How to Identify a Market to Invest? A Step-by-Step Guide

How to identify a market to invest? One of the most popular questions from real estate investors. Helen Chong, Founder and CEO of the HAYLEN Group, has shared a step-by-step guide on how to identify a market for real estate investment, and some real estate tips to help you make a decision. You can also watch the video version here.

Real estate investors always ask – where should I invest? This is a very tough question, because the United States is huge, California is huge, or even just saying northern California, that’s huge. So how do you find the right market to invest in? Today, I hope to share with you a few tips so that I can help you to focus, because like anything in life, you have to focus in order to pick the right property. Let’s get started!

First of all, you can start off with 10 or 20 cities that you have chosen or you have some kind of relationship with. As an example, maybe you had grown up in that town, you have relatives there, you have gone to school there, or you’ve heard that this market might be a good market. So you just list out all in a spreadsheet, 20 different properties.

Next, you need to start gathering these data. You need to find out about the population growth for the past 20 years. Right now, we like to compare the population of 2000 versus to the most recent data that you have for the population, so that you can look at what is the population growth. Then, the income growth in that area comparing the same period of time, and maybe income for that area in 2000 compared to the most recent data, as right now is probably about 2018. Also, the house value to see what is the growth rate for this particular time frame, maybe for the past 10 years. Then the crime rate, it is the same thing, compare for the last 10 years – is it going up or going down. You want to invest in an area where the crime rate is going down, right? Lastly, for this step, I’m also going to compare the job growth – are there more jobs that are coming to the market, is there a higher or lower percentage job growth. Now that you have all this data for 10 or 20 cities. You can now compare and choose the top 5 cities.

Now the next step, this time we are a little bit more focused now. There are a few things I will check during this stage. I look at the IRS Tax Migration, there is a website, just type in and search for IRS Tax Migration. Then you can look at people’s tax filing to see whether the money is going into the city or going out. There are always going to be some in and some out, but is it more in or more out. You can also see where did the money come from or where did the money go out to. This is quite interesting, and then once you start looking at that, you can write down the numbers for those five cities. Next, find out the vacancy ratio for apartment buildings in those cities – what is the vacancy rate. I would also look at which ones have more permits being issued to build. Additionally, the average rent for a two-bedroom apartment unit, the property tax rate, and the cap rate. The property tax rate and the cap rate is probably not as important, but it is also a good indicator when the other data are very similar between two options. 

After these numbers being put together, you can again narrow it down to fewer cities. I think this exercise is very important because especially for those who have a spouse might say – well I don’t understand why you picked these cities, then you can actually show them your reasoning through the numbers. Or maybe you have an investment partner, or you need other investors to lend you the money, you need to explain to them with data that you put together, how you chose these properties. It’s not wise to just say “somebody told me that I should invest here”, or “I read it on the news”, or “I heard it here or there”. You need to do your own research. It’s really important that you can prove why you’re doing what you’re doing by providing data. 

Now that you have narrowed down to three cities, let’s say, you can do some additional research. I like to go to the city planning website, where I just type in the city name, the planning department, and then I look for their general plan on the planning website. Typically, I look for a long-term general plan, a lot of times they call it 2040 general plan, because I want to see what the city is going to do in this area. Once I find that I kind of look through it quickly, maybe the table of contents, and I look for the word redevelopment. I like to see something about redevelopment projects, then I know – this area is not so good right now, but they are going to be redeveloping that area. A lot of times you’ll find that they have a vision for that pocket of this city, and they are going to do some redevelopment in this area, meaning that they’re going to encourage more businesses to come in, encourage more developers to build newer buildings. Then you know to focus on these areas because they are going to change over time.

Next, I’m going to go to websites like realtor.com to find this color-coded value heat map. I would look at that general area and the pockets where they have some kind of development. I would look for a lower value area that is located next to some higher value area, and I would probably invest in somewhere on the border. The main reason is that if there is any kind of development or improvement, it’s going to come from the higher value area to the lower value area. I won’t buy right in the middle of all the lower value area, because you might not have as much appreciation that way, so I tend to like to buy at the border. 

I also look at the crime rate. They have a crime rate heat map on realtor.com as well, and then you also look at a more stabilized area next to a place that might need a little bit more improvements, have a higher crime rate, then I also focus on the border. Because again, if there are any improvements, it would be close to the border first.

These are very important factors to look at. When I first started investing, I had a folder full of research. The internet at the time wasn’t as robust as now, so I would print out everything. I would compare neighborhood by neighborhood, I knew street by street whether this is like up and coming, I knew that the west side of this street is a more expensive area, the east side of this street is going to be less expensive. I will focus on just the border, maybe within three or four blocks of that street, so that I know over time this area will be improved. 

We hope this blog has helped you identify the markets because we know it is one of the most difficult tasks when you start investing. Feel free to reach out to Helen Chong at [email protected] or schedule an appointment.