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Real Estate Intelligence: The Power of Market Analysis

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Before diving into your first — or even your 15th — real estate investment, you must do some homework.

Conducting a real estate market analysis before you invest in a new project goes beyond searching for available properties online. Understanding good analysis can help you avoid common pitfalls and know you’re getting the most value from your investment.

Real estate market analysis: why it’s necessary

Diving head-first into an investment without taking the time to do a real estate market analysis can cost you time and money or even put the success of your project at risk for failure.

Here are some of the benefits of conducting a real estate market analysis and the pitfalls of skipping out:

Overpaying or underpricing

Your market analysis can help you determine the best listing price for a property. Overpricing could scare off potential buyers and cause the property to sit on the market for too long.

On the other hand, underpricing your investment property can lead to missed opportunities for maximizing profits.

Making risky investments

Going in blind has several risks, like buying properties in areas with declining property values or low demand. Be sure you evaluate things like market trends, economic factors, and supply and demand dynamics so that you don’t miss out on identifying profitable investment opportunities or fail to anticipate potential market downturns.

Financing challenges

If you’re not doing your homework, trust us, your lender is. Lenders rely on market analysis to assess a property's value and potential risks. When you perform your own market analysis, you can avoid some common difficulties in securing the best financing.

Identify good investment opportunities

A market analysis is an excellent tool for finding emerging trends, up-and-coming neighborhoods, or underserved markets. It can help you get ahead of the market and find the next great investment before your target area becomes saturated with other investors.

Competitive advantage

A comprehensive market analysis can help you understand market trends, pricing dynamics, and buyer preferences before you commit. You’re not the only savvy real estate investor in your area, but you want to be the smartest. If you evaluate and reevaluate your options frequently, you won’t miss out on good deals and the best opportunities.

Mitigate your exposure

Real estate investments come with inherent risk under the best of circumstances.

Good market analysis allows you to take a closer look under the hood and examine more of the factors that can make or break your investment, like an oversupply of housing in a particular market, declining property values, unfavorable economic conditions like high unemployment and depressed wages, and transportation and infrastructure in your chosen market.

Steps to conducting your real estate market analysis

Every project is different and will require its own due diligence, but it’s essential to follow the proper steps to get the most out of your fix and flip and rental investment properties:

Define your market

Know the specific geographic area you want to analyze. It could be a neighborhood, city, a specific investment complex or a larger region. If you’re a first-time investor, it helps to stay close to areas you’re already a little familiar with.

Gather market data

To collect relevant data to understand the market's dynamics check local government agencies, real estate associations, Multiple Listing Service (MLS) data, and reputable real estate research reports.

You’re looking for information about recent property sales, rental rates, vacancy rates, new construction, demographics, employment trends, and economic indicators. Don’t forget to take notes about zoning laws and building restrictions.

Analyze historical data and market trends

Past performance may not always guarantee future results, but it can help put market activity into perspective to help you make more informed decisions about your real estate investments.

Select a date range and examine historical data over that period of at least a few years to identify trends and patterns. Some of the factors to review include:

  • Property price appreciation
  • Rental rate changes
  • Sales volume

Analysis like this helps to understand the market's historical performance and cyclical patterns.

Assess supply and demand

Next, you’ll want to evaluate the current supply and demand dynamics in the market. This means you’ll determine the inventory levels of available properties, and compare them to historical averages. Evaluate factors like population growth, job market conditions, and development projects that could impact supply and demand.

Analyze comparable sales

To review recent comparable property sales to understand current market values, start by looking for sales of properties similar in size, location, condition, and features.

Analyze the sales prices, how long each property was on the market, and any significant price adjustments. This data gives you insights into buyer and seller behavior and helps determine the fair market value.

Study the rental market

Are you planning to rent your investment property? Analyze the rental market by comparing changes in rental rates, vacancy rates, and rental concessions. This analysis provides insights into demand and could show you potential investment opportunities.

Consider economic factors

Last, you’ll want to study the broader economic factors that influence the real estate market in your chosen area. Look at employment rates, income levels, GDP growth, and industry trends. Economic conditions affect housing affordability and the market's overall attractiveness for real estate investment.

Benefit from your real estate intelligence

Real estate market analysis is the kind of homework that can pay you back. It’s also ever-changing. It requires ongoing monitoring and updating to account for changing market conditions. Review and update your analysis regularly so that you can stay on top of changing trends and lucrative opportunities.

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