What does “good” really mean?
You see, the word “good” is a pretty subjective term.
“Good” pizza, “good” beer, “good” movie . . . everybody has their own opinion of what’s good and what’s not. But when you’re investing money in real estate, it’s important to understand exactly what separates good real estate markets from average, not-so-good, and even downright terrible.
How to find a good real estate market?
Here are seven factors that help make a real estate market good for investors:
- Job creation above the national average.
- Current and expected future population growth, also above the national average.
- Building permits pulled, current construction activity, and forecasted growth in real estate development.
- Government planning on both the state and local level, and whether or not the municipality you’re considering investing in is pro-growth or is over-burdened with red tape and regulations.
- Housing affordability by using the price-to-rent ratio to compare median home prices to median rents.
- Absorption rate, or the time that it takes for new housing that is brought to the market to be purchased or rented.
- Vacancy rate, comparing the average in your target market to the overall average vacancy rate for the market.
Cash Flow Real Estate Markets
Real estate investors looking for homes that provide a return quickly focus on cash flow markets. Cash flow real estate generates a steady and predictable income stream through the holding period of the investment.
How to find cash flow property
There are two financial metrics used to identify property with strong cash flow:
- Cash-on-cash return on a single-family rental house measures the annual before-tax income generated by the property divided by the total cash invested.
- Cap rate compares the NOI (net operating income before mortgage payment) to the price of the house.
The higher the cash return and cap rate, the better the property is for cash flow real estate investors.
By searching for properties with a higher yield, then sorting by cash-on-cash return, you’ll typically find hundreds of rental properties to choose from.
Photo/s credit to the owners