7 Key Considerations When Evaluating Markets For Investment…
As you know, Real Estate is all about location, location, location. Last month in our Investor Insights piece titled “Should You Focus Your Real Estate Investments on Your Local Market” we outlined our case as to why it may make sense for you to move beyond your local market when looking for your next real estate investment. Maybe what we said made sense and you are on board, but find yourself wondering where you should begin in narrowing down the search of possible markets to invest in. With this in mind, we’ll outline a number of key considerations and some helpful resources that can be used to hone in on potential locations for your next investment.
- Vacancy Rates: This one is fairly self-explanatory. Obviously, the lower the vacancy rate, the easier it will be to ensure your property is rented and the larger the pool of suitable candidates you will have to rent your property. In addition, a lack of supply or heightened demand leads to upward pressure on pricing as landlords can command a premium with limited options available. CMHC’s Housing Market Information Portal is an extremely valuable resource, with access to various reports and statistics, including vacancy rates and average rent levels in various markets.
- Affordability: RBC Economics publishes a quarterly report on housing affordability, looking at the percentage of pre-tax median household income it would take in various markets to service the costs of owning the average home (both single-family homes and condos have been factored in), when mortgage payments, property taxes, and utilities are factored in. Interestingly, in RBC’s September 29 report, housing affordability in Canada is currently the worst our nation has seen in 27 years. REIN, one of the leading real estate investor education providers recommends focusing on areas where the index is 33% or less, suggesting that anything over 38% is trending towards a speculative market. In the most recent report Vancouver, currently at 80.7% was the highest in the nation, Victoria was the third highest at 58.6%. You may be surprised to know that some of the markets touted as among the most attractive for investment in Canada over the last decade actually came in under the 33% threshold: 30.3% in Edmonton, 32.1% in Saskatoon, 32.1% in Halifax. While these areas have experienced macro-driven slowdowns, many of the underlying fundamentals that made them attractive a few years ago are still present.
- Rent levels: Many seasoned real estate investors use a screening tool referred to as the “10% rule.” Basically, they will only invest in an area where the gross annual rent is at least 10% of the purchase price. Over the long haul with fluctuating interest rates, etc., this number has been determined to provide a safe buffer to position you well for the investment to stay cash flow positive for the duration of your holding period. In Nanaimo, gross annual rents are currently typically less than 5% of the purchase price. Despite our low interest rates, it is pretty hard to cash flow at these levels.
- Average Incomes: Investing in markets where the average income growth is higher than the provincial average will position you well. Statistics Canada and the provincial statistics sites are helpful resources, as is the Census Profile data immediately after release.
- Population Growth: Similar to average income, you want the population growth in the specific market you are investing in to be outpacing provincial population growth. In-migration is a key driver of demand. More people = more demand for both rentals and home purchases, putting upward pressure on pricing.
- Strong Employment Base: You want to invest in markets where you have a relatively balanced employment base. Heavy concentration in one sector can be fatal for a rental market. Think Newfoundland and the cod fishery, Southern Ontario and the automotive manufacturing plants, small-town Alberta and the oil & gas industry, coastal BC and Forestry. All of these areas went boom to bust in fairly short order and some have taken years, if not decades to recover.
- Infrastructure and Transportation: How accessible is the market from other major centers? Is there a regional or international airport? How is the public transit system? Is there a university in the area drawing a steady pool of renters each year? All of these factors bode well, as the draw of the area and will positively benefit population growth and be better positioned to attract new business to the area.
While there are numerous other factors that you could look at, these 7 items are relatively straightforward to analyze and can serve as somewhat of a screening tool to determine if a market may be worth a further look. All of this research can be performed from the comfort of your own home and following a disciplined, systematic approach to researching various markets for future investment will go a long way in protecting your downside risk, while simultaneously positioning you well to realize a solid return on your investment.
Once you have narrowed your search down to a few markets, reach out to a few investment focused Realtors and property managers to validate your findings and assumptions. The right professional team can be an invaluable resource as you build your real estate portfolio and secure your financial future.
If you are considering an investment in real estate, put our full-service advisory team to work for you. Contact us anytime for your complimentary consultation at 250-751-0804 or firstname.lastname@example.org.