July 27, 2021

"How To Determine The Best Areas to Invest In" - Location Analysis

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By

Dave Seymour

"How To Determine The Best Areas to Invest In" - Location Analysis

Location is the most important factor for investors looking to invest in real estate. Location analysis determines which areas are best suited for investment and how much money can be expected to return on that investment. Investors need to know how location affects a property’s value, as well as what types of properties will do better in certain locations. The following considerations will help you determine the best areas to invest your capital in!

Important Factors To Consider

Population and Subsequent Growth:

The population of a location determines the demand for real estate in the area. Furthermore, whether an area is in the suburbs or a Metropolitan area further determines which sort of real estate (housing or commercial) would be more lucrative.

Analysts usually determine both factors when assessing an area: the current population, and subsequent growth in that area. A city’s population growth is directly proportional to the demand for real estate in the area.

Reports have concluded that areas where a working-age group is more predominant (18-34 years), the areas 5-year growth will rise exponentially. This can be analyzed based on the U.S Census Bureau's yearly report.

Commercial Growth:

Commercial growth for an area can be assessed based on factors, such as; taxes, energy, and credit-costs. These factors determine a business's ease of setting up operations or expanding in particular areas.

This is what ‘drives’ a population towards an area and subsequently look for housing. On the other hand, the aforementioned incentives can attract businesses and companies to invest in the area for commercial buildings.

Employment Growth:

According to the U.S. Bureau of Labor Statistics, the biggest workforce (based on a 5-year projection) are in:

  • Orlando
  • Florida
  • Seattle
  • Washington
  • Huston

Affordability:

When relocating, families usually prefer relocating to areas where housing is affordable. If investing in real estate units for housing is what you're looking to do, then areas such as New York, LA, or San Francisco aren't the best to invest in given their high home prices.

An easy way to calculate how much money would be coming in monthly by tenants is to compare home prices with local median incomes. This helps establish a base-line for what you can expect, how much you should invest and how soon can you expect to see returns on your investment.

Increase in Rent:

The amount of rent you have to pay for a studio apartment in 2020 might've been comparable to spending the same amount of money on a cozy three-bedroom home decades ago. Historically, rent growths have been documented as increasing steadily each year. For example; LA has an annual rent increase with a cap rate of 3.0%

Realtors and analysts prefer going for areas with moderate cap rates (3-5%) such as; Indianapolis and Phoenix.

Capitalization:

To determine business prospects, financial specialists focus on determining capitalization rates within the first year of investment. The capitalization rate (or cap rate) is referred to as the amount of time required to be able to see a gain in your investments. This does not come easy and cannot be determined simply by adding in monthly rent for commercial and housing properties.

There are several factors to be considered (termed as NOIs) which might limit the amount of money you get to keep per annum versus the amount of money you would have to invest back into the property for maintenance etc. In any case, realize that year-to-year value development can be unpredictable.

The Strategy

Weighing The Factors:

Financial analysts and investors must consider the aforementioned factors thoroughly before investing in an area. While it might sound like a lot of work scouting the area, there are reports available by numerous agencies to expedite the process, such as:

  • The U.S. Census Bureau
  • Bureau for Labor Statistics

Data from these agencies are complied with within the Metropolitan Statistical Area (MSA) which goes on to determine economic conditions and indicators for growth.

Once you have the data, you're required to come up with an investing strategy. Nothing can be as important for an investor as his or her portfolio which is a testament to how lucrative their strategies have been in the past. Your investment strategy has to assess risks, growth, gains, and even factor in losses to be thorough in an ever-changing business.

Finding The Right Team:

While an investor is a lot more than just a passive participant in the entire process, he or she is just one of many people in an entire team of strategists, analysts, real estate managers, and fund managers who work in sync with one another to make investment possible.

Once you've assessed every factor and weighed them out, it's time to set up objectives and have the entire teamwork towards achieving them. For example; score existing investment markets and all the potential expansion markets and compare them against each other. A model has to be updated at least annually since market fundamentals are always shifting.

Conclusion:

Location is the foremost, and arguably the most important element when investing in real estate. Since the lucrativeness of a particular area is subjected to change, no calculation can be certain. However, with an expert team and strategy, you can find the right figures and facts to make the process as smooth and profitable as possible.

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