How to Choose the Right City for Buy and Hold Real Estate Investment

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Slave trade. When I told my parents that I planned to accompany my boyfriend of three months to Taipei, Taiwan, my father’s first reaction was: “We don’t know this boy yet. He’s probably going to try to sell you into the slave trade in Asia. Why are you going to Taiwan?” The questions went on and on. At the time, I thought that moving to Taipei was the right thing to do. I made my decision to move to Taipei on intuition alone. I wanted to go and that was that.

Looking at real estate investing, intuition is important but doing research can improve your chances of success. If you plan to invest anywhere, including in your hometown, I urge you to gather data before making a purchase. Come up with criteria and stick to your plan. Make decisions using both intuition and facts.

Below are a few hints for how to choose the right investment city

1. Think Big – Choose a city with some people in it. If you live in a small town, think hard before you invest there. Check out the big city an hour or so away. I prefer cities with a population of at least 100,000 with larger market areas surrounding the city. I know investors who don’t mess with cities with populations less than 500,000.

2. More Growth Means More Money – People moving to an area are potential buyers for your flips or renters for your buy and holds. Growth translates to shortages of rental inventory and rising rents. For buy and holds, rising rent is a godsend. I invest in 7 cities: 4 with rising rents, 2 with stable rents and 1 with decreasing rents (oops!). Can you guess where I’m buying? In growing cities where you may even get appreciation.

3. Jobs – A Nice 4 Letter Word – Job growth is the biggest factor in choosing an investment city. If you can invest anywhere, why not chose a place where employers are hiring. I decided to buy a property in a city with negative job growth because the house was so cheap. The problem is that I keep lowering my rent to fill my space. On the other hand, I have 2 cities where I raise the rents every time I have a turn.

4. Rockin’ Ratios – I have tons of family in Florida and would love to find a great “buy and hold” investment city there. Unfortunately, the Sunshine State has a lot of cities like Coral Gables:

  • Coral Gables median home price: $443,200
  • Coral Gables median household income: $48,525
  • Coral Gables ratio of home price to income: 9.13

    So houses in Coral Gables cost over 9 times what people make. Looking only at this data, I’m going to assume that the housing prices will be too expensive here. I’ll also figure that the rents won’t be high enough to cover my costs because the tenants won’t be able to afford higher rents. Compare the ratios with Atlanta:

  • Atlanta median home price: 114,100
  • Atlanta median household income: 43,560
  • Atlanta ratio of home price to income: 2.6

    At first glance, it appears I can buy an inexpensive house in Atlanta and the tenants can afford to pay the rents. I’m not advocating buying in Atlanta because I haven’t looked at all the other factors but using this data I can rule out Coral Gables and put Atlanta on a “research further” list.

    5. Tenant Tendencies – Some cities just have more renters. If you want to buy and hold, why pick a city that doesn’t have a large number of renters. If you want to flip, you might opt for a “we want our own home” town.

    6. Don’t Buy in Places That Have High Property Tax – No need to elaborate here.

    7. The Big Wigs – Is the local and state government strong or are the leaders lacking vision and leadership? How about the courts? Find out how much liability you will have as a landlord. Are the state and city courts favorable to landlords?

    8. Getting There – Is the investment city an easy drive? If not, make sure the airports are good with lots of low cost flights.

    9. The Crime Scene – Multiple appearances on the T.V show Cops is probably not your best investment city.

    10. The Fun Stuff – Since you will be traveling to your investment city, make the area a fun one. Why not choose a place where you have family or friends? Opt for cities that are a good place to go for vacation.

    When deciding where to invest, back up your intuition with facts. Make a list of all the things you want in an investment city then start looking for the right place. Don’t just up and start investing in a place without doing your research. Do your homework before investing in your hometown too. When I went to Taiwan on a whim, I didn’t do my research. I lucked out though. My boyfriend of three months became my husband of 19 years.

    Photo: Eric Fischer

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    McKellar Newsom invests in single family properties in seven different markets. McKellar partners with investors who don't have time to devote to real estate investing.

    24 Comments

      • McKellar Newsom on

        Hi Jason,
        I like sperlingsbestplaces.net as a place to start. Housingpredictor.com is good but I wish they would have more info about predictions beyond one year. The government census and the local chamber of commerce often have good data as well.

        I like to check out the websites for the major property management companies. See if they are offering lots of move in specials or if they seem to lack inventory. Good luck. mck

    1. Brandon Turner

      Hey McKellar – I really enjoyed this article. I invest in a small town – which is okay but it makes raising rent next to impossible and the selection of tenants rough. I’ll definitely be putting this info to heart when I begin buying outside my area. Thanks for the excellent article!

    2. Invest in Pittsburgh, Pa! Stable housing market, diverse economy, lots of art and culture, great housing prices with rents that will provide high positive cashflow, voted America’s Most Liveable City in 2005, 2009, 2011 (see a trend?), etc etc.

      • McKellar Newsom on

        Hi Jerry,

        Pittsburgh sounds like a great spot. How many rentals do you have? How many turns this year? Were you able to raise the rents for all the turns? If so, by how much? Thanks. mck

      • McKellar Newsom on

        Hi Al,

        Investing in multiple cities is definitely not for everyone. I used to live in a resort town in Montana. I could never find anything that would cash flow. I tried out a number of cities then focused on three of them. I wish I would have found the three cities and hadn’t bought in the other areas. But I did learn a lot and had fun. I like buying multiple properties in a same city because you get economies of scale. A good option is to buy 7-10 in one area then expand to another area.

        Are you diversifying in your investment city or are you saying that you only invest in one neighborhood?

        Thanks! mck

    3. Mckellar: Great article to point out important considerations for investors before they buy!

      We are so fortunate to be here in the heart of North Carolina – God’s country. It’s truly an investors paradise so, all the rest of you, stay away!

      :)

      • McKellar Newsom on

        Hi Karen,

        I used to live in Charlotte, North Carolina years ago. I love North Carolina and was in Maggie Valley this summer.

        When I started investing, I was in Bozeman, Montana, 10 hours from a decent investment city. I looked hard at Spokane, WA but ended up going south to invest. You are lucky that you have a good investment area where you are.

        I ended up moving down south to follow my investments. Thanks! mck

    4. This should be part of an investors mantra when buying income producing property. Staying away from slum areas and purchasing in growth areas will get one a lot better cash flow and appreciation. Great article with some very important points.

      • If you want to be a hands-free, absentee landlord who doesn’t want to be part of solving problems or contributing to the neighborhood – yes – stay away from inner cities. You’ll just exasperate the leadership gap.

        • Do you feel it is the landlords responsibility to solve the problems of a neighborhood? Al, I am not asking to be confrontational, but more curious what you feel we as landlords should be doing in addition to providing safe clean housing.

          Jason

        • McKellar Newsom on

          Hi Al,
          What kinds of problems are you helping to solve in the inner cities? I have a number of inner city properties. Most have been very stable but I’ve had some costly turns. Thanks. mck

      • McKellar Newsom on

        Hi Jim,

        Thanks for your comments! I much prefer the non-slum areas but I do have 6 very low end areas. They cash flow well but I can’t see much appreciation anytime soon.

        Do you have an area to recommend? Thanks. mck

        • Not at this time. In my areas you can buy some really nice properties at very low prices, 50 cents on the dollar and cash flow positive. The problem is the job market, lots of renters but no money. The hay ride is over and down to a mule, with (time) they say it will get better, they say. I’ve got 70% equity so I can hold off, it’s the waiting. If the government would let investors with a proven tract record do thier thing, the ecomony would pick up by 20% plus.

    5. Great post about what to look for if you are investing outside of your local market. Although, if you live in or near a market that will cashflow, I strongly suggest investing locally, even if the numbers look slightly better elsware. If the numbers in your market don’t work and you are forced to invest elsware, invest wisely and be cautious.

      • McKellar Newsom on

        Hi Keith,

        Good point. I think investing in your area or near your area is good if you can get great returns. Some areas are too expensive, taxes are too high, etc.

        I used to live in Bozeman, MT. At that time the cap rates were at 3%. I couldn’t find one to accept my bids at modest 10% returns. I put bids in for a year before I invested in a different state. I looked at all the major cities in Montana and ruled them all out.

        I ended up investing elsewhere then moving closer to my investments.

        If you invest out of your area, travel costs need to be calculated into your returns. Thanks! mck

    6. Great article, thank u!!!
      Do u use city-data.com to perform research on city demographics, household incomes, job growth, etc?

    7. Great post, especially enjoyed the ‘Cops test’ in number nine. I would definitely second the idea of picking a city you want to spend time in for your investment market. Yes the numbers have to work but you may end up spending more time there than you imagined and it helps to have a positive reason to go check up on your properties. Starting in late ’09 we acquired a few apartment properties in Phoenix and from the cold, dark, wet winters of Washington State it’s very nice to pop down there to inspect the properties and managers.

      Two other good sources of data on cities and towns are http://www.city-data.com/ and http://www.citytowninfo.com/places. City-data has great statistics on everything from demographics to crime rates to housing and rental costs. CityTownInfo has a great feature where you can search for cities comparable to one you like that may help you locate a market that’s not quite as picked over by other investors.

      Giovanni Isaksen

    8. Great tips, the basics of remote investment for any country and continent (Taiwan included :)). Add to those the skills of selecting a good team and sticking to your numbers, and you’re guaranteed not to fall to hard, and make some nice, reliable profit in the long term, leveraged or not.

      Thanks, Mckellar! :)

    9. Lots of good tips about market selection. I actually really liked the price to income ratio. In the Coral Gables example it clearly shows that people who actually live there full time can’t afford to buy and possibly not even rent. They most likely live in areas outside the market where they can afford. The lopsided ratio shows your buyer and/or renter market is most likely a second home owner and/or wealthy buyer which can help you refine your strategy if you determine you still want to invest there.

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