Many real estate investors fail to recognize the importance of the market analysis. Whether they lack the skills and knowledge to complete the market analysis or just don’t understand the benefits, market analysis is an undervalued asset in real estate investment – when in actuality, it is the most important element in evaluating a real estate investment. Why? It forms the base for every calculation and decision that follows. Thoroughly researching and understanding the market is crucial to good decision-making and this is why a detailed market analysis is key to any real estate investment decision.
In this blog post, we will begin with a brief overview of real estate market analysis. Later, we will go through the process of conducting a market analysis and show you why this study shouldn’t be overlooked.
Overview
A real estate market analysis – or a comparative market analysis (CMA), is used to help you better understand a potential investment. A detailed market analysis is key to any real estate investment decision. In the end, the quality of the market analysis can make a difference in accurately determining whether or not a property is a feasible, profitable investment.
How To Perform A Real Estate Market Analysis
Conducting a successful real estate market analysis sounds intimidating. Sure, there are various factors that you need to take into consideration to help you better understand a particular property and the area around it. However, if you take a systematic approach and perform a few steps diligently, it is totally manageable. To that end, let’s take a look at the analysis process step by step:
Step 1: Learn About Your Competition
The first step is to define the area under consideration. Defining the area is more than just finding the lot boundaries but involves defining the size of the target market most likely to generate income. Accurately defining the target market allows an investor to identify competition and the current supply to meet current demand in that area.
step 2: Examine The Physical Environment
The second step involves a thorough analysis of the physical environment of the property. Several factors in the environment will impact how much a commercial property is worth. Such factors include things like location, natural resources, topography, soil conditions, climate, water availability, and transportation patterns.
At first glance, some of these factors may not seem terribly important, however, these elements could be an integral part of the area’s economy, industry, and desirability.
step 3: Examine Demographic And Economic Factors
After addressing the physical factors of the location, the market analysis evaluates the demographic and economic characteristics and trends in the area.
Simply put, demographics are the data that describes the composition of a population, such as gender, age, race, income, and so on. While demographics are often overlooked, they’re a significant factor that affects how real estate is priced and what types of properties are in demand. Major demographic shifts have a tendency to affect everything in the real estate sector from demand to consumer trends.
Another key factor that affects the value of real estate is the overall health of the economy. The purpose of economic analysis is to provide an understanding of the underlying population, business conditions, and the future demand for a particular type of real estate. Trends in demographic data provide some insight into the future economic health of a region. So, research the local economics, see how businesses perform in the area and look for potential clues about new developments. This might include building permits, new construction underway, or sales of surrounding properties.
Note: New construction is a signal that an area is considered desirable, but it can also be a source of competition for tenants or buyers. Other issues related to construction are zoning and development requirements for a new construction. The market analysis should investigate the zoning and building regulations as well as the timeline, costs, and attitude of the local planning board. These factors alone can determine whether or not a real estate investment is financially feasible or not.
step 4: Look At The Larger Picture
Finally, do not forget about larger trends that might impact the local area. Consider any important trends impacting property on a state and national level. Is commercial real estate booming or declining?
Identifying good trends might help you uncover a good investment before others find it. Seeing a bad trend may help you avoid a potential investment trap.
Final Thoughts
Overall, real estate market analysis provides key information needed for analyzing the valuation and financial feasibility of your real estate investment – this includes a comprehensive picture of the subject property, location, neighborhood, and the larger market economic drivers.
In other words, you will be able to see the path the investment will take. Although you cannot predict the future, it will help you create solid financial goals. So, before making any real estate investment decisions, be sure to conduct a thorough and detailed market analysis. Although this process is time-consuming, its importance should never be overlooked or understated.
