As a landlord or investor, your understanding of your local real estate market is essential to success. You must have an up-to-date understanding of the forces impacting demand, supply, pricing trends, and other factors that can influence investment decisions. Conducting a comprehensive market analysis allows you to take an informed approach when investing in rental properties. To help you make more informed investment decisions and increase your ROI, let’s take a look at how to analyze your local real estate market.
The Importance of Real Estate Market Analysis
A real estate market analysis, also known as a comparative market analysis (CMA), is a comprehensive assessment of a property’s value compared with other similar properties on the market. The following are some goals of a real estate market analysis:
- Set realistic prices for buying or selling properties
- Understand the current market trends and how they affect the value of the property in question
- Identify the supply and demand dynamics in the local real estate market
- Analyze the various economic factors that can influence the perceived market value of a property
By conducting a market analysis, real estate professionals can make more informed decisions about pricing and marketing strategies and better understand the competitive landscape of the local market.
Step 1: Define Your Objectives and the Scope of Research
Before diving into the market analysis process, you must identify your main research objectives and the scope of the analysis. Are you analyzing the market to better understand trends and establish a marketing campaign for your rental business? Or are you looking to determine the value of a specific property for sale? Knowing the purpose behind your analysis will help you stay focused and better guide your research efforts.
Step 2: Gather Data on Comparable Properties
Begin by gathering data on properties that are similar to the one you’re analyzing. These are known as “comparable properties” or “comps.” When selecting comps, here are factors to consider:
- Property size
- Number of bedrooms and bathrooms
- Age and condition of the property
- Amenities (e.g., swimming pool, gym, parking)
The more similar the comps are to those of your property, the more accurate your analysis will be. As a general guideline, aim to select at least three to five recently sold or listed comparable properties.
Step 3: Assess Local Economic Factors
A variety of economic factors can influence property values, including job growth, interest rates, and population growth. Keep in mind that these factors can vary by location, so always focus on localized data. For instance, a thriving economy in a specific area could drive more job seekers to that region, increasing the demand for local housing. On the other hand, high interest rates on mortgages could deter potential buyers, causing a dip in property sales.
Step 4: Analyze Market Trends
After gathering information on comparable properties, take a closer look at the overall market trends impacting the region. These are some trends to note:
- Home sales volume (how many properties are selling or have been sold recently)
- Average days on the market (how long properties spend on the market before selling or going off the market)
- Median sale price (the mid-point price of all properties sold in the area)
These trends can help you better understand the market’s current state and how it may evolve soon. Moreover, they can impact the value of the property you’re analyzing, so keep them in mind when conducting your research.
Step 5: Assess the Supply and Demand Dynamics
The real estate market performance hinges on the balance between supply and demand. By investigating the level of supply and demand, you can better understand how easy or difficult it may be to sell a property and what factors are influencing the market. Here are some indicators of supply and demand dynamics:
- Number of available properties
- Ratio of buyers to sellers
- Median list prices compared to median sale prices
Step 6: Calculate the Market Value of Your Property
Once you have a good understanding of the market trends, it’s time to calculate the value of your property. You can approach this step in several ways. For instance, you could use an actual price paid for a comparable property or use a pricing model based on the statistics you gathered in Step 2.
You should base the final value on an average of all the prices of comparable properties. However, don’t forget to consider other factors, such as the current state of the market and local economic conditions.
How To Interpret Real Estate Market Analysis Results
Now that you have conducted a real estate market analysis and calculated the value of your property, you have to interpret the results. The first step is to understand what the data you collected tells you about the current state of the market.
Look for trends in the data, such as changes in median sale prices, days on the market, and inventory levels. For example, say the number of properties on the market is decreasing, but the median sale price is increasing. This could be a sign that demand is strong and buyers are willing to pay more for desirable properties. On the other hand, if the home sales volume is decreasing and median sale prices are declining, the market could be softening.
Next, use your data to compare the value of comps for sale in the area with the estimated value of your property. Are they similar, or do you need to adjust your price? If there’s a discrepancy between your estimate and other listings, look for possible explanations, such as differences in the age or condition of the properties.
Finally, consider any external factors that may have an impact on the market, such as economic conditions, local government policies, or seasonality. These can all influence prices and should play a role in your interpretation of your results.
Real estate market analysis is a powerful tool that increases the chances of success when investing in properties. By following these tips to analyze your local market, you can more easily make informed decisions and increase your ROI.
If you need help finding quality properties to invest in or require assistance managing your current investment properties, let Excalibur Homes help. We’re a rental property management company that can connect you with real estate investment properties and take the responsibility of landlordship off your hands. Let us help you get the most out of your investment.