3 Ways to Know if a Market is an Affordable Market
The big question that arises most frequently as we enter a time where housing inventory is tightening and prices are rising is, “where or what do I buy now”? In the past 5 years there were plenty of choices for real estate investors to buy properties in many parts of the country. Today many investors are finding it much harder to find these good deals. The sad truth is many non-seasoned investors will either make mistakes and purchase properties that do not make financial sense or they simply give up and miss the opportunities.
Key to sustainable investments
Seasoned investors know that it is always a great time to invest, but where they invest is the difference between good and bad investments.
The key of course to a good investment is the sustainability of the ROI (return on investment). The key to any sustainable investment is to buy in markets that are considered affordable. Not necessarily affordable to you or your bank account but to the general public as a whole.
You all know the expression, “you make your money going in." The translation, of course, is the ability to buy today with some sort of forecastable appreciation and cash flow. Cash flow is easy to forecast as it is simple mathematics. Market rents minus expenses equals cash flow. Sustainability of this cash flow is the most overlooked piece of diligence in investing and is obtained in affordable markets.
Appreciation is always speculative in nature, however there are ways to increase the probability of appreciation by buying in affordable markets. With affordability to a market being so important let’s dig deeper
3 ways to know if it is an affordable market
1. Income to price ratio:
The simple equation is (median income x 3 = affordable).Think of the last time you went to get a home loan, the lenders typically always want you to buy a home that you can pay for using 1/3 (33%) of your income.
They do this because this amount is what a lender has proven through their actuary calculations to be a safe and sustainable amount you can as a borrower be able to repay without going into financial distress. If the national lending system uses this as an affordability measure, then it would make great sense as an investor to make sure we are buying properties with this same affordability measure.
As investors most of us qualify a tenant based on the same criteria. We want the tenant to make 3 times rent so we know they can afford to pay each month.
2. Median home price matches median income:
In the above example it may be possible to buy any priced property and find someone that can afford to pay rent based on a salary of 3 times rent. To invest in the safest, most sustainable property, you want to invest in property that has the largest number of people who can afford to rent your property.
To do this you want to invest in property that represents the area’s median priced home. Further you want to insure that the median priced home can indeed be bought and rented based on the area’s median income.
This gives you the largest pool of renters and when you go to sell will give you the largest pool of buyers who are willing to pay retail prices for a home they can move their families into (this is often referred to as the sweet spot). My past experiences has been that I often actually sell the property to the tenant which further benefits my bottom line as I save the cost of listing the property through a conventional realtor transaction.
The only thing better than an affordable market is an undervalued market. If an affordable market represents a purchase where you can pay for the median home with 33% of your income, then a market where you can buy the median priced home for less than 33% is of course considered an undervalued market.
There are markets at any point in time that are considered undervalued based on this criteria. For example, Atlanta Georgia is a market where you can buy the median price home for only 20% of the area’s median income. This suggests the market has 13% of growth before it even is classified as an affordable market.
To you as an investor it represents great sustainability. When doing your diligence on affordable markets, you also want to insure the market has upward growth potential. Job growth and population growth will provide you this upward growth you desire. Markets such as Atlanta, Philadelphia, Birmingham, Memphis, and Kansas City just to name a few represent these great markets.
Ride the wave
As you invest in great affordable and undervalued markets and watch for the market shifts (typically a 5 to 8 year cycle), you can be rewarded with both great cash flow and equity growth. The nice thing is these markets always exist. Like everything in life they are moving targets but fortunately in real estate the movement is much slower than typical investments making them safer and more lucrative. To keep on top of all these moving targets join the Equity Builders Group Investment Group and receive insights to these on your inbox weekly.
Happy investing. http://howtobuyusarealestate.com/equity-builders-real-estate-buyers-group/