Doing market research and competitive analysis can help you find a good investment. It is, in fact, an essential step in real estate investing.
Real estate is one of the most lucrative investments available. When you invest in real estate, you have an opportunity to earn generous returns, especially if you know what you are doing. However, not all real estate investments have the potential to generate gainful profit. As a real estate investor, it’s important to know how to choose the right investment to ensure profitability.
Table of Contents
- Is Market Research the Same as Competitive Analysis in Real Estate?
- Why Should Real Estate Investors Perform Market Research and Competitive Analysis?
- 7 Questions You Need to Answer in Your Real Estate Market Research and Competitive Analysis
- 5 Easy Steps to Doing Your Own Real Estate Market Research and Competitive Analysis
- How Often Should Real Estate Investors Perform Market Research and Competitive Analysis?
But with the many properties available for sale, how do we know which one will make the most profit? When choosing a real estate investment, it’s important to consider different factors that will help you determine an investment property’s potential profitability. This is where real estate market research and competitive analysis come in handy.
Seasoned investors never fail to do their research and perform proper competitive market analysis before making any investment decision. By doing so, you’ll be able to identify which investment property offers the most beneficial gains, so you can decide if it’s worth your time and money.
In the past, investors relied on manual research to make a decision. Nowadays, modern investors use online platforms to aid them with their real estate analysis and research. Mashvisor is the best real estate app available today because of its full-service tools that help investors find the right investment property.
Is Market Research the Same as Competitive Analysis in Real Estate?
Although they are interrelated, real estate market research and competitive analysis are not synonymous. Market research in real estate is a general term that refers to the gathering of the necessary information about the investment property and its location. When you perform market research, you get all the information about a particular real estate market.
On the other hand, competitive analysis is a subset of real estate market research. It is one of the things that is done after gathering all the essential information about the investment property and its market. When performing a competitive analysis, you investigate and analyze the competition using the data from your market research.
In other words, market research is the umbrella term used for real estate research and analysis. Market research covers several categories, and one of them is competitive analysis. So, when we speak about competitive analysis, we refer to one of the several tasks that must be performed in the market research process.
What Is Market Research in Real Estate?
In real estate, when we talk about market research, we refer to the act of gathering information about the investment property and the real estate market to which the property belongs. As part of market research, we also gather information about the demand from homebuyers and renters, as well as the drivers of the real estate market in a specific location.
By performing thorough market research, you’ll essentially obtain access to the following important information:
- Information about the investment property, such as:
- Rental income
- Expenses
- Cash on cash return
- Cap rate
- Return on investment
- Information about the location, such as:
- Local economic trends
- Population growth rate
- Job growth rate
- Tourism
- Availability of public transport and walkability
- Amenities
- Information about the market, including:
- Demand from buyers and renters
- Market drivers
- Customer preferences
- Average rental rates
- Average occupancy/vacancy rates
- Other real estate trends
What Is a Competitive Analysis in Real Estate?
Competitive analysis is a part of market research—it is one of the many categories that make up real estate market research. Doing competitive analysis allows investors to study the competition using market research concepts and techniques. To perform an accurate competitive analysis, you also need to gather accurate information during your research.
The competitive analysis process allows you to understand your competition even better. By analyzing your competition, you will know what they are doing, as well as their future business plans. Through this, you can gain useful insights to help you make the right investment decision for your own real estate venture.
Related: How to Find Real Estate Investing Opportunities Before the Competition
Why Should Real Estate Investors Perform Market Research and Competitive Analysis?
Doing market research and competitive analysis can help you make an informed decision for your investment. In fact, it is a crucial step in real estate investing. Investors who skip such an important process often end up buying the wrong investment that doesn’t help them earn maximum profit. Worse, some need to suffer painful losses because of wrong decisions.
Benefits of Performing Real Estate Market Research
There are many reasons why market research is necessary for real estate. One of the major reasons is to have all the necessary information that allows you to gain a deeper understanding of the market. This information will then help you invest safely and profitably.
Here are the other benefits of doing thorough real estate market research before buying an investment property:
1. Understand the Real Estate Market in General
Before investing in any real estate market, it’s important to understand the trends and changes in that specific market. Doing so allows you to determine opportunities for a real estate investment. In addition, you’ll also be able to identify the risks of investing in that market based on the current trends.
2. Identify Current Market Needs and Demands for Real Estate
Thorough real estate market research also allows you to understand the needs and demands of both buyers and renters. For example, by gathering the right information about market needs and demands, you’ll know the market share for investors who plan to buy and sell a property. You’ll also know the market share for investors who plan to rent out their properties.
3. Identify Future Demands and Opportunities
Additionally, you will understand the population, economic condition, and job growth of the market, allowing you to factor in potential future demands. Will there be enough developments that will drive new residents to the area? How soon will your property appreciate in value so you can sell it at a maximum profit? These are a few of the questions that will be answered by research.
4. Understand the Pricing of Housing and Rentals
Whether you intend to sell your property or rent it out, market research will help you understand the pricing of housing and rentals. Through this, you’ll be able to determine if you will gain a profit considering the average rental rates and home values of properties similar to the one you are eyeing.
5. Identify Which Neighborhood Is Best for Your Chosen Strategy
Some neighborhoods are optimal for traditional rentals, while others are ideal for short term rentals. Whatever rental strategy you are planning to take, doing market research allows you to determine which neighborhood will help you maximize your profit. Moreover, it will also help you stay away from neighborhoods that are not appealing to renters.
6. Determine Potential Income and Expenses
A comprehensive market research also provides accurate information on the potential income and expenses associated with the investment property. By knowing the essential figures, you can determine whether or not the property will be worth your money. It also helps you choose the one that offers the most gains with fewer expenses.
7. Choose the Right Investment Property
Taking into consideration the real estate data that you’ve obtained, you can do your market analysis and decide which investment property is right for you. Depending on your preferred investment strategy, your market research will guide you in making the right investment decision that offers the most gainful benefits.
Related: Top 5 Websites to Analyze Investment Property
Benefits of Doing Competitive Analysis in Real Estate
As mentioned, a real estate competitive analysis is part of market research. When you do your research, it’s imperative to also analyze your competition so you can gather gainful insights that will help you with your investment.
When you investigate, study, and analyze your competition, you will be able to:
1. Determine the Potential Income You Can Earn
With competitive analysis, you’ll know the average income your competition earns. It can be a good basis for your potential income too. For example, doing rental comps lets you identify how much the properties that are similar to yours rent out for. You’ll also know the average occupancy rates and demand for similar property types.
You can use rental comps to identify how much the properties that are similar to yours earn, as well as the average occupancy rate and demand for similar property types.
2. Identify What Strategies Are Working Well for Your Competitors
When you analyze the competition, you’ll also know the business strategies that are effective in maximizing profit. For example, you will be able to identify what amenities the most profitable competitors offer. Through this, you can then decide to incorporate these effective strategies into your own investment and see if they will work for you, too.
3. Create a Plan to Be Better or Equally Successful
Performing a competitive analysis helps you identify the similarities and differences between you and your competitors. It allows you to create a plan so that you can be as successful as them, or even brainstorm unique ways to be better. You can also identify gaps that you can possibly fill, opening more opportunities for your growth.
7 Questions You Need to Answer in Your Real Estate Market Research and Competitive Analysis
Effective real estate market research and competitive analysis often start with asking questions. By knowing which questions to ask, you will get the right answers that will help you make an educated decision for your investment.
Whatever investment strategy you are planning, make sure that these questions are answered when you do your market research and competitive analysis:
1. Why Should I Consider Investing in This Real Estate Market?
As a real estate investor, the first question that you should ask yourself is why you should invest in a particular real estate market. By asking such a question, you will gain insights into what the market can offer. It also allows you to identify investment opportunities as well as the advantages and other factors that will be beneficial to your overall profitability.
2. What Are the Market Risks Involved?
All investments are not without risk, so when doing your research, make sure to also include the possible risks that you will likely encounter. It allows you to decide which risks you are willing to handle. For example, certain market risks include poor economic conditions, high unemployment rates, low job growth, poor tourism, and slow appreciation rates. Make sure to only take calculated risks.
3. What Are the Drivers for This Market?
Knowing the drivers of a real estate market can help you determine if there will be enough demand for housing or rentals. Whether you plan to invest in traditional rentals or Airbnb properties, it’s critical to find out the driving factors that will help you become a successful investor. The lack of market drivers means the real estate market is risky to invest in.
4. How Much Net Income Can I Possibly Earn?
Let’s talk about the numbers. After all, the purpose of investing is to generate a profit. When you do your research, you need to find out how much income you can potentially earn, less the expenses. It’s best to use an investment property calculator to help you get an accurate computation based on the figures you obtained from your research.
5. How Are Similar Properties Performing?
An important part of market research and competitive analysis is knowing and studying the performance of similar properties in the same area. Make sure to investigate real estate and neighborhood comps so you can compare how each property is performing. It allows you to get a general overview of what to expect when you invest in the same type of property.
6. Who Are the Competitors in the Market?
The above question allows you to get a deeper insight and understanding of the competition, which is an important factor that can help you get ahead in the game. By knowing the competition, you will be able to make strategic plans on how to compete in the market so you won’t be left behind. You can also learn their strategies, which can help you with your own investment.
7. What’s the Best Investment Strategy for This Market?
It doesn’t matter if you already have a preferred investment strategy in mind; knowing the most effective strategy for a particular market can help you finalize your decision. Certain markets are optimal for Airbnb investing, while some are best for traditional rentals. Ensure to find out the optimal rental strategy for a specific market before you make a decision.
Related: Airbnb vs. Renting Out the Traditional Way: Which Rental Strategy Is Better for You?
5 Easy Steps to Doing Your Own Real Estate Market Research and Competitive Analysis
Now that we’ve learned the difference between market research and competitive analysis and each of their benefits, it’s time to find out how to perform one. Whether you are new to real estate investing or with sufficient experience, being familiar with the steps involved in real estate research and analysis is crucial to your success.
Here are the five simple steps for conducting your own market research and competitive analysis in real estate:
Step 1: Gather the Necessary Real Estate Data
The first step is to gather all the real estate data that you need to help you make a comparative analysis. Some of the most important information that you should find out include the location’s economic conditions, housing demand, tourism, and home appreciation rate. You also need to gather important figures, such as cap rate, cash on cash return, monthly income, and occupancy rate.
Step 2: Gather Real Estate Comps Data
Aside from the information about the real estate market and the property that you’re planning to invest in, you also need to gather real estate comps data. Real estate comps refer to properties with similar features as your subject property. The properties should be located in the same area and neighborhood as the subject property.
Step 3: Calculate Your Potential Returns
Using the data that you’ve gathered from step one, you need to calculate the potential returns you can generate from the property you are interested in. Make sure to factor in the expenses as they can greatly affect how much net profit you will earn. Also, it’s best to include your financing option in your calculation to get the most accurate results.
Step 4: Perform a Comparative Analysis
The next step is to perform a comparative analysis using the real estate data that you’ve gathered. To do it, you need to compare your subject property with the properties included in your rental comps. The best real estate comps are those with more similarities to the subject property. Analyze how the rental comps perform and whether they are gainful or not.
Step 5: Study the Competition
The final step is to study the competition. The real estate comps are most likely your competition. After comparing them, you also need to study each of them to know which one you will most likely be closely competing with. As mentioned earlier, analyzing the competition gives you proper insights into what to expect when you are already investing in the area.
Can You Do These Steps Manually?
While the steps for real estate market research and competitive analysis may seem simple and easy to do, doing them manually will take a lot of your time. In fact, manual research and analysis are not really recommended nowadays because they can be time-consuming, tedious, and prone to error.
The best news is that you can do all the above steps in just a few minutes using Mashvisor’s platform. How can Mashvisor help? First, you can use its database to search for active for-sale listings based on your chosen location, budget, and property type. You can customize the filters so you can find a property according to your preferences.
Once you find a property that you’re interested in, you will be taken to a page where you will see all the necessary information to help you determine if this property will make a good investment. You will find important data like monthly income, cash on cash return, cap rate, occupancy rate, expenses, and cash flows.
What’s more, Mashvisor offers a real estate investment calculator that lets you automatically calculate your potential returns based on the given figures. The best part is that you can customize the values for expenses and financing options, providing you with the most accurate and personalized computation.
In addition, you will also be provided with neighborhood comps so you can compare similar properties within the area. It also allows you to get an insight into the possible competition so you can assess whether or not it is a good idea to invest in your chosen market.
To start looking for and analyzing the best investment properties in your city and neighborhood of choice, click here.
How Often Should Real Estate Investors Perform Market Research and Competitive Analysis?
Performing real estate market research and competitive analysis should be done every time an investor plans to buy an investment property. As a real estate investor, you should be careful about which properties to invest in because not all are profitable. It is why conducting thorough research and analysis is a crucial process that you shouldn’t skip.
What happens if you don’t perform real estate market research and analysis when buying an investment property? Here are some risks involved if you skip this important process:
- Investing in the wrong location
- Buying a property at a higher price than it’s really worth
- Buying a property that is costly to maintain
- Buying a property that doesn’t generate sufficient income to cover its costs
- Pricing your rentals wrongly
- Using the wrong investment strategy
- Not knowing how to stay competitive
Conclusion: Market Research and Competitive Analysis Are Essential
Every real estate investor should perform proper market research and competitive analysis before making any investment decision. By doing so, you’ll be able to gather and understand all the necessary information that can help you identify a profitable investment.
Performing real estate market research also allows you to understand market trends so you can determine housing demands and identify possible investment opportunities. In addition, conducting a competitive analysis lets you dig deeper insights into the potential competition. You can plan ahead on how to stay on top of your investment.
While you can go through the process manually, it’s best to find a reliable real estate analytics platform that can help make your life easier. With Mashvisor, you can do all the steps involved in market research and competitive analysis without the need to do anything on your own. The process that usually takes several days or weeks to finish can be completed in just a few minutes.
Learn how Mashvisor can help you find the best investment property. Start your 7-day free trial with Mashvisor now.