information and property managers that utilize the latest software. It’s now easier than ever to invest in any hot market across the country (or world).
With so much information and so many tools readily available, how do you choose the best market to invest in real estate? Start by identifying property classes, measuring market growth rates, and analyzing other market indicators like median home prices. From there, you should be able to narrow down the best markets for real estate investing.
Invest in Real Estate: Choosing the Right Property Class
Property classes (i.e., Class A, B, C) are used to describe the characteristics of a potential real estate investment. The properties are graded according to a combination of physical, geographic, and demographic characteristics. No matter which major U.S. markets you’re looking at, a Class A property in one market will offer many of the same risks and rewards as a Class A property in another market. In short, there is more merit to investing based on property class than based on geography.
Let’s compare each class of property. Class B & C properties are seen more as cash flow investments than appreciating assets. That’s because Class B & C properties generally offer higher price-to-rent ratios but lower property appreciation rates. On the other hand, Class A properties often provide lower cash flow, but they are also considered lower risk investments. That’s because Class A properties offer greater potential for appreciation when located in a hot market. For these reasons, many investors choose Class A properties over B & C properties in markets that show indications of growth.
Choose the Right Market: Potential for Growth
The potential for growth, both in population and jobs, is an important factor to consider when determining the right market to invest in real estate. If a market shows strong potential for growth in these two areas, you can expect lower vacancy rates and strong appreciation in the value of your investments. As an example, the Dallas-Fort Worth area brings in an average of 300 new residents every day to fill jobs created by companies like Toyota moving into the area. As a result, we see an average of 98% occupancy in our homes, and homes have appreciated in value 7-10% each year for the past five years.
Market Indicators: Median Home Price
The median home price in a market will give you an idea of how much it costs to invest in real estate in the area. Markets with a large population and strong job growth sometimes (but, not always) have such a high cost of entry that they aren’t a smart investment.
For example, San Francisco is a wonderful place to own real estate right now. However, it may not be the best place for the Average Joe to invest in real estate. Why? The median home price in San Francisco is about one million dollars. A median home price this high may not produce enough cash flow to cover an investor’s expenses, such as; taxes, insurance, management fees, maintenance costs, etc. Of course, a lot of the return on investment depends on rental rates for these properties. In the case of San Francisco, the average rental rate of a home in the area isn’t sufficient for real estate investing.
For comparison, the median home price of a home in Dallas-Fort Worth is $230,000. The median rental rate for these homes is roughly $2,000 per month. With these values, you can expect an average cash on cash return of 7.5%. If you plan on using a conventional loan to invest in real estate in DFW, your leveraged rate of return will climb to 10-15%. These results explain why so many individuals have chosen to invest in real estate in the DFW area.
Looking for an investment property?
Click here to browse our property portal. >>
Class A Properties, Growth and Low Cost of Entry
With a growing population, affordable home prices, and strong rental outlook, Dallas-Fort Worth is an ideal market to invest in real estate. Download our latest market report for the Dallas-Fort Worth metro area to find out why DFW is an ideal place to build and strengthen your real estate portfolio.