What’s an Emerging Market
and How can it Benefit Me?
We often get asked why we chose the real estate markets we do. For many real estate investors the choice is simple. They invest where they live. They know the area and it can cut down on costs for them (i.e. less travel costs). There is nothing wrong with buying properties in your own back yard as long as the right conditions exist.
For example: If you live in a one industry town where the population has been diminishing year over year due to layoffs, then it might not be the ideal location to make profits regardless of how well you know the area.
Before we dive into emerging markets, you need to know one thing about real estate. It’s cyclical. It goes though periods of ups and downs. It’s understanding those upswings and down swings that helps investors decided when and where to buy properties to get maximum returns. Knowing where you are in the real estate market cycle should also contribute to you choice in exit strategy and which markets you will focus on.
As an investor, you want to maximize the value of your portfolio. You do this by moving from markets that have peaked, to markets that are undervalued. As you follow the real estate cycle you will see the signs when it is time to buy or sell in a particular market. Being flexible in where you buy, allows you to take advantage of more markets and as a result, allows you to further increase your profits.
In sync with the real estate cycles, at Simple Acquisitions we look to acquire properties in emerging markets.
What is an emerging market?
An emerging market is just what it sounds like. It’s a market that is experiencing or is about to experience substantial growth. A knowledgeable investor comprehends what makes an emerging market attractive by studying the signs from the beginning. Typically when a city is emerging many properties are undervalued. Once the city reaches its full potential, and the city has the amenities that make a city great, that you are able to see the value increase.
The economy and demographics influence the housing market. People migrate to where the jobs are. When there is great economic opportunity, it is expected that a city’s population will grow concurrently. Government incentives attract new businesses to a city which in turn results in a migration of people to fill new jobs that are created.
With a larger population comes the need for more housing. Strengthening a city’s economy improves occupancy in the majority of American real estate markets. These are the important elements of an emerging market.
Emerging markets are often a second-tier city. These are urban centers with above-average urban population growth that offer a lower cost of doing business and lower cost of living than first-tier cities. In real estate investing, these second- tier centers are seen as viable investment alternatives to the “big six” markets of Boston, Chicago, Los Angeles, New York, San Francisco and Washington, D.C. (Investopedia)
These second tier cities, also known as 18-hour cities, have been steadily making progress in replicating elements of what makes the larger cities so attractive, without the higher housing prices and higher costs of living of the bigger centers.
How Can it Benefit Me?
Many secondary markets are emerging as popular markets for investors as they search for value add opportunities. Markets with good hospitals, schools, great job growth, high quality of life, and good transportation hubs all contribute to migration to a city and hence an increased need for rentals. In top-tier markets when returns start to diminish many investors jump over to second tier markets to benefit from better returns. Transitioning to acquisitions in emerging markets allow for better returns.