“Tell me about the fundamentals”. This is the first question every investor should ask when considering any investment. In the stock market, it’s all about the sector, the company and the financial metrics. Is the sector growing with a strong future of demand for its products? Is the company well run, with strong market share, a competitive product line and some special attribute that makes it outperform the rest of the sector? Does it have a strong balance sheet and a favorable price/earnings ratio? If you get the right answers to these questions, the fundamentals look good. (Whether investing in any stock these days is a good idea is a whole other question).

In real estate, the fundamentals are just as critical, and even more fun to analyze. Find the answers to the following questions and you will have a clear picture of the potential of a real estate investment:

1. How have values performed through the current cycle? Think 10-15 years here. Today’s cycle is not just what happened in the past 5 years, since the bust. Look back further. If home prices in a given market are below 2002 levels, there is a good chance that market has over corrected. Meaning, it has dropped below the level where the boom began. The market is now “below the trend line” because American Housing wants to appreciate a bit greater than inflation. If it has not appreciated in ten years, it most likely has upside coming to it. To do this research, use Zillow’s Home Values feature and make sure you change your charts to “10 years” and “sold price”.

2. Are people moving in or out of this place? Migration patterns illustrate whether a market is attracting new demand. People like living in-doors, so if they are moving to a place, they will need a roof over their heads. Migration also indicates that something good is going on there. People follow jobs, low cost of living, high quality of life and lifestyle benefits. If people are moving somewhere, find out why. Click here to see a video that demonstrates several resources on the web that can help.

3. Now that you understand what is happening to this market, time to better understand why. This is where human intelligence comes in. OwnAmerica is rapidly building a national network of real estate companies and agents who can answer the question why, but so can the Chamber of Commerce, local Business Journal, and even everyday citizens on sites like www.citydata.com.

4. Once you’ve located a market with strong fundamentals, you are going to want to find a good buying opportunity. Before you even begin looking for a distressed property to buy for a below-market price, look for a distressed market. A place with a great long term picture, but a painful short term picture. Is there a glut of supply due to overdevelopment, speculation and foreclosure? Is the market overly dependent on one employer or sector which has gone through tough times, but is now healing? Basically, is there a problem here that is depressing home values, but that is explainable, isolated and temporary? If so, the tide is likely to rise.

This is how we analyze investment markets. Check out this video of me doing this live on the Fox Business Network. Once you locate that rising tide (that will lift all boats), it’s time to find a diamond in this rough; an ugly duckling that needs someone with vision to nurture its potential to become a beautiful swan. That will be the subject of the next installment on this blog.

Is there a market you have your eye on? Post a comment here and let’s build this brain trust together.