Technical and fundamental analyses of real estate investing (The Market)
OK, if real estate investing is all about The Market then how do you know what are the best markets and where they are? There are many things here to consider and please remember that no market represents the absolute perfect scenario because after all, we do not live in a perfect world. I believe you want to do a balance of technical analysis and fundamental analysis. I have had conversations with people who only look at technical analysis, which I believe is critical to knowing when you are in a great market. However, I also believe when you look at fundamental analysis, you are looking into the future (the dashboard report) to see where a market is heading.
Fundamental analysis includes things like:
- Population Growth - insights as to sustainability of cash flow and value increases
- Job growth - insights toward population growth
- Industry - important to have a variety of industry so the city can endure a industry that may dry up or move on such as Detroit with one (auto) industry or Vegas with only one (gaming) industry
- City's 5 year growth plan - does the city have a plan, do they wish to grow or do they prefer to be a small community
- Housing permit activities - goes to suggest future growth or decline
- Path of progress - which way is the city growing, if the city grows to the north the north end of the city may have higher values than the South
- Undervalued or overvalued - what is affordability in comparison to income and is it increasing decreasing or stagnant
Technical analysis that is paramount to know is:
- Absorption rates - insights into supply and demand of current housing market, lower than 6 month supply typically means seller’s market and higher than a 6 month supply typically means buyer’s market
- Pending home sales - insights as to the growth or decline of the real estate market
- Population size - should be at least 1million metro size to insure enough job diversity
- Median income versus median home price - can the incomes pay for the housing?
- Unemployment rates - should be at or below national average
These are just examples of items that make up a great real estate market. I believe once you consider these factors you may understand why the market is so important to the overall performance of a real estate investment.
I always say until you take some time to create a real estate plan and establish the 5 W’s, you cannot succeed:
- What do you want out of your investment?
- Where should you invest?
- When should you invest?
- Why are you investing?
- Who will make up my real estate mastermind? My Accountant, my attorney, my partners, my real estate professional and advisors.
Once you take the time to consider your plan and write it down you have taken the first big step and the rest will fall into place and you are on your way to creating wealth.