When deciding on an investment property, there are a number of things to consider. The two areas of consideration are macroeconomic factors and microeconomic factors. The microeconomic factors include things that you’d normally think about when analyzing a property like mortgage, taxes, insurance, utilities, other costs vs the rental income generated by the investment. Macroeconomic factors look at the bigger picture in which the real estate investment fits. Things to consider include the economy of the region, the job growth or unemployment rate, the population growth or decline, and who the main employers are, among others.
In this article, we will focus on the macroeconomic factors we need to take into consideration when looking to purchase an investment property.
Before you start looking at the numbers for a property, there are a few questions you should first consider:
- Is the GDP (Gross Domestic Product) of the area going up or down?
- Are there jobs in the area?
- Who are the main employers?
- Is there net population growth or loss?
Let’s look at each of these in more detail.
How the economy is doing should be the first thing you consider when you’re looking at where to invest. If the economy is improving, then obviously, that’s a good thing. An improving economy means more jobs, more people moving in to fill said jobs and more rental demand, which eventually leads to higher rents and higher real-estate prices. That’s a good time to be a real-estate investor and kind of sounds like a no-brainer.
But what about if the economy is circling the drain, so to speak? If that’s the case, then opposite events may be happening. If there are no jobs, people are moving away to find jobs elsewhere, there are more vacancies and lower rents, then this could all lead to lower real estate prices.
The next question you should ask is: Is this a cyclical economy? If the answer is no then you should get the hell out of there and look somewhere else. If it’s yes and you know the economy will bounce back, such as in Alberta with oil, for example, then this might be an opportunity in disguise. Homeowners may be tight on cash and more desperate to sell, which leads to more willingness to negotiate and lower prices. Many potential buyers may also be in dire financial straits, so you’ll have less competition. If you’re in a position to get into the market, this may be a great time. So, look at economic reports from banks and economists and take action accordingly.
Is employment increasing or decreasing in the area at which you’re looking? As mentioned above, an increase in jobs means more people moving into the area who need accommodations and increases rental demand. If unemployment is increasing, then the opposite is true. Banks and economists typically release monthly reports where you can find this information. You also want to compare these numbers to the national average to know whether you’re ahead or behind the curve. Being ahead is better.
Major Employers in the Area
Major employers are defined as companies that employ more than 100 full-time individuals on a regular basis. The more major employers in an area, the more stable the job market, and in turn, the more stable the working population. If there are only two or three major employers in an area, you’re going to be in big trouble if one of them decides to leave or go out of business. Ideally, you want a town with a good number of major employers, so the economy is more resilient in the event of a downturn. In comparing Edmonton and Calgary, for example, Edmonton held up better during the oil recession of 2015-2017. The majority of the oil company’s head offices resided in Calgary, so when the recession hit and people got laid off, the vacancies in Calgary skyrocketed and rents went down faster than the Oilers’ chances of making the playoffs this year. Edmonton, on the other hand, had a more diversified economy, with a large number of government jobs, as well as manufacturing and construction, in addition to oilfield-related work. By comparison, Edmonton rents still went down, but not as sharply as Calgary’s.
If nothing else, the population growth or decline in an area is a pretty good sign of whether the economy is doing well. People won’t move to a place if there are no jobs, so population growth is a good thing. If you find that the population is decreasing, you should consider looking elsewhere. This information is typically listed on the city’s website. Again, see if the area’s population growth is higher than the national average.
In summary, before you start doing the math on your investment property, look at the bigger picture of the location and economy and how your investment fits into that picture. The goal is to find a city or town where the economy is growing, there are more job opportunities with a number of major employers and the population is growing. Once those are ticked off then it’s time to dig a little deeper and start analyzing your property. I will go into this in more detail in my next article.
Until next time, happy investing!