How We Select a Target Market
How We Select a Target Market
By Christopher Starr
Selecting a market to invest in is one of the most important decisions to ensuring a successful investment. Every investor has their own reasons for selecting a market. In this week’s article, we share 4 important criteria for market selection used by most investors.
4 Criteria to Consider for Market Selection
Year after year population is estimated by the U.S. Census Bureau. The increase or decrease in a city’s population will determine the investment demand. A great indicator of future demand is the growth of the millennial demographic in a certain market. At the state level, there are interesting migration maps available, like this one from North American Moving Services, that show what states people are moving in and out of.
One source for tracking job growth is the U.S. Bureau of Labor Statistics. It’s important to keep track of job growth in the markets of interest. Know the top employers and the effect they have on the market, and ensure no one industry has a large influence because if the industry takes a hard hit it will negatively affect the area. Think of the oil industry in Houston, Texas.
Supply & Demand
This is economics 101, the supply and demand metrics are at the core of any analysis. It’s important to take a look at the new supply being developed in a market. The demand is driven by both job and population growth. Buying and selling activity is also important to watch as this demonstrates confidence to an investor.
The cost of housing is a huge problem today, especially in markets like New York, Los Angeles, and San Francisco to name a few. In San Diego, the median home price is around $600,000. The housing cost in San Diego is 135% higher than the national average according to Payscale.com. In markets where housing affordability is high, renting is often the choice which is a positive for those investing in apartments.
There are certainly several factors that must be reviewed in order to identify a market where the chance of a successful real estate investment increases. Stick to the fundamentals and start by reviewing the points mentioned above. Then once you’ve identified a target market you can dig in deeper, and using resources that provide micro level data, such as local universities, chamber of commerce, and economic development corporations. Take time to understand a market, and never just take someone’s word for it. That was one of my first mistakes. I was only three blocks away from success or failure and paid the price because I didn’t follow up with my own analysis.
What criteria do you consider before investing in a market? Share your thoughts and tips in the comments below!
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Part 1 of the Capital Structure Series - Overview of Debt & Equity
Part 2 of the Capital Structure Series - The Pros & Cons of Using Debt