Buying real estate is one of the best ways a person can build wealth over time. Whether purchasing a personal home to live in or an income-generating property, you want to secure the greatest return on your real estate purchase.
But not all properties are created equal. What will appreciate at a higher rate over time may vary from location to location.
Savvy real estate investors study their local market to maximize their returns. Here are some ways you can analyze your real estate market to get the most on your current and future investments.
Understand market cycles
Every market is cyclical, with ups and downs that signal when it’s the right time to buy or sell to get the best deal on a property. There are four main market cycles to note.
- The accumulation phase is when the market is at its lowest, and you’re likely to acquire property at its lowest price. If you’re flexible on your purchasing timeline, the accumulation phase — also known as a buyer’s market — is the ideal time to buy. It pays to work with a trusted real estate professional who has insider knowledge of the market and can let you know when bargain properties are up for sale.
- During the markup phase, the market prices begin to increase. You can still get a decent price on a property if you buy it during this time. Just be prepared to potentially enter into bidding wars when you make your offer. You can sweeten the deal for a buyer if you can make a larger down payment and get preapproval on any mortgages or financing.
- The distribution phase is also known as the seller’s market in real estate. This is when the demand for homes is greater than the number of properties available on the market. If you’re looking to sell, this is the time to pack up your home and list it to fetch the best possible price and maximize your return.
- The markdown phase is the most disappointing for investors looking to sell. While you may still be able to make a tidy profit on your property, you’ve likely already missed the peak prices for this real estate cycle. If you aren’t in a hurry to sell, it might make more sense to hold onto a property and earn income in the meantime by renting it out.
How long a cycle lasts varies, ranging anywhere from a few weeks to several years. By steadily watching your local market, you can anticipate when one phase is about to end, and another is set to start, so you can plan your purchase or sale accordingly.
Follow current events connected to the market
News-making current events can have a significant impact on a local market. Natural disasters that cause significant damage, such as tornadoes and hurricanes, can leave their mark on the market. And real estate prices tend to increase in cities that allow legalized recreational marijuana dispensaries.
While a natural disaster is hard to track, and legislation can take time to make its impact, one event affects the real estate market every four years in the United States: the presidential election.
Interest rates tend to be lower in the lead-up to the election, increasing the demand for real estate. This is an ideal time to sell property, because there are more prospective buyers than homes on the market, increasing the demand and price. At the same time, if you’re just getting started in real estate investment, this can be a good time to buy, because you can secure a low fixed-rate mortgage.
Watch the economy and job market
The job market plays a part in determining the demand for real estate in a community. If your city has a low unemployment rate or is attracting new businesses, demand for real estate will be high, making it the best time to sell and get a good price.
Likewise, if industries are leaving your town, the demand for property will be low as people move to other parts of the country. Although this might be a good time to purchase property for a low price, you should proceed with caution. If there are no signs of new jobs or industries coming into the area, you could find yourself with a property that won’t grow in value or, worse yet, decline in value.
Study neighborhoods
Once you have an understanding of the global, national, and local economy, it’s important to analyze the neighborhoods in your community. Although some neighborhoods are consistently in demand, you can use your expertise to pinpoint emerging markets before they’re in high demand.
By following demographics in your community, particularly age, you can get a good idea of what neighborhoods will become most attractive to buyers down the road. You’ll see the greatest profit if you can be an early buyer in one of these areas.
Look for neighborhoods with empty nesters or retirees that are close to top-rated schools. As these homes go on the market, they tend to be in high demand among families with young children.
Look for hidden gems
As you get to know your local market, you’ll also better understand what buyers and renters are looking for in specific neighborhoods. That includes everything from the number of bedrooms and bathrooms to the styles of homes and finishes.
While you can make some of these changes yourself with renovations, others will cost you more money to complete. These costly updates can cut into your returns.
For example, say you’re looking at a neighborhood where most of the homes are four bedrooms with two baths, and a two-bedroom, one-bath property comes on the market. This property may not be the smartest investment because it will always fall short of the rest of the comparable homes in the area.
Instead, look for a property of the right size and in the right location in need of updates. You’ll get the home for a decent price and see a large return on the updates and renovations you make to bring it up to the market standard.