It’s all too easy for real estate investors to focus mainly on the property they are considering purchasing without putting the same amount of effort into properly researching the area it is in. Needless to say, this is a mistake, and it’s one that can be easily avoided by working with an experienced real estate agent who knows the best (and worst) local areas for investment.
As you can imagine, the research you’re going to be conducting when purchasing a property that is purely for investment purposes is very different from what you’d do for your own home. It’s possible to overlook excellent investment opportunities that are simply not on your radar because their location is very different from what you and your family prefer.
There are two different categories of factors that need to be taken into account when investing. The macro scale considerations (the bigger picture), and smaller localized micro considerations. Each is a topic worthy of its own post to provide any kind of value to our readers, so today we’re going to be focusing on the bigger picture macro considerations and we’ll cover micro considerations in a future post.
With that in mind, here are a few hints and tips on how to objectively assess and analyze a location (on a macro scale) when purchasing an investment property in the Savannah area.
Let’s get started.
The Local Job Market
One of the most important factors you should take into account is the local job market. Ask yourself if there is there a healthy amount of employment opportunities within a commutable distance of any property you are considering. Find out if the local job market is increasing or contracting, just because it’s healthy now doesn’t mean it will be in 5 year’s time.
You should also be aware of the risks that surround investing in an area that relies on one or two large workplaces (like huge factories) for the majority of the local employment - if they close down it’s going to mean bad news for your investment. Ideally, you want a mix of white and blue collar jobs, with people employed by a large number of businesses, in an area with low unemployment.
The popular quote of “people are always going to need somewhere to live” is often used (albeit slightly tongue in cheek) by real estate investors to explain their reasoning behind investing in property. While the quote is true, it’s also an oversimplification.
Population growth is a very important factor when assessing an area for real estate investment. Like any other product, service, or commodity the unbreakable rules of supply and demand are what will decide the ROI of your investment. Ideally, you want to invest in an area that is seeing a constant increase in population. Be sure to compare the population growth of the metropolitan statistical area (MSA) you are considering investing in with other areas of the country, ideally, you want a population increase that is bigger than the nationwide average.
Tip: Be sure to check population growth on a zip code level as well as on the larger MSA level. A neighborhood can quite easily have negative population growth in an MSA area that otherwise has an overall increase in population.
If you’re investing in a property with the intention of renting it out, then the price-rent ratio is an equation you should be getting very familiar with. It essentially puts a number on the amount of rent you will receive per dollar invested in the purchase price of the property, and the lower the number, the better the investment.
To calculate the PRR you take the median house price of the area you are investing in and divide it by the median yearly rental costs of the area.
For example, an area with a median house price of $200,000 and a yearly rental cost of $12,000 would have a PPR of 16.6 – which is pretty good.
However, an area with a median house price of $500,000 and a yearly rental cost of $16,000 would have a PPR of 31.2 – which is not so good.
Find out and compare the PPR of all the areas that are on your investment radar. While PPR is not a golden ticket to a guaranteed huge ROI, it’s certainly a metric that helps.
If you are looking to buy an investment home, contact us today at 912.737.2935!