Investing in real estate is the best investment option, especially to build a powerful portfolio of passive income. Discover the best 4 tips to know where to invest!
There are countless factors to consider when investing in real estate, but these are the four that you should focus on when looking for a new city.
To begin you will need to consider four macroeconomic factors. Macroeconomic factors refer to large-scale trends and characteristics of the area, as opposed to microeconomic factors.
Various publications list the macro trends that they believe will shape the real estate market in a particular year. The four macro factors you can start with when deciding to study an area and its metropolitan statistics (the city and surrounding suburbs) are:
1. POPULATION TRENDS
Researching the demographic trends of a population can give you a better idea of what the future global demand for housing will be like for a specific city. Try to find cities that have shown considerable growth in recent years.
Looking for regions with a growing population tends to mean higher demand and limited supply of housing, which translates to higher rents and higher appreciation compared to areas with excess housing and dwindling populations.
Some of the questions that you can ask yourself when carrying out this investigation are:
Is the population growing or shrinking?
You can look at the statistics of the last 3 or 5 years.
What are the age demographics of population growth?
Are these younger people heading for their maximum earning potential? Are they seniors who may be closer to retirement and/or living on a fixed income?
2. ECONOMY AND EMPLOYMENT
While there are economic indicators that show how the country is doing overall (for example, Gross Domestic Product), each of the different states and cities have their own smaller economies.
Depending on local state and city policy, there may be different growth trajectories. Some cities have several large employers (e.g. Coca Cola, Home Depot, Walmart, etc.), while others have large infrastructure and major urban developments. Understanding these companies and their impact on a city can give you greater insight into whether an area is a good place to invest. Some questions you can ask yourself are:
Who are the main employers and are they from various industries or one sector?
Are major employers expanding or contracting?
What is the growth rate of new businesses in the city?
How does job growth compare to the national average?
What is the GDP of a particular city and is it growing?
3. WAGE AND INCOME TRENDS
Income trends are important because that’s where the rent comes from!
If income rises rapidly, this could mean higher rents and rising home values since everyone has more to spend. A higher median income can also lead to lower vacancy rates.
The key questions to ask yourself are:
Is income increasing or decreasing?
What percentage of the population lives below the poverty level?
4. RELATION PRICE-RENT
The price-to-rent ratio measures the relative affordability of renting versus buying in a given real estate market. It is calculated as the ratio of home prices to annual rental rates (for example, if a house were worth $1,000,000 MXN it could rent for $10,000 MXN a month; the price-rent ratio is 1%). The formula to calculate the price-rent ratio is:
Median Monthly Rental Price / Median Home Price = Price-Rent Ratio
The ratio is an indicator of how much cash flow you can expect from a property. The higher the ratio, the more you will have left over after paying expenses.
Some experts say that real estate investors should look for a 2% price-to-rent ratio (ie, if a house costs $2,000,000 MXN, you should get $40,000 MXN in rent per month). However, they can be hard to find opportunities. Instead, you can focus on markets with ratios of 1% or higher.
And after carrying out your search and complete investigation on where to invest, you can proceed to close the investment contract in the property that best suits your financial interests.
You can also read: Discover the best areas to invest in real estate in Mexico
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