How to Identify Real Estate Micro Markets to Invest In
What is your process for finding the best micro-market for your rental properties?
There are many resources to utilize in drilling down data.
We will cover resources that can help you identify a higher potential return on investment and asset class today.
How you filter through the data is the most important part.
The tools are free as well!
Be the first to understand how you can seek out best value compared to cost and rent rates in your local area.
Let’s get started.
Are you familiar with income values versus comparable values?
This can easily be referred to as residential valuations versus commercial valuations – where the income dictates the value.
- For more insight, see our article How to Calculate ARV & Repairs.
- For an introduction into common real estate formulas, see Real Estate Formulas 101.
Evaluating income value versus market value, is a common practice for investors when valuating a potential investment.
However, often times there are specifically residential rental properties that can vary widely when it comes to income value versus comparable market value.
- Have you noticed that?
Well, here’s what I’m referring to.
Some locations have property values of approximately $100,000 for a three-bedroom home and another area may have values at approximately $250,000 for a three-bedroom home.
In this scenario, the home that has a value of $100,00 may rent for $1,500 per month and the other home may rent for the same amount.
When this happens, the home with the value of $100,000 would have a higher income value than it does market value.
The other home being the opposite. It has a higher market value than it does an income value.
- Using the 1% rule, the $100,000 home that rents for $1,500/month, has a income value of $150,000.
These examples are one part of the initial criteria that should be used to identify higher asset classes for your rental properties by rent rate and location.
Now that you understand the income value versus market value example, let’s speak more about identifying rent rates by area.
Your preference would ideally be to find locations that at least support the 1% rule like the $100,000 home.
This way you can insure the property will be cash flow positive.
Using the 1% rule as well as comparing the rent rates to property values, you will complete your first filter.
Let’s now discuss how you will determine the rent rates.
Using Zillow, Homesnap, Apartments.com, Rent.com or Facebook marketplace, survey several locations in your immediate area and document the rent rates in each area by bedrooms, bathrooms, property type and square footage.
When you begin researching you will find that a three-bedroom rental property will vary in rent rates based upon location.
Property type does matter.
So, be sure not to compare an apartment to a single family home. Properties should be like-kind.
However, be sure to look for variance and similarities in rent rates by location.
You may notice that rent rates may be the same in different locations for the same property type, but the cost (or market value) of the properties could be much different.
- This is the first identifier to higher potential income, for similar property values and condition, based upon area.
Remember, the objective is the compare market value for those properties that have similar rent rates from the first filter conducted in the Market Assessment section.
Lower property cost does not mean the asset is ideal for your investment strategy. This is where you will use more filters and apply your preference to asset class.
- See more on understanding asset class in 5 Ways to Evaluate Rental Property here.
This is your secondary filter.
Let’s talk about the next filter.
Income is the primary variable that controls eligible rent rates in any area.
There is always a variance in people that make more than the median, less than the median and those that align with the median.
- However, rent rates should always be about one third of the tenant’s gross income.
Many owners and property mangers use this as a basis for making sure the potential tenant can afford the residence they are applying for.
- By using http://www.city-data.com/ you can search the zip code of any city and get the median income for that location.
This will be the next filtering process you will use to determine a more stable investment versus a less stable investment.
Ultimately, you are using the data to find the ratio of eligible tenants that can afford your property.
The higher the amount of eligible tenants the better. This will support you maintaining a lower vacancy rate.
Of what you’ve already filtered, now document the median income of each of your interested locations thus far.
- Be sure to look at local taxes while you’re in http://www.city-data.com/ as well.
We’ve now, completed the third filter.
Let’s move forward to the next filter.
A high priority for families is the development of their children.
Education is a primary role in the advancement of people and their potential to become successful.
Therefore, school districts with higher rankings will always attract more residents.
This doesn’t matter if they are renters or buyers.
- Be sure to notate the rankings of the elementary, middle and high school rankings for what is currently on your filtered list using https://www.greatschools.org/.
Ranking your current list according to school district’s ranking is your next filter.
You should now be filtering your list even further to where your list is becoming smaller and smaller.
Lets move to the next filter….
The next filters are collective, however very important as well.
Access to transportation is usually supportive of commuting to work, school or to run errands.
- Use https://www.google.com/maps to identify highways, schools and major employers.
If you are close to a major highway, chances are your commute to any place you need to get to, doesn’t involve extensive travel times.
However, confirming both parents and children (or dependents) have ample transportation options is ideal.
You may want to review what public forms of transportation are available also.
Access to employment where travel times aren’t too extensive is important.
Crime and safety is also very important.
- You can also view the trend in crime rates for the locations you’ve filtered with http://www.city-data.com/.
Be sure to review all three of these as your final filters.
You’ve just completely filtered your most optimal investment preferences in your micro-market.
You’ve just accomplished identifying the highest potential return on investment and the best asset classes near you.
How does it feel to have your preferred locations identified and your list of areas to scout?
Hopefully you have multiple optional areas still on your list (and not just one).
However, you’ve just identified your primary investment areas and you know the why behind each of them.
Now, all you need to do is make sure the numbers work!
Thanks for joining us today faithful readers – future leaders.
Love ya and keep striving for growth.
- Be sure to use our Free Rental Property Investment Calculator here during your analysis of any property.
Purchase one in our Shop here. It is an Microsoft Excel based tool.
Please comment other techniques you use to identify your investment areas of interest.
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