3 Important Factors When Considering A Market for Real Estate Investment
Between the rise of the internet and the availability of inexpensive airline travel, real estate investors are increasingly investing in markets outside of their own. This is especially true when it comes to markets like Southern California where the price to rent ratios simply don’t make sense for real estate investors interested in cash flow. As a result, many of these investors end up researching markets in other states to determine where to buy and hold real estate.
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Having worked with a number of out-of-state investors over the years, I have begun to formulate a list of the most import criteria to consider when investing in another market. Understanding that most of the investors I work with are interested in cash flow as well as long-term growth, I would rank these 3 factors as the most important when considering a particular market:
Factors to Consider when Choosing a Market for Real Estate Investment
1.) Employment and Job Growth. In my opinion, monthly cash flow is great, but I would only invest in a market if there is an opportunity for long term growth as well. Historically, the markets with steady appreciation and population growth do so as a result of strong job growth. I look for markets that have a friendly corporate environment, strong employment centers and data that indicates continued job creation in the years to come. This is typically a great indicator that the population will continue to increase, the demand for real estate will be strong and that prices will steadily rise as a result.
2.) Price to Rent Ratio. Some people call this statistic the “Gross Rent Multiplier” which is essentially just the price of a property divided be the gross income. This is by no means a detailed analysis of a particular property, but a high-level approach to begin to understand a market by analyzing average price to rent ratios.
For example, if you were to look at a market in Southern California where a typical investment property would cost approximately $300,000 with rents around $1,500/mo, you would calculate the GRM to be around 200. Contrast this with a market like Atlanta, GA where an investment property could be purchased for $80,000 with rent of about $1,000/mo. The average GRM in Atlanta would look much stronger at 80 compared to 200 in Southern California.
3.) Legal Climate. Thirdly, I would want to invest in a market that was not unfriendly to landlords and investors. Every state and local municipality is going to have differences that relate to interpretation of contracts, time-frame for evictions, lawsuits against landlords, etc. I think it is critically important to invest in jurisdictions that allow investors to evict tenants in a reasonable amount of time. Putting yourself in a situation where a tenant could live rent free for a long period of time while you deal with a cumbersome legal process is a quick way to an unprofitable investment.
Choosing a market and understanding the factors that should contribute to this decision is critically important for any investor. Whether you are considering an out-of-state investment or simply looking at different sub-markets in your city, it is imperative that you put in the time and do the research. The more knowledge you have before investing, the more likely your investment will be a profitable one.