3 Red Flags for Any Real Estate Market

This is a transcript of a previously-aired segment of “Self-Directed Investor Talk,” a radio show dealing with self-directed IRA strategy hosted by Bryan Ellis.

Did you know that there are three housing market indicators that can tell you, with astounding certainty, whether a region and the real estate located there is going to go up or down in value? Without an awareness of these red flags, you could end up trapped in a dead-end, no-good property that will never sell, never rent, and suck up your cash forever. Remember, our number one rule is don’t lose money. Let’s take a close look at how to spot these red flags and what to do about them.

1 | Red Flag: An unsteady, unpredictable jobs market.

Now, I don’t mean all of those numbers that the government and media spin out for you on a regular basis that are designed to make you feel good or at least confused about the state of the economy. I’m talking about the real hard local jobs numbers. Before you buy a property in any area, take a look at job trends in that area, including whether hiring volumes are headed up and what types of jobs are available. Are there high-paying jobs with lots of growth potential, or are there just dead-end jobs for low-wage earners? You see, those workers are your renters and your buyers. Make sure you do the following:

• One, confirm there will be workers to rent or buy from you.
• Two, that they’ll have the money that it takes to make your deals profitable.
• Three, explicitly compare the current job growth rates to historical levels for that area to confirm that job growth is at least steady, if not growing.

Now, the job numbers tell you about the past, but to really know what a deal will do, you need to predict the future. To do that, you’ll want to take a look at the fine print in a very unusual location, the official tourism bureau of your target market. What are you looking for?

2 | Red Flag: A weak community master plan.

Most communities have something that they call a master plan, which is a community’s vision for itself and a description of the process they intend to follow to transform that vision into reality. But while most communities do have a master plan, many do not actually implement that plan or have enough of a real actionable concept to help build a community. Signs of a good community master plan is:

• One, truly relevant and realistic changes in sight. Such as building up walkability, which is a big deal for a lot of buyers these days, or creating an environment that is welcoming to local businesses.
• Two, a focus on real solutions. If the community plan just says stop housing depreciation, for example, that’s just a recognition of a problem. But if the community plan actually outlines how to bring a halt to deprecation and you can see physical evidence that the community members have bought in and are working hard to that end, that’s a far better sign for your investment.
• Three, look for fostering innovation. Communities with true growth potential are problem solvers and welcome new and exciting members, whether those members are people or businesses. If your target area has a clearly laid out plan for bringing in startup companies, creative residents and established businesses from elsewhere, and there’s evidence that the plan is being implemented, then the community master plan is likely working in the community rather than just simply taking up space on a bureaucratic website.

Now that I’ve tackled past and future, let’s talk about the present, because the present is the exact location of the next red flag.

3 | Red Flag: A stagnant commercial sector.

You’ve heard the phrase “like attracts like,” and when it comes to the businesses that can make or break a community’s job market and population growth, that couldn’t be truer. If you want to be able to safely bet that the economy of an area will be growing in the future, look to the businesses that create the jobs in that area. Have they been there a long time? Are new businesses moving in? Check the websites and the news. Are big employers planning to shut down, downsize or just move on in the coming year? If you can find clear evidence that big employers are staying and other big employers are headed in the direction of your potential investment, it bodes very well for your future success. On the other hand, no matter how good things look right now, if a big employer is getting ready to leave, you could be buying a money hole instead of a profit-generating property.

Additionally, here’s a real golden nugget. Consider checking out the minutes of the city council meetings and the zoning board for the past six to 12 months. It’s there that you’ll sometimes find discussions about companies considering moving into or out of the area. This information can give you the make or break indicator for the employment and commercial sector for the area in a way that’s just not otherwise available.

There you have it, three indisputable red flags that will tell you, with a high degree of certainty, whether you are buying into a potent region with a promising future, or investing in a piece of real estate guaranteed to never sell, never rent, and suck up your cash forever.

Bryan Ellis is CEO of Self Directed Investor Society, America’s only private association for affluent self-directed investors, and host of Self Directed Investor. You can reach him at http://www.SDISociety.org or by email at bryan@SDISociety.org.