Landlording & Rental Properties

How Picking Rental Markets Based on Climate Can Make You More Money

Expertise:
56 Articles Written
real estate investing by climate

A central piece of any successful real estate strategy is picking the right market.  You know the drill — you want good schools, safe neighborhoods, with lots of potential buyers or renters. Most real estate investors will use many of the following qualifications to determine if a property is worth buying:

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  • Sales price
  • Projected rehab costs
  • School info
  • Neighborhood demographics
  • Neighborhood crime rates
  • Projected appraisal value

Here is one more you should consider: Climate

This isn’t obvious but if you are committed to investing then you should consider climate seriously.  Here’s why:

All things being equal, it is always going to be smarter to pick an investment in a climate that has significant temperature swings.  Think Cincinnati, cold in the winter, hot in the summer — huge temperature changes over the course of the year. It could be 100 in the summer and minus 10 in the winter.  That’s a difference of 110 degrees over the course of the year.  Compare that to San Diego (where I live) where it’s 80 in summer, 50 in winter, so not much of a swing at all.

The three benefits of investing in a market with huge temperature swings are:

  1. Flipping – You can sell for more money.
  2. Buy and Hold – You can charge more in rent.
  3. You will sell/rent your property faster than your competition.

For example, consider 2 different investments, one in Cincy, one  in Wilmington, NC.  Both have comparable sales prices, rehab costs, neighborhoods, projected rents, projected sales prices, etc.  The major difference between them is that the neighborhood where the  Cincy property is located will have utility bills (gas, water, electric) that average $350/month while the Wilmington property neighborhood will average $100/month*. Market rent for both properties is $1000.
(* These are approx. estimates)

  • Total expense for Cincy property for a tenant is $1350 (rent + utilities)
  • Total expense for Wilmington property for a tenant is $1100 (rent + utilities)

So, after we green up both properties (see previous posts to see how we do this) we cut the utility bills by 50%:

  • Cincy property monthly utilities are now $175 while other neighborhood homes are still $350.
  • Wilmington property monthly utility are now $50 while other neighborhood homes are still $100.

As the investor, considering both properties, you can:

  • Increase rents in the Cincy home by $125/month and still save your tenant $50/month.  That equates to an increased profit for you of $1500/year, $7500 in 5 years.
  • Increase rents in the Wilmington home by $25/month and save your tenant $25/month.  That equates to an increased profit for you of $300/year, $1500 in 5 years.

All things being equal, this is a no-brainer.  The Cincy property will win every time because the savings and profits are so high. Some of the other added benefits are that you have happier tenants who’ll probably stay longer since their utility bills are lower.  In addition, harsher climates (like Cincy) tend to have more rebate programs available, so your rehab costs could actually go down.

So, if you are truly ‘market agnostic’ and willing to invest in any market you should definitely consider the climate of the property you’re investing in.  It’s a strategy that’s new but steeped in sound investing principles.  You get higher rents/sales prices because you offer a compelling advantage to any future tenant/end buyer.  It’s a win for you, a win for the end buyer and a win for the polar bears.  Not too bad…

Photo: Jenny Downing

    Joshua Dorkin
    Replied almost 9 years ago
    Jim – I’ll admit it . . . this is a great idea that I had never thought of. It just makes sense, though. I’ve heard a lot of arguments for investing in different areas — most good — but I’d have to say that this is probably the most creative. Thanks for sharing it with everyone.
    Joshua Dorkin
    Replied almost 9 years ago
    Jim – I’ll admit it . . . this is a great idea that I had never thought of. It just makes sense, though. I’ve heard a lot of arguments for investing in different areas — most good — but I’d have to say that this is probably the most creative. Thanks for sharing it with everyone.
    Jim Simcoe
    Replied almost 9 years ago
    Thanks for the kind words, Josh…
    Jeff Brown
    Replied almost 9 years ago
    Hey Jim — You’re irritatin’ me yet again. 🙂 Why can’t you be like the rest of the Greenies, mostly heatin’ things up with their hot air, sans empirical data? Though opting to stick with my demographic, economic, and government ‘outlook’ as means to choosing investment location, you continue putting the concept of green knockin’ on the door of my ‘A’ list. Stop it, will ya?! By the way, are we gonna meet, or what?
    Jim Simcoe
    Replied almost 9 years ago
    Hey Jeff, No problem, glad I am making you think a bit, my friend..Let’s get together next week for coffee, Tues or weds am work best for me so let me know. As always thanks for the humorous comments-they always make me laugh..
    Jim Simcoe
    Replied almost 9 years ago
    Hey Jeff, No problem, glad I am making you think a bit, my friend..Let’s get together next week for coffee, Tues or weds am work best for me so let me know. As always thanks for the humorous comments-they always make me laugh..
    Jeff Brown
    Replied almost 9 years ago
    Will do, JIm.
    Jim Simcoe
    Replied almost 9 years ago
    Jeff, coffee on thrs am? let me know, facebook or email me privately if that’s better for you: jim at jimsimcoe dot com.
    Steve Dexter
    Replied almost 9 years ago
    Dunno bout extreme temp swings. Lots of wear and tear on the bldgs compared to my fairweather farm here in socal. Hi vacancy Cincy keeps me buying in SOCAL where rents are goin up adn rental demand os high. With so many great deals here, why are you going out of state?
    Joshua Dorkin
    Replied almost 9 years ago
    You can’t just pick a market because of climate for the reasons you mention, Steve. Clearly, the other buying factors must also be in play to make an investment worthwhile — but you knew that already . . . 😉
    Steve Dexter
    Replied almost 9 years ago
    Dunno bout extreme temp swings. Lots of wear and tear on the bldgs compared to my fairweather farm here in socal. Hi vacancy Cincy keeps me buying in SOCAL where rents are goin up adn rental demand os high. With so many great deals here, why are you going out of state? Reply Report comment
    Joel Owens
    Replied almost 9 years ago
    Just one more item to throw in the toolbox when looking at investments. I never thought about it much. Here in Ga it goes from very hot to very cold so it might be something to look at.
    Steve Babiak
    Replied almost 9 years ago
    Many of these “green rebates” are only available to owner occupants, so landlords and flippers do not get those benefits. So this statement seems misleading to me: “In addition, harsher climates (like Cincy) tend to have more rebate programs available, so your rehab costs could actually go down.” If you are a rehabber or landlord, first check that you will be entitled to collect on these “green rebates” before you assume that they will lead you to an even bigger savings.
    Jim Simcoe
    Replied almost 9 years ago
    Steve, There are over several thousand different rebate programs available nationwide. Some are for owner-occupied ONLY and many are for property owners. A landlord and/or a flipper, if they are on title (thus qualifying as an ‘owner’) can get these rebates as long as at the time of the work, they own the property. We’ve done it on many properties. Obviously, you want to make sure that you read the qualifications of any rebate programs you’re looking at to make you’d get the cash. In my experience, most rebate programs allow it. The one area that landlords and flippers usually don’t get money for renovations are in federal tax-credits. These are usually only for owner-occupied properties. That’s why in the sentence you quoted, I didn’t say ‘tax credits’. Perhaps that’s what you meant and if so, I can see how it might be confusing. Thanks for bringing it up..
    Steve Dexter
    Replied almost 9 years ago
    “All things being equal, it is always going to be smarter to pick an investment in a climate that has significant temperature swings. Think Cincinnati, cold in the winter, hot in the summer — huge temperature changes over the course of the year.” ALWAYS? I really dont think so, green rehabs have a long way to go before they shake the needle on my cost effectiveness radar