Many indicators suggest that the real estate market is rebounding after the collapse of a few years ago. This means more home construction, higher prices for existing houses and a robust rental market. In fact, rents are increasing in most markets around the country. As Jason Hartman recommends, purchasing as many properties as you can afford in different markets is the best strategy for maximizing a return on your investment. As you evaluate potential markets for your investment, though, there are a few important points to consider.
When shopping for rental investment properties outside their local area, new investors might be tempted to look just at the property’s location, condition and cost. But to minimize risk, it’s helpful to consider the bigger picture: the strength of the community’s economic base, the unemployment rate and overall population growth.
Areas which haven’t seen much of a recovery in employment and commercial expansion may be risky markets for small investors, especially since rents are trending upward. It may be harder to find tenants able to pay the kind of rents that can carry mortgages and even yield a profit. If the community isn’t seeing much economic growth from new enterprises and the expansion of current ones, it probably isn’t going to attract new residents – who often start out their stay in a new place by renting.
Likewise, a stagnant economy is often accompanied by a high unemployment rate, which can also indicate an exodus of workers to better working conditions elsewhere. In communities with this kind of profile, there may be plenty of properties available at low prices in the aftermath of the foreclosure crisis. But a successful return on the purchase depends on keeping those properties rented at rates that sustain the investment over the long term.
An August 2012 report by US News Weekly profiled a number of these shaky markets, such as Detroit, where an 11% unemployment rate in June 2012 coincides with a 0.2% rate of job growth. The area also saw a negative population growth of nearly 5% between 2008 and 2011. Though real estate in Detroit is easily available, its investment potential may be pretty risky.
What’s a small investor to do? First, consider diversifying your investments. As Jason Hartman’s investment strategies advise, buying multiple properties spread over numerous markets offers the best protection against a collapse in any one of those markets. Since every area has its own unique “market,” it can be difficult to make generalizations about the potential for investing success.
Second, examine the larger context of the properties you’re considering. Look for areas with an expanding economy that supports job growth. Do some research: are there any new businesses or institutions planning a move to the area? Are new businesses opening up? What kind of jobs are available, and are they likely to attract the kind of tenants you need to make your investment pay?
Rental income investing, with diversified holdings in different markets, remains one of the best ways to secure a stable income for retirement – or for a more independent life at any age. But each market is unique, with its own context. Looking closely at who lives and works there, and why, can help you reduce risk and make the most of your real estate investment.
The Heroic Investing Team