What is it that makes increases the demand for housing in any local area? What leading indicators can help any investor identify future demand and great real estate investment opportunities? Well, here are three, and if your investing is principled with a focus on these three areas, you are much more likely to protect and grow your investment.
Population Growth
Areas of population growth implicitly mean demand growth. Unless there is overbuilding, there are more people in one area with a fixed price of available dwelling units. As a result of this, there is a greater demand for housing. I only seek out areas with a history of population growth as well as growth projected into the future.
Job Growth
Peeling back the onion further, job growth is essential to future housing demand. In fact, job growth is what drives population growth. The two tend to correspond, however, job growth is more of a leading indicator because the jobs bring the people. A good way to get a heads up on future job and population growth is to identify the major employers in the area and their plans for growth and also understand new and future employment opportunities.
For example, a few years ago, in my city, Melbourne, FL, Northrop Grumman Aerospace Systems was expanding its facility and announced plans to hire 15,000 people in the area over the next few years. This was a clear indicator of future growth and boy is traffic never the same here!
Job Diversity
Even further than population growth and the jobs that drive that population growth is job diversity. Job growth alone increases population, but job diversity helps tell the story about risk of housing demand and the sustainability of that growth. Put simply, using my example of Northrop Grumman in Melbourne, if this was the only employer bringing jobs to the area while others are stagnant, yes, the population would grow but there is greater risk as the jobs are driven by one company and industry. If that company loses a major contract or does not win new business, what happens to those jobs? It could be a hit to the area.
This is why a great rule of thumb is to not invest in areas where 20% of employment is concentrated in one company or industry. Diversity is key. Jacksonville, Florida is a great example of job diversity. Yes, they have a great military employment base (two military bases), but many jobs from a variety of industries such as finance, construction and professional services.
Sum it up
Altogether, both job diversity and job growth lead to population growth. However, pay attention to job diversity to understand the risk associated with jobs. In identifying markets with high job diversity and strong continued growth of jobs, it is likely that population growth in those areas will continue, increasing the demand and value of your real estate investments in those areas.
For passive investors who seek to invest in apartments, look for great areas and use this as a helpful guide in vetting sponsors and identifying those opportunities.
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