Location is arguably the most important consideration when it comes to real estate investing. As an investor, it can be daunting to know exactly where to buy a property among hundreds of cities. It can be debated that the city the investor lives in can be a good place to start. He/she lives there, can get to it quickly, and manage/work on it if necessary. Also, the investor will be intimately familiar with the nuances of the neighborhoods. The best place to live and the best place to invest don’t always coincide, however. Grant Cardone said that he buys where it’s best to invest, and he rents where he wants to live. As an investor, it’s really important to have a systematic method of choosing the best market to invest in. At Elevate Real Estate Investments, we consider the 5 primary metrics when qualifying a market.
Population growth –
It goes without saying that cities with a growing population are favorable for the investor. More people mean more potential renters, who are the customers. More than just population growth, we look for areas with positive net migration, which means that more people are moving into the area than moving out. Population growth can result from births outpacing deaths, but net migration is a more accurate indication of the desirability of a city. These data can be accessed online through www.census.gov and www.worlpopulationreview.com. One can also find net migration data from Uhaul’s website: www.uhaul.com.
Job growth –
People flock to where the jobs are, similar to the animals in the Serengeti being drawn to the watering hole. People need to make a living, so they move to where the jobs are. Cities with growing employment opportunities are highly desirable target markets. We look for news of companies moving and opening new headquarters, and also consider statistics for the number of available employments. Job growth leads to population growth, which is favorable for the investor.
Job diversity –
More than just the number of jobs, employment diversity is of paramount interest. One dominant employer or sector leaves the city vulnerable to the sustainability of that one company or sector. Cities like Detroit saw a huge downturn when the auto industry took a hit. We look for cities with many resilient sectors like government and healthcare jobs, and also cities where the jobs are well diversified across different companies. The information for job growth and job diversity can be found on www.BLS.gov. and also www.deptofnumbers.com
Supply and demand –
Unlimited supply leads to imbalance in the market and ultimately, reduced demand and value. Overdevelopment can lead to reduced occupancy and decreased rents. It’s crucial for the investor to be aware of the number of anticipated rental units needed vs new units that are being built in an area. Some areas have legal limits on where and how much can be built, and other areas, such as coastal cities, have physical limitations on development. www.deptofnumbers.com is a great resource for this information.
Favorable laws for landlords –
Business and landlord laws vary from state to state and city to city. Cities with strong laws for tenants are often challenging and unfavorable for the landlord. Rent control, eviction limits, and other measures can be detrimental to the unassuming owner. The investor must be thoroughly familiar with real estate and business laws in the area that he/she is considering.
By considering the 5 criteria above, we can have high confidence of success in building a team in a particular area. We find that focusing on a specific city gives us the edge in being familiar with the nuances of the neighborhoods and having a trusted/proven team in place. Being able to scale also gives us the advantage in being able to negotiate favorable terms with the vendors.
A couple more things to consider –
The pricing and the competitiveness of the market
If the investor’s strategy is to achieve a positive cashflow, often it’s hard to do that in expensive markets like the coastal cities. In these areas, it may be necessary to put down a lot more than 20% to yield a positive cashflow. Some investors accept zero or even negative cashflow and count on the market appreciation, but this can be very risky. If the investor’s strategy relies on positive cashflow, the asset pricing/unit must be such that an asset can cashflow with max leverage. The general rule of thumb is that if the monthly rent is about 1% of the purchase price, the property will likely cashflow.
Neighborhoods within a city
Also, within a city, there are many micro neighborhoods. In every good city, there are bad neighborhoods, and even in bad cities, there are good neighborhoods. An investor must be keenly aware of the nuances of the different neighborhoods. Sometimes even one street can divide a very nice neighborhood and a bad area. Paying attention to school districts, Google images, and also asking local property managers can be helpful.
By: Ki Lee