4 Mandatory Market due diligence checks for passive investors [Due Diligence]

Markets are a hot topic right now. Deals can succeed or fail based on the market they’re in. Today, we’ll cover four must-do checks before investing. The last one is the biggest risk for investors today.

1. Job Growth

First, we look at job growth. It’s more accurate than population growth for our markets. When companies create jobs, they file tax documents, open offices, and more. These are easier to track than population data, which often comes from less accurate sources like censuses.

One consideration is a market like Florida. There might be more population growth than job growth because many people retire there. But generally, a market with growing jobs is better than one with just a growing population.

2. Average Household Income

Next, we check the average household income within 1, 3, and 5 miles. We want rent to income ratios to be healthy. In booming markets, rent to income ratios can get too high—40% or even 50%. This leads to delinquencies and trouble filling properties with paying tenants.

This is especially important if you plan to increase rents. Make sure incomes can support your projected rents.

3. Single Points of Failure

We also look for single points of failure in the market and project. Here’s an example: a colleague invested in student housing. A bridge connecting the property to the campus got shut down, turning a short commute into an hour-long one. The property became less viable for students.

This is rare, but other examples are markets with a heavy concentration of employers or industries. Take Detroit, which relied heavily on the automotive industry. When the big three automakers left, property values plummeted.

We don’t just want job and income growth. We want a mix of jobs and industries to reduce single points of failure. Other risks include critical infrastructure like bridges or regulations that could impact an area.

4. Deliveries and Absorption

Finally, watch out for deliveries and absorption. Some markets are booming, attracting many builders. Sometimes, they overbuild or the influx of people slows down.

Nashville is a prime example. It has double-digit vacancy rates with thousands of new units coming online over the next two years. You’ll want to be sure supply won’t outpace demand.