3 critical market factors for investors
Think fast: what are the top market factors you need to know as an investor? If you’re not sure, or if you hesitated even for a moment, read on.
When embarking on a property investment journey, the state of the local real estate market matters a lot. Of course, you may not actually live in the area where you’re planning to buy a property – and you don’t need to.
What you do need is a deep knowledge of that market. We’re here to help you gauge the market inside out (and to know when to back out if the indicators are all wrong).
Here are the three most critical micro-factors for real estate investors:
1. Inventory rate
Repeat after me: The number of properties available for sale in a local real estate market is inversely proportional to the list prices. When the inventory is running high, prices hit rock bottom. Conversely, when the inventory is low, prices skyrocket. That’s Economics 101—and you’re already acing it!
Naturally, you want to invest when the prices are low and sell when the prices are high. Is there ever equilibrium? The short answer is yes. A balanced market is one that has no shortage of inventory of properties for the next six months. Anything less will cause upward price pressure.
Anything more will lead to downward price pressure. The National Association of Realtors (NAR) shares existing homes sales numbers every month. This can give you a fair idea of an area’s current housing supply and inventory levels.
2. Vacancy rate
When you choose to invest in a rental property to create a source of passive income, vacancies become inevitable. Since it’s not a renter’s forever home, they’re bound to leave someday. As such, there may be months or days when your property is just sitting there, without any tenants.
You may find immediate replacements. But if you don’t, you won’t be making any money for the duration that it’s vacant. Of course, as a real estate investor, you want to keep the vacancy rate at a minimum.
You may want to look into the survey on residential vacancy rates published by the U.S. Census Bureau every year. Remember that for you, the magic number is 3%. In a balanced market, that’s the ideal vacancy rate.
Here are three types of commonly used vacancy rates:
- Market average (what’s typical in that market based on existing data)
- Economic vacancy rate (difference between a property’s potential rent and actual rent)
- Physical vacancy rate (percentage of units that are unoccupied)
3. Rental yield
Say you buy a property for $500,000 and rent it out to a family for $3000 per month. What would be the rental yield in this case? It’s the annual rent calculated as a percentage of the purchase price.
In this example, you’ll earn $36,000 annually, which puts the rental yield closer to 7.2%. As a rule, the higher the rental yield of a property, the better the investment market. Between 5-8% is considered to be a good yield range. Greater rental yields suggest that the property is deemed valuable by tenants, and hence, they’re willing to pay more.
That’s a good sign for your revenue generation prospects.
What’s a good rental yield?
The answer to this question isn’t set in stone. Every real estate investor has a different tolerance of risks as well as expectations of reward. A terrible rental yield for one real estate investor could be decent for another.
But that’s the beauty of the real estate business. There’s a buyer out there for every property and a property for every type of buyer.