How do we figure supply and demand in a rental market?
By Seth Joiner
Regardless if we know intimately the area we would like to invest in or if it is
across the world we need to understand that in rental markets just like housing
markets it is based on supply and demand. If there are a small number of renters
and a large number of properties available then we have an imbalance in the
market, which always benefits one side over the other.
So then we need to ask what are the factors that we can look for to discover
what the supply and demand are for any given area? There really are four main
factors to look at when trying to figure out if we should invest or not.
Location
We always hear about location, location, location and to some extent I would
agree. When we are talking about real estate we need to look at it from a little
different perspective. Do people want to live there? Is it on a busy street? If
it is on a busy street then our rental signs will be highly visible and
potentially can save us money on advertising the property. Is there a unique
quality to the property? Is it on a golf course, great mountain views or on the
water?Employment trends
Next we need to find out what the local employment trends are doing. Let’s face
it people live where they can find a job and if we can find out if there is job
grow or is the job market in decline then we can understand what the market is
going to do. Is a big employer leaving or coming into the area?
Now we can say the people might consider commuting great distances to go to and
from work, but that will only take us so far. We might be able to draw a 30-45
minute window around the major employers to discover the safe distances, but if
we don’t want to gamble with our money then we need to be realistic and find our
properties close to where the employers are.
Population growth
Again we need to take a look at the trends. Is there population growth or is the
population in decline? This is also has direct correlation to employment so we
can use both of these numbers together to discover if our market is right to
invest in or not.
Often times the population has a tremendous effect on job growth even though it
might be temporary. As in times of great population growth there are new jobs
created around the building industry itself to compensate for the population
growth. Construction jobs, architects, engineers, real estate professionals etc
are all directly affected in a population boom or bust.
Inventory
Even in boom times when every thing is going well there still might be a problem
of over build. In other words there are too many houses for too few people to
live in them. We need to be very aware of the overall industry and have team
members that can help us know what the market is doing.
Property managers and real estate brokers will be invaluable in telling you what
the vacancy rates are (high vacancy rates are a clear sign of over build), what
the market rents are and what are the different promotions going on to get
people into properties. When there are a lot of promotions then you know that
supply out paces demand.
The funniest part about all of this is that the market regardless if you are
looking in your back yard or across the country is constantly changing and you
have to keep up what is happening now and then far into the future. The more
that you know the better prepared to make a solid educated decision regarding
when or where you should invest.