How to Research Real Estate Markets for Investing

Whether you're an experienced investor expanding into a new market, or are getting into real estate investing for the first time, it's important to research the real estate market before investing. Market trends, property values and neighborhood characteristics can vary significantly from one location to another, and what works in one market may not work in another. The work of researching real estate markets, by contrast, is more standardized, with steps that walk you through transitioning from market novice to market expert.

A financial advisor with experience in real estate investments could help you analyze and manage investments in your real estate market.

Define Your Goals

As with many investment activities, researching a real estate market starts with clearly defining your own investment goals . You don't need to know everything about every aspect of a market. Focusing on your goals will help narrow the scope of research to the markets and properties most likely to meet your needs.

Ask yourself the following questions:

• Are you interested in commercial real estate , such as office buildings, retail spaces or industrial properties?
• Or are you more inclined toward residential real estate , like single-family homes, multi-unit properties or apartment complexes?
• Do you want to buy physical property, or are you more interested in buying real estate investment trusts (REITs) or pursuing other investment options that don't necessitate buying physical property?

If you're leaning toward residential real estate, you have a few investment strategies to choose from. Are you planning to flip properties – buying them at a lower price, renovating them and then selling them at a higher price? Flipping requires a deep understanding of property values, renovation costs and the potential resale market in your target area.

Alternatively, are you looking to buy and hold properties for rental income? In this case, your focus might be on multi-unit properties or single-family homes in areas with strong rental demand.

Your investment goals will also determine the level of risk you're willing to take on.

For example, flipping properties might offer higher short-term profits, but also comes with greater risks, including unexpected renovation costs or fluctuations in the housing market. On the other hand, investing in rental properties can provide steady income over time, but requires long-term commitment and property management.

Choose a Target Market and Neighborhood

Once you know your goals, it's time to start your research. Here are three general steps in the process:

• Choose the target market. The location of an investment property often significantly impacts its value, rental income and long-term appreciation potential. Markets that are adding jobs and people are more likely to see increased housing demand, driving property values and rental rates higher.

• Select a specific neighborhood. Examine neighborhood characteristics such as safety, schools, public transportation, shopping centers, future development plans and overall appeal. Don't neglect future development plans.
• Assess rental demand. Areas with lots of renters that are near universities or city centers might offer more stable rental income. Neighborhoods with primarily owner-occupied homes may have less rental competition, but offer opportunities for long-term appreciation.

Look at Property Value Estimates

Looking at property value estimates can help you determine whether your investment is likely to be profitable. Start by reviewing median home prices in the neighborhood and comparing them to other areas within the market. This will give you a sense of how the neighborhood's property values stack up against the broader market.

It's also essential to look at comparable properties, or comps . These are recently sold properties in the same area that are similar in size, condition and features to the property you're considering. By comparing your potential investment to these comps, you can get a better idea of what the property is worth and how much to pay for it. Online real estate platforms like Zillow, Redfin and Realtor.com can provide useful tools for finding and analyzing comps.

Review Historical Data and Forecasts

While past performance is not always indicative of future results, neighborhoods with a history of steady appreciation are more likely to continue appreciating in the future. Keep in mind that properties in areas with strong histories of price appreciation may cost more as well.

Begin with long-term trends. How have property values changed over the past five, 10 or 20 years? Are there significant fluctuations or periods of rapid growth or decline? For example, a market that has consistently appreciated over the past decade may be more likely to continue growing, while a market with volatile price swings may present higher risks.

After examining the past, look at forecasts and projections for the market. Real estate analysts and economists often provide market outlooks based on factors such as economic growth, population trends and new developments. A market expected to see significant job growth and population increases may be a good candidate. Forecasts rely on assumptions, however. Try to corroborate them with other data and sources before committing to an investment.

Bottom Line

Researching real estate markets is the first step when considering investment decisions. By defining your real estate goals, choosing the right target market and neighborhood, analyzing property value estimates, and reviewing historical data and forecasts, you can identify opportunities and avoid potential pitfalls.

Tips for Real Estate Investment

• A financial advisor can help you create a real estate investment portfolio for your needs and goals. Finding a financial advisor doesn't have to be hard. SmartAsset's free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you're ready to find an advisor who can help you achieve your financial goals, get started now .
• Use SmartAsset's free online mortgage calculator to estimate the payment on your next real estate investment including interest, principal, taxes and insurance.

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