What New Investors Should Know About Choosing a Real Estate Market

Town X has an 8 percent cap. City Y has a 7.5 percent cap and is landlord friendly. Z County has a 14 percent cash-on-cash return and an average ROI of 9 percent.

Have you ever felt like pulling your hair out listening to everyone talk about all the great rental markets across the country and how you should be investing there?

Does it leave you questioning where you are investing or thinking of investing? It is draining!

Which Real Estate Market Is Right for You?

If this is you, I have good news. There are pockets of outstanding communities to invest in across this country that nobody has ever seen or heard of. No, they are not in the limelight like Los Angeles and New York. No, they do not have a “Real Housewives” show like Dallas. No, they are not a vacation destination like Miami. No, they are not on a top 10 list of best places to invest.

They are, however, absolutely OK to invest in.

I live in a hotspot location and invest in a no-name town. “Heavens no!” you might be thinking. “How could you?!”

Let me tell you something about what I learned regarding this dynamic. It matters more about how comfortable you are with the area than almost anything else. Unfortunately, many places can be street to street—meaning buying a property on one street could yield an incredible tenant pool while investing just 500 feet to the east on a different street could spell horror for you. You do not want to be that person who bought on 123 Main Street because you thought you got a screaming deal, but everyone who actually knows that town knows the only reason nobody picked it up is because it is the capital of Drug City, USA.

If you truly live in an area where everything within 250 miles would be a terrible investment, then in my opinion, you need to hop on a plane. There is no replacement for walking the streets. You can look at all the pictures, read all the articles, and talk to all the people you want, but until you go and walk the area, you will never get a feel for if that area is right for you.

Why “Hot” Markets Are Typically Uncool Investment Locales

Here is another important note. If you think you are just going to roll up on a hotspot location like Austin, Nashville, or Atlanta, you may want to think twice. I can tell you firsthand, the competition in these high-demand areas is remarkable. There is an investor on every corner. Does this mean you cannot invest there? No. It simply means you need to work that much harder to find a deal. Also, like your Economics 101 class taught you, decreased supply and higher demand usually means higher price.

I just opened up a real estate app on my phone and clicked on a random property downtown where I live. My first click was a duplex at about 3,000 square feet. It is selling for $650,000 (original list price was $675,000). To even hit the 1 percent rule, each unit would need to rent for over $3,000 per month. I can buy the same property in my no-name town for 25 percent of that and hit the 2 percent (or maybe even the 3 percent) mark.

Are there any exceptions? Yes. Do you want a town that is a one trick pony? No.

By this I mean, if the town is driven solely by ABC Corporation’s steel bending factory, maybe look at the next town over. You want to do some due diligence before you pull the trigger on a particular area.

“But what if I cannot afford to fly all over the country trying to find an area?” you ask.

You really cannot afford not to. However, one idea is that some people like to do “ghost ads.” They will post a rental ad on Craigslist to gauge rental demand and price point. This way you can see what sort of respondents are reaching out to you. Are these going to be people you can see yourself renting to and dealing with?

What about capturing appreciation in some of these hot areas?

Good question. I, like many others, try not to bank much on appreciation, because it can be volatile—especially with looming market corrections and the like. Many people would rather invest in a market that has not seen drastic rises (or falls) in appreciation. The thinking is, should there be another recession, the city with the nice level and steady property values may not be subject to all of the harsh market swings.

The Bottom Line

Ultimately, what is the best course of action?

The best course is the one that leads you to take action. If investing in a hot area is going to do that for you, go for it. If you want to stick to your back yard because that is what makes you comfortable, that is fine, too. Do exactly what is best for you and your goals. Real estate investing is usually a “get rich slow” game, so make sure wherever you end up, you can see yourself there in the future.

Are you in the process of choosing a market? How are you going about it?

Share in a comment below!

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.