Real estate, as we’ve all heard, is about location, location, location. As true as this statement may be, it is more important to first find a strong market. If you’re in a great location but a poor market, you may still not be able to perform your business plan. On the contrary, if you’re in a good or great location in a strong market, your chances of executing your business plan are much greater.  As a passive investor, it is important to be able to identify strong markets and those you should stay away from. Below are 6 red flags that disqualify a market whether you’re an operator or a passive investor. 

All data to qualify or disqualify a market can be found on the US Census website. There are also many other website that will provide this data.

#1 No Job Diversity

No single industry should employ more than 20-25% of the population. If one industry employed say 40% of the population and it collapses, there is a very good chance a property would be hit hard by the residents living there. Many residents would not be able to pay rent, ultimately hurting the NOI and valuation of the property. Investing in a market with a diverse economy you are able to minimize risk substantially. 

#2 Population Decline

A declining population is essentially a declining market. If the market is declining, so is the real estate economy.

Here are a few factors to look at:

• net migration
• overall population trend
• number of households

 #3 Rent to Income Ratio

A high rent to income ratio leaves very little room for rents to grow. Residents are only willing to allocate so much for rent. When you reach north of 40%, residents will typically look for another place to call home. Personally when analyzing a market, if the annualized median rents higher than 35-40% of the median income, the market is disqualified.  

#4 No Job Growth

A very basic red flag is no job growth. No new jobs mean lack of population growth and lack demand for real estate. 

Yearly job and employment data can be found on numerous sites.

 #5 Regulations

Local government regulations is something you should have knowledge in regardless on the type of real estate investing you’re doing. Certain markets favor real estate investors over others. For us at Morongell Capital, we like to acquire assets in business and landlord friendly states. Being aware of local regulations can help you on underwriting assumptions and carrying out your business plan in a timely manor.

#6 High Inventory

Supply and demand is a key metric in any business. For multifamily real estate, a key metric to be aware of is absorption rate. For example is 10,000 units come online in 2018 and only 6,000 units get absorbed by residents, it is a good sign that the market has oversupply. Oversupply causes more concessions and lower vacancy rates leading to lower property value. An excess of inventory (oversupply) is a strong reason to disqualify a market.

What are some reasons you consider to be a red flag and will disqualify a market?