Guide to Efficient Real Estate Market Analysis

Guide to Efficient Real Estate Market Analysis

Learn how to use up-to-date info and the newest technology to analyze the real estate market quickly and effectively.

What is Real Estate Market Analysis?

Real estate market analysis is gathering and analyzing all the essential data you need to make intelligent choices about whether to buy, sell, rent, or develop real estate. 

Comparative market analysis (CMA) is a type of real estate market analysis that compares the features of a property to those of similar units in the same area. Real estate agents often use CMA to determine the fair market value of private homes. CMA can also help buyers and sellers decide how much to ask for a house before they put it on the market or how much they are ready to pay for a home in a specific neighborhood. 

Professionals in commercial real estate (CRE) use a more complex form of market analysis to develop and analyze investment strategies, deals, and the best ways to use land parcels to make the most money. A commercial real estate market study tries to find and look at many different types of data to answer questions like

• Which real estate markets in your area will likely shrink over the next few years? 
• Which places offer the best chances to make money by renting out homes? 
• The rental market is likely to grow and is expected to stay where it is.
• Where are rates of crime and vacancies likely to stay low? 
• What kind of building should be built on a specific piece of land? A shopping mall, an office building, or a complex with multiple units?
• Which areas would be best for a particular store chain to grow into?

The Benefits of Data-Driven Real Estate Market Analysis

Before doing a real estate market study, you must be clear about your goal. Is the main objective to build wealth by buying property that will increase in value over time? If not, is the main goal to find the best market to open a store or build a rental property to make money immediately? The specific purpose of the study is to tell us what factors to look at and how much weight to give each one. 

But complex data is essential no matter what the main goal is. This guide will talk about the best ways to do a commercial real estate market analysis. It will also look at how agents, owners, and buyers can use location intelligence to make real estate market analyses more accurate and help them make better CRE decisions.

Critical Factors in Real Estate Market Analysis

Two main types of factors go into a real estate market analysis: factors that affect the market as a whole and factors that affect individual properties. 

1. Factors at the market level

Everyone knows that location, location, location is the most essential thing in real estate. Real estate market research needs to look at a lot of data about the more significant areas where possible properties are located, even before it looks at data about specific properties. The following are some of the most essential pieces of information used in market-level analysis:

• Trends in population and jobs in the area: Are the people of the site going up or down? Are young families coming in or out? What is the difference between the national average and the typical household income (HHI) in this area? And are there more jobs in the area?

• Infrastructure and local amenities: Does the area have many shopping malls, bars, parks, and other exciting places? Are the local business districts busy and lively, or do they look like they’re just sitting there? How much competition is the planned use of the property expected to face if it is a store?

• Crime rates: Are crime rates going up or down in the area? Do they pose a significant risk for investments?

• Plans for new building and development: What kinds of big building projects are planned for the next few years? Will demand for homes continue to be higher than supply, or will there be too many homes for sale? What are the rules and regulations in your area?

Prices of homes and the number of people living in them: How do the vacancy and rental rates in this area compare to those in similar places? Are prices and rents going up or down?

2. Property-Level Factors

In addition to market-wide factors, real estate market analysis should account for various factors, precisely the properties under consideration. Some of the elements that should be considered include: 

• Specific position and ease of access: How far away is the land from good schools, public transportation, and other valuable things? What kind of store is it, and how convenient is the location? How many people walk by it every day? How easy is it to get to the house by car or public transportation? Is there enough parking? 

• Costs of repairs and improvements: How much does keeping the house in reasonable shape cost? What kind of shape is the property in? What needs to be fixed up before it can start making money? If you look at it the other way, is there a chance to increase its value through repairs or redevelopment?

• Renters and rental income: If the building has units that can be rented, how much rental income does it make? How many people are staying there, and how many are not? Does everyone pay their rent on time, or are there many people who don’t? 

• Foot traffic patterns: Physical visitation patterns are essential for companies that deal with customers, like shopping centers and other stores. How many people visit the place every day? Are the numbers going up or down? How do you know what kind of people see the property? And how do the numbers of visits compare to properties in the same area?

• Comparative benchmarking: Besides the things we’ve already discussed, commercial real estate analysis should also look at the prices and performance of similar buildings over the past few years.

Metrics for Figuring Out How Profitable Income-Generating Properties Are

If your main goal in buying a home is for its value to go up over time, looking at the above factors can help you evaluate possible real estate deals and determine if a sure home will likely go up in value at a reasonable rate. 

But if the goal is to make rental or more immediate income, several other metrics will help you compare different chances and determine which will make you the most money. This is not a complete list, but here are some of the most important ones: 

• Cap Rate: A property’s capitalization rate is its net operating income (NOI) divided by the total buying price. This includes the cost of financing but not repairs or closing costs. Cap rates help investors determine how much money different locations could make and compare them. 

• When you split the price of a home or the average cost of homes on the market by the expected annual rent, you get the gross rent multiplier. You can use the gross rent ratio to see how one call stacks up against another. 
• Cash on Cash Return: This measure helps investors keep track of their cash flow and determine how much money they will make at the end of the first year. Cash on cash return looks at how much a property makes each year compared to how much it costs each year, including fixes, down payments, and more.