A real estate market analysis is the process of analyzing a certain real estate market based on historical and current data in order to identify the best potential investment properties to purchase in the market.
It is often referred to it as a comparative real estate market analysis because it relies heavily on comparing investment properties with one another or comparing your investment property to other competing properties in the market.
This article aims to help beginner real estate investors understand the basics of a real estate market analysis by emphasizing its importance in real estate investing and the different steps that any real estate investor should make when conducting a real estate market analysis.
Related: Investment Analysis Software: Real Estate Investing
Why is it important to do a real estate market analysis?
A comparative real estate market analysis is essential for any successful real estate investment because it allows the real estate investor to make the optimal investment decisions and base his/her investment strategy on factual and historical data to ensure that he/she can achieve the highest return on investment.
When a real estate investor is considering investing in a certain market, the real estate market analysis helps him/her choose the best investment property for the investment in a market that is flooding with real estate properties that are up for sale.
Naturally, when looking at a real estate market, not all properties in that market will be equally optimized for investing. In order for a real estate investor to identify the best potential investment properties and to make the choice of which investment property to purchase, real estate investors must do a real estate market analysis as it is the only way for them to be able to decide on the absolute best option for their investment and avoid spending their money on a purchase that does not meet their criteria or investment goals.
Steps to conducting a real estate market analysis
A comparative real estate market analysis might seem like an intimidating step in real estate investing. If you’re a beginner real estate investor, you might find it challenging to obtain the necessary data for conducting a real estate market analysis, and you might not know how to go about the different steps required for analyzing the market or the investment properties in it.
Below are the basic simple steps needed for doing a real estate market analysis that any real estate investor, beginner or experienced, should be able to do on his/her own.
Choosing a location
The first step towards conducting any comparative real estate market analysis is choosing the area or the location in which you intend on purchasing an investment property. While most beginner real estate investors prefer on purchasing an investment property in their local area, it isn’t necessarily the best option even though you are much more familiar with that area and the market performance in it. As most real estate investors know, location is the most important aspect of real estate investing.
Before deciding on a certain market, make sure to research the different markets and the options available to you and to choose a market that has a good performance and potential for appreciation.
Preferably, you will want to find an area that is a buyer’s market since these markets are more advantageous for purchasing properties and are where buyers are the ones who dictate the market and control its prices.
Related: What is Location in Real Estate Investing?
Deciding on a type of investment property
After deciding on an area or a market to invest in, it is time to decide on the best property type for your real estate investment. Deciding on a property type depends on two things: your personal taste or choice, and the best property type in that market. Some property types perform exceptionally well in certain real estate markets, but their performance declines drastically in others.
Make sure to do your research when deciding on the type of investment property that you want to purchase. The findings of this research will heavily influence the other steps of your real estate market analysis.
Related: What are the Best Types of Property for New Real Estate Investors?
Finding a data source
After deciding on a real estate market and a property type, you will need to find a reliable source of data. The data you’ll be looking for in this step is a bulk data of the listed, sold, and pending properties in the market.
There are several online sources, both free and paid, that you can access and obtain your data from. Some of the examples include Mashvisor.com, Zillow.com, Trulia.com, and Redfin.com.
What type of data will you need to gather?
The data you gather should include at least the following:
- Property prices/sale prices
- Property status (sold, pending, for sale)
- Property characteristics (number of bedrooms/bathrooms, age, size, number of floors, amenities, etc.)
- Walk-score
- Recent improvements
Identifying a number of similar properties in the market
After gathering the data, it is time to identify a number of properties that are similar to the investment property type that you have decided on in the second step. These are called real estate comps. When selecting the investment properties to compare, it is recommended to choose 3-5 properties that are listed for sale as well as 3-5 properties that have been recently sold.
Make sure that the investment properties you choose are all similar in terms of their size, age, type, number of rooms, and their functionality to the one you are considering.
Comparing investment properties
Your next step in your real estate market analysis is comparing the different investment properties. After choosing the potential properties for your real estate investment, you need to compare the properties based on their prices. Identify the properties with the highest/lowest listing price, and try to identify the factors that might affect each property’s price. For example, the property with the highest listing price might have a feature that the other properties don’t. Alternatively, the property with the lowest listing price might be lacking a feature that all other properties have.
This step needs to be done twice: once for the listed investment properties that you’re comparing, and once for the investment properties that have been recently sold.
This allows you to determine whether prices have gone up or down and to identify other market trends based on the common features among the different investment properties that have been recently sold and how those features have affected their prices.
Deciding on the best investment property
The final step in doing a real estate market analysis is to identify the best investment property out of the ones you’ve compared. To do so, you need to take all the data you’ve gathered into consideration, and you will have to visit the properties and inspect them to identify any other features that might affect their price or their functionality as well as to get familiar with the location of the property and the area that you’re investing in.
Some of the things that you need to consider include the condition of the property, for example, as investment properties that are in a bad condition or that require extensive renovation works might result in them costing more than their listing price in repair costs.
Additionally, visiting the property and the location will give you a better understanding of some features that might make the property worth more than its listing price, or you could scout out the area for any development projects that might result in the property appreciating in value.
Bottom line
Doing a real estate market analysis is not an easy task to do, especially for beginner real estate investors with little experience in the market. However, as you conduct more real estate market analysis, you will start to get the hang of it, and you will be able to better identify the features and aspects of each investment property that make it stand out and increase its potential as a real estate investment.
Lastly, if you’re looking for the best place to start gathering data and conducting a real estate market analysis with ease and at a drastically higher speed, subscribe to Mashvisor to gain access to a wide variety of tools and features that can help you analyze any real estate market in the US and find the best performing investment properties in that market.