Scouting Out New Markets - What to Look for, What to Avoid

Finding your ideal property in the right real estate market can be challenging. It’s easy to focus on the rental property itself, calculating what your returns will be and running the numbers. In reality though, there are a number of different things that can impact the success of your investment. One important factor is the real estate market that you invest in.

It’s not always easy to know whether a property is a great opportunity. To help, here’s a look at a few things that investors should look out for and things they should avoid when entering a new real estate market.

8 Factors to Consider When Researching New Real Estate Markets

There are a number of things that you’ll want to look for when researching new real estate markets to invest in. Here are some things you should pay attention to:

1. Population Trends

When scouting for new markets, assess the region’s economic stability and growth potential. Ideally, there should be low employment rates and job growth. An increasing population size is another good indicator. Look out for places where people are moving to. They will likely be searching for places to live, which could help to fuel demand for rentals.

2. The Local Economy

A market with a strong and diverse economy could be better able to weather short term fluctuations in the local job market.

Let’s say you’re considering two cities: City A and City B. City A has various industries like tech, healthcare, and manufacturing, while City B relies heavily on one sector. If that industry collapses, that could heavily impact the local economy. City A, meanwhile, would likely be less impacted by the collapse of one industry since it’s more diversified, making it the safer bet for long-term stability.

New company openings are often another indicator of a good local economy. Keep an eye on the news to see if large companies are about to open a new branch or factory in a particular area. That could bring in more workers who might be looking for homes, potentially increasing the demand for rentals.

3. Appreciation

Another important consideration for many investors is housing appreciation. What have housing prices done in the local area over the last ten or twenty years? Taking a look at where housing prices have gone can help to give you an idea of where they could go in the long-term. Keep in mind though, that short-term fluctuations can impact housing prices as well, so if you’re investing for the short-term and plan to sell within the next few years, paying attention to appreciation, and projected appreciation, is especially important. 

4. Rental Yields

You should also look for markets where the rental yields are attractive. High property prices relative to rental income can eat into your profits. On the flip side though, are properties that are priced affordably, but could indicate a lack of demand. Pay attention to supply and demand factors when gauging the type of returns that you may be able to get by investing in that area. Consider running the numbers on potential investment properties. One number that you’ll want to run is your projected rental yield. Divide your projected rental income by the value of the property and multiply it by 100 to see what your projected yields could be. 

5. Price-to-Rent Ratio

You’ll also want to determine whether the local area is affordable to local residents. To determine this, you’ll want to take the median property value and divide it by the median annual rent. The higher the ratio, the more risky the market could be for rental investments. Generally, you’ll want to look for a moderate price-to-rent ratio that could indicate a market where there’s more people looking to rent instead of buy. Broadly speaking, anything between 15 and 20 could indicate the sweet spot for investors to maximize their returns. Note, however, that this metric is just one indicator, and must be used in conjunction with other factors when making your decision.

Read our tips on How to Invest If You’re in an Expensive Market.

6. Rental Trends and Market Competition

Rental price trends can also give you an idea about the growth of an emerging market. If rental prices continually increase over the long-term, that signals a demand for housing in that location. You should also keep an eye on how long rentals stay vacant for.

However, high demand often means there will be more competition. High-demand areas could also see new development, which could lead to an oversupply of new properties, which could lower rental prices. This is why investors should consider potential competition from new developments aside from looking at existing inventory in the area. To find out this information, check to see how many building permits for new housing are being issued in the region.

7. Rental Laws and Regulations

All landlords have legal obligations, but not all cities or states have the same laws. Some areas have stricter regulations, while others may have legislation that’s more favorable to landlords.

Here are some things to consider that could affect how you manage your rental property:

• Rent Control Laws - Rent control policies dictate rental prices and rent increases. Thirty-three states ban rent control but California, Oregon, New York, New Jersey, the District of Columbia, Maine, Maryland, and Minnesota currently have rent control policies. Suppose you’re considering investing in a market with stringent rent control laws; you’ll need to adjust your rental pricing strategy and be prepared for limitations on your ability to increase rents.

• The Eviction Process - A lengthy eviction process costs money and time. States that have a simple eviction process may allow you to evict a tenant more efficiently.

• Security Deposit Limits - These can be in the form of limits on how much you can collect and shorter timelines to return the security deposit.

• Additional Legislation - Some states provide additional rights to tenants. In California, for example. a landlord has to do repairs in a timely manner. If they don’t, the tenant can do the repair themselves and deduct the expenses from their rent. 

8. Taxes

Taxes are another obligation when you’re a property investor. Local governments impose property taxes that vary widely depending on the location and assessed property value. High property taxes can reduce a rental’s profit potential, especially if they increase over time. Although landlords can take advantage of various tax credits to lower their tax burden.

Here’s what you need to know about taxes as a landlord: Prepping for Tax Time - What Landlords Should Know.

Red Flags to Look Out for When Investing In New Markets

1. A Declining or Stagnant Economy

Be cautious when economic indicators are trending in the wrong direction, like when major employers have recently announced layoffs and businesses are closing down. These areas may experience high unemployment rates, which can lead to lower demand for housing.

2. High Crime Rates

Areas with consistently high crime rates can deter potential renters and lead to higher turnover, longer vacancy rates, and lower rent prices. If you found an affordable property in a neighborhood that experiences frequent break-ins and vandalism, it may be advisable to look elsewhere. Even if the property seems like a great deal, safety concerns could drive away prospective tenants or lower the value of the property. Research crime statistics for the neighborhood and prioritize safety when scouting new markets.

Make sure your rental unit is safe and secure. Here are 8 Security Tips to Help Protect Your Rental Unit - And Your Tenants.

3. Environmental Risks

Environmental factors can have a significant impact on property values and rental demand. Investigate potential risks such as hurricanes, flooding, or wildfires. Higher environmental risk may also lead to higher insurance premiums and repair costs, which could affect your bottom line.

Finding the Hidden Gems

Searching and encountering one red flag after another is frustrating. But if you’re persistent enough, you are certain to uncover some hidden gems. Here are some promising signs to look out for:

• Emerging Markets

Keep an eye out for emerging markets, or even emerging neighborhoods within established markets. Gentrification and urban revitalization can turn overlooked areas into hotspots for rental property investment. Look for signs of improvement, such as new businesses, infrastructure upgrades, and rising property values.

For instance, if you spot a neglected downtown district that’s recently seen an influx of trendy cafes, art galleries, and young professionals moving in, this could potentially be a great time to invest in rental properties in that area.

• College Towns

College towns can be a good market for rental property investors. They often provide a consistent pool of potential tenants and a steady stream of new students each year. Research the local colleges and universities, and consider properties that cater to students and faculty. 

Look for college towns with a growing student population and limited on-campus housing options. Investing in student-friendly rentals near the campus could yield high occupancy rates and reliable rental income. Just keep in mind that in some cases, demand in college towns could be seasonal.

• Revitalization Zones

Many cities designate revitalization zones to stimulate economic growth and development. These areas often come with tax incentives and infrastructure improvements. Investigate whether there are any revitalization projects in progress or planned for the future in your target market.

Next Steps for Investors Looking to Invest in Rental Property in a New Market

Access Online Resources: The internet is a treasure trove of information for property investors. Here’s where to look:

• The U.S. Census Bureau offers demographic and economic data that can be invaluable for understanding population trends.

• Many local government websites provide information on zoning regulations, property taxes, and development plans.

• Look for market reports and studies published by real estate associations, consultancy firms, and investment organizations. These reports often provide in-depth insights into local real estate markets, including trends in property prices, rental rates, and vacancy rates.

Analyze Economic Indicators: Assess economic indicators that reflect the health and stability of the local economy, such as unemployment rates, job growth, GDP growth, and industry diversity. Websites like the Bureau of Labor Statistics and local chambers of commerce can be valuable resources. Be sure to visit the Renters Warehouse Market Research Center to get granular information about the local housing market that you’re looking into.

Consider Demographics: Examine population demographics to understand the composition of the local population. Pay attention to factors such as age, income levels, and household size. This data helps in identifying the type of property that you may want to consider investing in. 

Assess Rental Market Trends: Analyze rental market trends by looking at historical and current rental rates and rental market trends. This information can help investors gauge the demand for rental properties in the area.

Visit the Area: Whenever possible, visit the area you’re considering in person. Walk around neighborhoods, explore amenities, and get a feel for the local environment. This firsthand experience can reveal details that might not be apparent from data alone.

Keep Tabs on Regulatory Changes: Stay informed about any regulatory changes, such as zoning updates or changes in landlord-tenant laws, that may impact your investment strategy.

As you research, approach each market with a critical yet open-minded perspective. Taking the time to do your research upfront can help you to scout out a good market – one that’s worth investing in.

Want to start your search for rental property? Search our inventory of available properties for sale. If you’re just starting your investment journey, take a look at our free guide How to Assess and Survey a Potential Property - Your Guide to Walkthroughs.