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3 Key Criteria For Judging The Profitability of a Real Estate Market

Thinking of entering a new real estate market?

Or maybe you’re questioning the profitability of your current market.

Well, not all real estate markets are created equal.

Some have a plethora of great deals for investors to take advantage of, others have challenging rental markets, and others are so over-saturated with investors that it’s silly to spend your time there.

The good news is that, in today’s world, you can invest in pretty much any real estate market in the U.S. remote from any other state.

That means you have prime pickings.

To help you choose, here are three key criteria for judging the profitability of a real estate market.

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1. Diverse Jobs & Economy

This might not be the first thing that comes to mind when you think of real estate investing, but putting your money in a market with a diverse and stable economy is actually really important.

If you own a rental, for instance, in a one-industry town, and then that industry leaves (as we’ve seen happen before), rent decreases, vacancy increases, and the value of your property goes down.

The best markets will have multiple industries to support workers and a low unemployment rate.

Here are some of the things you’ll want to consider for a strong job market…

  • Is the number of jobs increasing or decreasing?
  • Is the median salary for workers increasing or decreasing?
  • What types of jobs are available? Low-paid labor? High-paid technicians?
  • Does the market have multiple stable industries in the area?

2. Price/Rent Ratio

Price/rent ratio is a metric you can use to get a general idea of a market’s profitability.

It won’t tell you everything you need to know about at area, but it can certainly help you understand how profitable a market is for rental properties.

To calculate the price/rent ratio, you just need to take the median property price divided by the median yearly rent. Here’s what the formula looks like…

 Price/Rent Ratio = Median Property Price / Median Yearly Rent

So if a market’s median purchase price is $200,000 and its median annual rent is $24,000, that would be a price/rent ratio of 8.3.

The higher the price/rent ratio number, the less profit an investor will receive in that market.

San Fransisco, for example, has a price/rent ratio of 50.11, which means that a $600,000 home only rents for $1,000 per month.

On the other end of the spectrum, Detroit, Michigan has a price/rent ratio of 5.35, which means that a $64,000 home will rent for $1,000 per month.

3. Competition

Even if a market is very profitable for investors, it’s also important to consider how many investors are already fighting over deals in that area.

This shouldn’t necessarily discourage you from entering the market, but you need to know what you’re getting into.

If you are going into a competitive market, here are a few things to consider…

  • Who are the most successful investors in that area?
  • Do you think you’re capable of competing with them?
  • If you can’t compete with them directly, is there an under-served market or niche that you could take advantage of?

Perhaps the easiest way to determine how much competition is in a specific market is just to Google for “sell my house for cash in [city].”

Then see how many real estate investors are trying to rank their websites for that keyword.

That way, you know what you’re competing against.

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