The value of the location of a rental property involves more than just a flashy zip code. For many renters, proximity to schools, parks, public transit, colleges, grocery stores and retail shopping centers are important considerations. If the rental is in a planned community with neighborhood amenities, it should be close to pools and tennis courts or parks for outdoor recreation. Proximity to freeways and public transportation can also be a deciding factor. Unlike homeowners, who are willing to add some time to their commute to purchase an affordable home, renters, especially millennial renters, might not have the flexibility or desire to do so. Short of consulting a psychic, how can investors look for signs that a market is prime for purchasing their next rental? While no specific research can work like a crystal ball, let's take a look at some of the best indicators to help identify a real estate market with growth potential.

Population Growth

This one is pretty straightforward. If a market’s population is growing, it’s going to increase the housing demand and ultimately strengthen the market over time. You can look up year-over-year population estimates for cities throughout the U.S. on the Census Bureau’s website. It should be noted that population growth alone doesn't guarantee a great rental market. When examining population growth, you also need to think about market affordability.

Affordability

Affordability is an excellent way to determine if a market is heading up. Can the average family, making the average income, afford to purchase an average priced home? When the average home price can easily be afforded with the average income, this is an ideal market prime for growth.

Existing Home Sales

Existing Home Sales information is compiled monthly by the National Association of Realtors (NAR). It breaks down sales trends in four major regions of the country: the West, South, Northeast, and Midwest. This is a helpful metric to watch because it offers insight into the health of markets around the country and the demand for housing in each area. An increase in sales can potentially indicate an area is an emerging market.

Supply and Rate of Sales

When looking for price growth, two great metrics are months of supply and how quickly that inventory is selling. Economists suggest that 5-6 month supply indicates a balanced real estate market. When you have more than that, there is often a downward pressure on prices. When you have significantly less than that, there is upward pressure. Looking at the average number of days on market can also help. When properties are selling in less than 30 days on average, there is opportunity and an indication that prices may be heading up soon. This means there are more people looking to buy than there are listings available, and multiple offers on properties regularly create bidding wars and rising prices. For large, established markets, you can view data for months of supply and average days on market at Redfin's data center.

Rising Rental Rates

If rents are climbing steadily year-over-year, this is a sign of healthy housing demand and a favorable indicator for real estate investors. To get your hands on the data, check out Zillow's rent index — a seasonally adjusted measure of the median estimated market rate rent across a given region and housing type.

New Residential Construction Index

The New Residential Construction Index is provided by the U.S. Census Bureau and is made up of two surveys: the building permits survey and the survey of construction. The building permits survey looks at the number of permits that are given out for new homes each month. The construction survey looks at how many homes are started and completed each month. Both are indicators of an area’s potential for real estate price growth.

Foreclosure Statistics

Foreclosure rates are a solid metric for evaluating overall market health. It’s not a good sign if you’re in a market with a high or increasing foreclosure rate. Luckily, across the U.S., the foreclosure rate is at an all time low. With Covid, we may see these numbers increase drastically.

Follow Business News

Announcements from major corporations can provide a lot of insight into which markets are on the rise. If a company announces a new office location, or maybe a second headquarters (Think Amazon) this is huge news for the real estate market. Big companies do their research. They’re not likely to build a new facility and hire thousands of people in an undesirable market. You can get some very useful intel by following the choices of large corporations. At the end of the day, whether you’re looking for a long-term hold or a short-term flip, pick a market you believe in; one that aligns with your investment strategy. You can make educated guesses regarding the market you’re looking to invest in, but you can’t see into the future — nobody can. Don’t allow timing your purchase perfectly in the perfect market to stop you from moving forward. And when all else fails, you can always bank on the prudence of experts with years of experience and ride their tails: https://www.realtor.com/research/topics/hottest-markets/.