A successful real estate investment starts with thorough real estate market research. The information gathered during your real estate market research will help identify opportunities and risks within the marketplace and guide your investment decisions. If you're new to market analysis, follow this guide to conducting real estate market research as a real estate investor.
Start big before going small
It's a good idea to have a bigger picture of the overall market before you start real estate investing. Taking a macro look at the real estate industry as a whole will give you insights into market trends, like a buyer's market versus a seller's market, if people are moving to or from the city, or what industries are oversupplied or undersupplied based on current and future demand. This data can help you identify what investment strategy to target.
While the tools and websites you use to help you gather information will differ based on the type of investments you're targeting, in general mico market research is done in a fairly similar manner regardless of whether you're investing in commercial real estate or residential real estate.
Investors interested in commercial property can look to CBRE Group (NYSE: CBRE), CoStar (NYSE: CSGP), and CoreLogic (NYSE: CLGX) to find helpful data on subsectors within the CRE industry. Residential investors can look for housing market data on websites like Attom Data, CoreLogic, Realtor.com, and other trusted real estate websites like Millionacres.
Once you've identified the industries that have the most potential, you'll want to target a market area to invest in. Many of the websites listed above will provide data on how the top markets are performing for that industry, providing information about supply and demand, net absorption, rental rates, occupancy levels, cap rates, and more. Using this data, you can narrow down a general investment strategy to a targeted market.
If you don't see that data readily available, reach out to a local real estate agent. Many real estate brokerages will provide a monthly report for the metro area. This data, in addition to their personal experience and knowledge, can help you gain a better understanding of the local market and tell you what zip code, neighborhood, or property features are performing well or not, as well as give you a better understanding of pricing in that market.
Supply and demand is critical for determining the value, income potential, and profitability of an investment in the long term. Submarkets, meaning the local real estate market you're targeting can have a very different supply and demand than the general macro market. Make sure you understand the specifics of your area, including vacancy rates, average days on the market, demographic trends, current properties in development, or planned development that could impact that supply and demand.
Determine the property's value, performance, and potential
Now that you've established a target market and investment strategy, you can start analyzing the individual investment property. Property value is established in different ways depending on the property type. For example, commercial properties are valued using cap rates, which looks at the income the subject property is or can produce in the given market.
Residential property, particularly single-family homes, are valued by looking at property prices of comparable homes. A comparative market analysis or real estate market analysis can be used to help determine the as-is market value or after-repair value of a property. It's important for investors who are targeting a residential rental property to consider the property's rental potential in addition to the market analysis valuation.
Rental rates can be determined by using industry websites to look at going rental rates. CREXi is the largest online platform for leasing or selling commercial real estate and is a great place to compare rental prices per square foot. Investors targeting residential rentals can look at current rental listings on industry websites or look at historical rental data on Rentometer.com to determine market rent.
The data gathered during your real estate market analysis will then be used to run an investment analysis to determine the individual investments potential return based on its price, current performance, or potential performance in the given real estate market. The more you practice conducting real estate market research, the easier market analysis will be. Staying updated on trends and news will help you more easily adjust your portfolio or investment strategy to adapt to the changes in the marketplace.