All industries are susceptible to demographic changes. The age, cultural orientation, economic status and linguistic makeup of a population will influence tastes and drive or siphon demand for certain products and lifestyles. Perhaps more than any other industry, real estate is defined by demographic shifts.
As a real estate investor, it’s essential you possess a clear, thorough understanding of the correlation between demographics and real estate investing. Your ability to position real estate products to appeal to your target demographic will determine your success.
Your target demographic will determine where you purchase a property, the type of asset you buy and how you position it. If you’re investing in an area popular with younger renters, for instance, you should position your asset as a place that offers a Millennial-friendly lifestyle. If you’re buying a property in an area with lots of retirees, consider the ways you could position your building to meet the needs of older renters and empty nesters.
Learning how to read demographic information in a way that informs your investment strategy will help you make more calculated real estate decisions that help you achieve financial independence faster and more efficiently.
Demographic factors to consider
When pursuing a new real estate investment, demographic factors should be among the first variables you take into consideration. Beyond the condition and price of the property itself, recognizing the type of person that property is bound to attract will influence your success with that investment. Here’s what to consider:
· Population: Take a look at the population data of the city you’re planning to invest in, as well as the population data of its metro area dating back at least five years. This will give you a clear idea of whether the population that region is growing or shrinking. It’s usually unwise to invest in areas with a shrinking population. Shrinking populations could indicate a future depreciation in real estate values, even if they’re appreciating in the short-term.
· Age: You can learn a lot about an area by looking at its median age over a five-year period. Use the median age to determine the type of property you end up purchasing. Areas with a large number of people age 55 and up, for instance, will likely want independent living apartments and assisted living facilities. Luxury condos and apartments, meanwhile, are in higher demand in areas with people between the ages of 35 and 55.
· Employment statistics: Regions with high levels of unemployment simply don’t command rents as lucrative as areas with lots of jobs. Take a close look at the unemployment statistics surrounding the town and region you’re investing in. For instance, if industrial employers have left the area and haven’t been replaced with similarly active industries, you may want to explore other areas.
· Types of jobs and active employers: Take a look at the types of jobs dominating the local economy, as well as the region’s most active employers. Is a burgeoning industry, like the tech sector, dominating the local economy? If so, you’ll likely have access to a stable pool of high-earning tenants. If industrial players are the more significant economic force, the area may be more susceptible to economic instability.
· Supply and demand: What percentage of rental homes in the area are vacant? If there are a lot of empty units in your target market, there’s a strong chance your asset will sit vacant, as well. To rent out an apartment in an area with an oversupply of rental housing, you’ll have to likely discount your rental rates or offer other incentives. While the barrier to entry in a more active rental market may be higher, the returns are also likely to be much more consistent and stable.
There are many other insights to take into account as you develop your investment strategy, as well. For instance, does your target market have a large number of people who spend the summer there, but leave for the winter? Or, does your selected investment region have a distinctive culture or industry that’s an important part of regional identity and pride? If so, try to think of ways you could capitalize on that through your real estate investment strategy.
Meeting demographic needs
Once you understand the demographic of a certain area and how your investment strategy fits in with it, start to think about positioning. How can you capitalize your investment on the group of people who will find the most value in it? There are a few crucial strategies to consider:
· Pursue the most prevalent age group: Arguably the best way to ensure you’re making a smart acquisition is to target the most prevalent age group in your market. If you’re investing in an area with lots of young families, consider larger rental units or even single-family homes within desirable school districts. If you’re investing in areas with a large Millennial presence, bank on transit access and entertainment options.
· Identify underserved sub-market needs: While serving the most prevalent demographic force is a safe bet, take the current supply of housing types into consideration and look for an underserved need. For instance, if you’re purchasing real estate in a college town with a sizable retiree population, there’s a chance most of the existing housing serves students, providing you with the opportunity to break into the senior housing market.
· Invest in renovations and services: Once you purchase an asset, use your knowledge of area demographics to make renovations to better position the property. How can you meet the needs and tastes of your target audience? Additionally, consider providing services to make your rental homes attractive to the types of residents you’re hoping to lease to.
Learning how to incorporate demographic information into your real estate investment strategy allows you to become a more competitive investor. Understanding how to capitalize on groups vs. available units means reaping the best possible return on your investments. While it requires a lot of research, due diligence and strategizing, a demographically informed approach to real estate is one of the safest approaches to buying property.