When you’re looking at an investment property to determine whether it will be a good income generator for you, it’s important that you know how to do a proper market analysis. This will help you to understand if the property will be profitable.
One of the things you’ll want to consider in your market analysis is demand and supply. Today, we’re talking about how that works and what you need to do.
Rental Investment Market Analysis: Understanding Demand
Demand will include things such as the residential population, the local income levels, and projected job growth. When you’re considering demand, you want to look for trends in the economy, and what kind of government regulation is going on in the area.
Rental Investment Market Analysis: Understanding Supply
On the supply side, it’s important to consider your product on the market, and the quality of the existing products on the market. You want to understand the vacancy rates, absorption rates, and zoning requirements. These will factor into your market analysis.
Gather Information about Primary Trade Areas
Usually, I choose a primary trade area. This involves taking a map of where the property is located and then physically drawing a primary trade area around the property that I’m analyzing. That’s going to capture all of the competition in all the nearby areas. I recommend that you use drive time, and in an urban area, that trade area would be anything with a five or 10 minute drive. If your property is in a rural environment, you’ll have to go further out.
Capture all of the competing properties that are similar to your property in that primary trade area. You can also do a secondary trade area that goes a little further out from that, and you’ll have more data for your market analysis.
Compare Amenities with your Competition
Sometimes, I will call all the listings that I find in the primary trade area. If there are properties on the market, I want to know what kind of amenities they have and what the condition of the property is. If you’re conducting a market analysis for an apartment complex, call the building and find out what kind of amenities are provided. Ask about the average rents, and if there are one, two, or three bedroom properties available. Gathering information like this will give you a more accurate vacancy rate that you would find if you just checked the internet.
You also want to understand what the asking rent is and compare that to the amount that the property actually rented for. If you do this in your primary trade area, you’ll get a good ballpark figure that will establish what rents are. You’ll be able to use this information to establish your own projected income and expenses for the property. Remember that with each amenity you add to the property, additional expenses will follow.
Once you analyze the supply and demand, you can get a good market rate rent for your investment property.
If you need any help with a market analysis, please contact us at HomeRiver Group. We do these all the time, and we’d be happy to help you.