Real Estate Rookie Podcast

Rookie Podcast 16: How to Pick Your Perfect Market: Cleveland vs. Columbus Case Study With Dave Meyer and Jamie Gallagher

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What better way to learn a concept than a real-life, real-time case study?

Today, we listen in on rookie investor Jamie Gallagher as he compares and contrasts two markets. Meanwhile, BiggerPockets’ data wiz David Meyer is there to walk him (and us) through the numbers.

You’ll learn how to use population growth, rent-to-price ratio, rent-to-income ratio, and historical performance to weigh the pros and cons of various markets so you can compare apples to apples.

These aren’t the only factors to consider, but this episode will give you a solid grasp of the basics and put you way ahead of most investors in your search for a market that makes sense for you and your goals.

Be sure to check out BPInsights, the new Pro member benefit bringing you fresh, local real estate data, at biggerpockets.com/insights (use the promo code “ROOKIES” for a discount if you’re upgrading to Pro!). And you can find more of David’s work in BiggerPockets Wealth magazine at biggerpockets.com/magazine.

Click here to listen on Apple Podcasts.

Listen to the Podcast Here

Read the Transcript Here

Ashley:
This is the Real Estate Rookie Show number 16.

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Dave:
When I look at two markets, and I’m just trying to compare a couple of markets, there are three things that I typically look at. The first is going to be the rent to price ratio. And if you got-

Ashley:
My name is Ashley Kehr, and I am here with Felipe Mejia. Felipe, I have to know, how’s the Nashville market after Elise on our last show talked of all the great deals she’s finding in Tennessee.

Felipe:
Yes, she did. Yes, she did.

Ashley:
Have you found a lot of competition in the past week?

Felipe:
It's interesting. I've seen competition to be pretty steady in Nashville. I don't think much of it. One of the things that I'm doing right now though is we just put in an offer on a potential flip. And if you know anything about me, I do not flip properties. But-

Ashley:
I know. I am so surprised to hear that. I was just about to take a sip of my drink and then you said that. I just set it down on the [inaudible 00:01:01]. That’s awesome though.

Felipe:
This property is two houses down from a rental property that I already have. And the gentleman came out, started talking to me after I was cutting the grass at one of the properties, and basically poured his heart out; but knows that I own two or three rentals on this same street. And he said, "Hey, man, I'm about to go into foreclosure. I'm going to lose this house. What's the most that you'll give me for it?" After some back and forth and all that, I gave him an offer that I think he's going to accept, and we'll find out in the next couple of days. Hopefully by the next show I'll be able to tell you about it.

Ashley:
How awesome is that the lead came to you?

Felipe:
Yeah. It’s all about just being out there in the community, honestly, I think. And he knew that I was an investor, so I think it might be great.

Ashley:
Yeah. I agree with you. Today we're going to talk about finding markets. For anyone that is starting to look into Tennessee now to come and invest there, we have Dave Meyers from BiggerPockets. He is the VP of growth and analytics. Is that his title? It was a mouthful, but-

Felipe:
Yeah, it was.

Ashley:
-he's going to talk about Columbus, Ohio, and Cleveland, Ohio, because we have another guest today. We have Jamie Gallagher, who's starting out his investing career. He's a commercial realtor and he's been looking at those two markets. And Dave goes through all the data and what you should take away as far as cashflow appreciation.

Felipe:
Yeah, he got some great nuggets. Talks about what are people willing to pay, how’s living in that area as well. I mean, some other things outside of just data, but data is very important. I’m really excited to hear about that. Jamie, David, thanks for coming on the show, man. Real, real pleasure to have both of you guys here. Thanks for making the time.

Jamie:
Thank you.

Dave:
Yeah, thanks. It’s awesome.

Felipe:
Absolutely. Hey, Jamie, David, if you’ll tell us a little bit about yourself, who you are, what you do. We’d love to learn more about you. Jamie, if you’ll start us off.

Jamie:
Yeah. My name is Jamie Gallagher. I live in the DC market in Fairfax County, and I’m actually a commercial realtor.

Felipe:
Oh, cool.

Dave:
My name is Dave Meyer. I am the vice president of growth and analytics at BiggerPockets. I’ve also been a real estate investor for about 10 years, mostly in Denver and in Colorado.

Felipe:
David, that’s a mouthful there, men. Give us a little bit more explanation of what that is for BiggerPockets.

Dave:
Yeah. Yeah. They didn’t spare any words when they gave me a title.

Felipe:
That’s right.

Dave:
Basically I work with the teams that create all of the amazing content here at BiggerPockets. We also do a lot of our marketing and product value adds. When we launch new things on the site, whether it’s part of the pro membership, the free membership or a new premium membership, me and my team work on those major projects.

Ashley:
That's great. That's awesome. And I know that I've looked at some of your sheets that you have done on market analysis. I think there was one where Buffalo, where I'm from, was actually the best for appreciation and cashflow, right?

Dave:
Yeah. Yeah, exactly. Well, thank you. I’m glad people are reading them. I should say, in addition to all those things, I have a background in data science so a lot of what I do on BiggerPockets in terms of creating content and producing some of our products is related to data. As you said, I’ve been writing a lot of things about where to find good cash flow and where to find good markets, buffalo is always near the top, so good job picking Buffalo. And I think we’ll be talking a little bit about that today, so I’m excited to dive deeper into that.

Felipe:
And a lot of that is also in the BiggerPockets magazine, right? A lot of that data that you pull.

Dave:
Yeah. Yeah. The BiggerPockets magazine is really cool. I’ve been writing articles for that too, longer form articles just about different markets that you might be interested in. Besides what I do at the date of the magazine is really cool if you guys haven’t checked that out. But yeah, a different way that we use data on BiggerPockets, the magazine is certainly one of the great ones. And then as part of the pro membership, we do offer something that I think is launching the day this podcast is coming out, which is called BP Insights. But we can get to that a little bit later.

Ashley:
Yeah. And if you guys want to find out more information about the magazine, it’s at biggerpockets/magazine and it’s called the Wealth Magazine. There was one issue released and the second one is coming out very soon. Jamie, I want to talk about have you done any real estate investing yet? Do you have any of your own properties or you’re just starting out?

Jamie:
This will be my first.

Ashley:
Awesome.

Jamie:
Hopefully have many.

Ashley:
Yeah.

Jamie:
What I’m doing now is more of like a proof of concept, that I can do out of state investing from Washington, D.C. I’m looking at Columbus, Ohio and Cleveland, Ohio mainly because, one, I grew up in Cleveland. I went to school at Ohio State. And every time I go back, particularly to Columbus, I just see the transformation that that city has under taken over the last 20 years. And I know we’ll get into this a little bit later, but some of the things that I find attractive about the Columbus market is, one, that it’s growing.
Two, it has economic stability and also diversity. And I like the fact that there’s a major university there with Ohio State, and it’s a state Capitol. All of those features combined really make it a great spot to start looking at investment properties.

Felipe:
Jamie, you’ve definitely got two great cities, I think, that you’re looking into Columbus and Cleveland, both in Ohio.

Jamie:
Mm-hmm (affirmative).

Felipe:
What’s your goal though, with real estate investing? I feel like a lot of times people may be just jump into real estate without a goal. Right?

Jamie:
Yeah, absolutely.

Felipe:
And so, I’d be curious to find out what your goal is as to why you want to invest in real estate.

Jamie:
That is a great question. Over time, I would like to make real estate investing like a full time job to be quite frank and then scale those properties to maybe then adding an arm of property management and seeing where it’ll take me. But if I can’t get this first property or two properties under my belt, and knowing how did do things correctly and also at scale, I have no hope to get further down the road. Really I want to take one step at a time with my investing, but the ultimate goal is to do it full time.

Ashley:
That’s great. Let’s talk about those two markets that you’re interested. We have Columbus and Cleveland, Ohio. Now, David, do you want to go through and walk Jamie through your analysis of each of those?

Dave:
Sure. Yeah. I pulled some data. As part of BiggerPockets, we just license data from pretty much every market in the country, rent data, sales, data, foreclosure data. And so I went through that and I knew ahead of time that you’re interested in Cleveland and Columbus. And I also pulled some data from Arlington, Virginia. Is that where you’re from or where you’re located?

Jamie:
It’s literally [inaudible 00:07:38]away from where I am. It’s one of most affluent counties in America. I’m sure you saw that with your data.

Dave:
Yeah, I noticed that. I noticed that when I saw the average home price there; as well as I looked up the average median income and it seems very high. Is that the primary reason you were moving away from investing locally and looking at these two cities in Ohio?

Jamie:
Correct. Barrier to entry is a little bit tougher.

Dave:
Okay, great. Yeah. And I can definitely see that. Just so everyone knows, the average home price in Arlington, Virginia came in at around almost $700,000, so very high. Whereas the other cities that we’re talking about here, Cleveland is $67,000 and Columbus is $172,000. We really, sort of, span the gambit on these three markets with Cleveland being a relatively lower price market. Columbus still comes in under the national average, which is about $230,000 and Arlington being three times that at nearly $700,000.

Ashley:
That’s crazy to me. I just bought a four bed, two bath. A fix up or it needs some work, but for $27,000.

Dave:
Wow. Oh my God.

Ashley:
So different than Arlington.

Dave:
Yeah. I mean, just in a holistic sense, this is why I think it is really wise of you, Jamie, to look at other markets. I think a lot of people are intimidated by that, especially in their first investment, but there are a lot of great property management companies out there. There's a lot of good turnkey companies out there. And you can obviously find markets that offer prices at pretty much any entry point, whether it's $27,000 for a fourplex or $700,000.

Ashley:
No, it’s four beds. Four beds not a fourplex.

Dave:
Oh, four beds? I’m sorry.

Ashley:
Four beds, two baths. Yeah.

Dave:
Okay. That would be great. I’d be moving to Buffalo.

Ashley:
Actually, I did buy a fourplex for $20,000 in November though, so that could happen.

Dave:
Oh my God. Wow, that’s unbelievable.

Ashley:
Yeah.

Dave:
What I think I can add here, Jamie, is just some numbers behind these different markets. And I’ve pulled a lot of data and before we jump into that I just wanted to make it clear. I think a lot of people, particularly people who are new to real estate investing, feel that the word data is intimidating or they’re not a data person or that sort of thing. The literal definition of data is a piece of information, so that’s all we’re talking about here. It’s using data to just gather as much information as you can about these various markets.
And, yes, I’m going to go through a little bit of very simple math that will help you but really what I try and encourage new investors to do is gather all sorts of information as possible, whether that’s a number or an understanding of who the top employers in a given city or state are. I have all of that data here and we can walk through it. My first question here-

Felipe:
Hey, David.

Dave:
Yeah, go ahead.

Felipe:
Really quick before we jump into that, and I’m really excited to hear what you’re going to say but I really want… Because I always try to put myself in the position of a listener, where would people find this data? I mean, where would be great resources to go and find this data?

Dave:
Absolutely. As I talk through some of the various data points, I can share where I pulled it from.

Felipe:
Perfect.

Dave:
A lot of it is coming from BP Insights. That is a product we are releasing in June, I think it’s literally the same day this podcast comes out, which is part of our pro and premium membership. And it has, basically, all the information about every property in the country and rents. And this is just a beta launch in June, so we’re going to be rolling it out, but I have access to the full amount of data here. A lot of it is publicly available too, though.
You can find it either on Zillow, which makes a lot of data publicly available, or I use a lot of census data, or the Federal Reserve also has a lot of data there. As I go through it, I’ll do my best to call out the various places you can get it. If you want to just go out on your own and find this, all of this is pretty much publicly available. Our goal with BiggerPockets is trying to make it convenient so you can easily search and find all the stuff in one place. But for anyone listening at home, if you did want to… Most of this, I should say, is available publicly.

Ashley:
Just very time consuming to look it all up, I’m sure.

Dave:
Yeah, it kind of is. The one you were talking about earlier with Buffalo, I did that all manually and it took me several weeks of time for sure.

Ashley:
Yeah.

Felipe:
But the thing is, with that, I think it's worth the time; because if you're going to be investing in a city for long-term… And if you're going to do a flip, I probably wouldn't do as much research or something like that. But if I'm in a buy and hold and invest, and I want to know what the rents are going to be, what have they been historically, where they're at now, and where they're going, and what the job growth is, the time to me is going to be irrelevant of how much I spend, because I know that I'm going to be investing there for the next 10, 15 years. Right? I think it's worth it.

Dave:
Yeah. Totally. I completely agree. I think that it’s a small investment in time. What I’m doing is aggregating data for every city and zip code in the entire country, which takes a lot of time. But for someone who’s picking between two or three markets, if you use BiggerPockets Insights it will take minutes, but you can find the data for three, five markets if you practice and get used to it; and learn how to do some of the math behind these calculations that I will try and explain during the course of this podcast.

Ashley:
Yeah, if you want to go ahead and start digging into the numbers. But I just want to remind everyone that the numbers and the data are great, but you want to know the other stuff too and you need the boots on the ground. You need your team. You shouldn’t pick your city just based off the numbers, make sure you’re looking at a whole aspect of things. And maybe we can go more into that after you’re done, Dave, talking about the data and the numbers.

Dave:
Yeah, for sure. And yeah, I know I like that you said that earlier, Jamie, that you thought of these two cities because you have some roots there. You have a fundamental understanding of how they’ve changed over time. You’re not just pointing to places on a map and thinking, “Oh, I’ll invest here or there.” That leads me back to my first question. Outside of what you said before, talking about how you’ve seen the cities develop and grow, what numbers have you looked into about these two markets, and what do you like, and what are you concerned about?

Jamie:
Yes. The numbers that I like are obviously the price point. I’m looking for duplexes, triplexes, fourplexes, and things like that. And I’m working with two realtors. They’re excellent. I’m going to give them a quick shout out. Jennifer Kessel-White and Lauren Lucas are my realtors; and the reason why they’re so good is they know their market. They’ve actually done some investing themselves as well. And they’ve been able to point me in the right direction when I’ve had so some questions.
But what I’m looking for is the price point, and I set my budget at 200K. And the reason for that is I’d like to buy these properties. And in the area of Cleveland and Columbus, I have relatives that are in the trades so they would be able to help with some of the repairs and things like that. And so, what I’m trying to do is build my team right now. It’s June now, at the end of the month I’m actually going to be going to Columbus for a tour of about six properties and then hopefully making a decision based on, one, the location and other data like is there development coming, is there anything planned by the city.
Things like that to ensure that I’m choosing an area that’s on the upswing. And so, yes, the numbers are important, that data is important, but also the civic component of where the neighborhoods are, where those homes are located, are super important to me as well.

Dave:
Yeah, that makes a lot of sense. Back to what Ashley was saying about just beyond numbers, just having a fundamental understanding of the neighborhoods and even on a block by block basis which property is going to be best for you. I’ve been investing in Denver for years and one of the properties I bought, I found out that they were building a park. They were taking some abandoned old city stuff that wasn’t being used anymore, basically, and they’re turning it into a public space.
And I wound up finding properties around there because I had an idea that it would appreciate. And while I'm a data guy through and through, the numbers don't show you that. You have to I understand and actually walk around and have a great agent that knows the area that can tell you those types of things. It sounds like you're primarily looking for cashflow. Are you looking for appreciation? Have you thought about how you're going to ultimately decide on a great property?

Jamie:
Yeah. That's a great question. Cashflow keeps you in the game. I think I've heard that a couple of times on the podcast, right? But really I'm looking for appreciation in equity. That's where my primary focus is. If I know a property is not going to appreciate but I'm getting $500 on that door versus $200 on a property that's going to appreciate more quickly over time, I'll take the lower cash flowing property.

Ashley:
Jamie, that’s such a good point because Felipe had mentioned before what is your goal of real estate investing. You also know what your target is. You know that you want equity and appreciation out of it. And that’s something you need to figure out before you go and find your first property. It’s what do you want out of that property? It could be cashflow, can be appreciation. It could be because you want to make that your secondary home someday and you want someone to pay it off for you. That is such a great point. Thank you for bringing that up, how you need to figure out what your goal is of that property before you even go out looking for a property.

Jamie:
Absolutely.

Ashley:
Okay. David, go ahead back to your data.

Dave:
Great. Yeah, I know. When I look at two markets, and I’m just trying to compare a couple of markets, there are three things that I typically look at. The first is going to be the rent to price ratio. And if you guys have heard of the 1% rule on BiggerPockets, you might understand this. And basically what that is, is it’s an approximation of cash flow. You are comparing how much rent you get in a month to the total price of the home.
And, for a variety of reasons, that basically helps you assume how much cashflow you’re going to get. The higher the number, the better. That means that for each dollar you invest into that home, you are getting more and more cashflow from it. To calculate this you basically only need two things. You need to understand what the average rent is and what the average home prices in one of these markets. I mentioned this earlier, for Cleveland we have a $67,000 average median home price and for Columbus we have 172,000. Pretty dramatically different entry points there.
For rent Cleveland is averaging about $880. And when I say average, I mean medium, just for anyone who’s going to correct me. And for Columbus, it’s $1,250. And so when you actually divide that, you take that red number, so take $880, and divide it by $67,000. We get 1.31. That would be the rent to price ratio for Cleveland. That is very good. We use a rule of thumb a lot of times on BiggerPockets of 1% or above as being a very solid deal. And so we have a 1.31 rent to price ratio for Cleveland. That’s very strong and encouraging.
For Columbus, we do the same calculation. We divide $1,250 by $172,000. Again, the monthly rent divided by the price of the home, and we get a 0.73. It’s under the 1% rule. But I talked to a lot of people about this. Rules of thumb are very blunt instruments. This is a very generalized idea. And by using averages, as we are here, it oversimplifies things a little bit. But if you are just getting used to it, being close to 1% is generally a good thing. If it’s under, that does not mean that you can’t find great deals in that market.
By rule, that means it’s an average. That means that there are deals that are better than that and there are deals that are worse than that. And so in both of these markets, you are probably going to be able to find a pretty good deal. Because while Columbus is under that 1% rule, there are probably many, many deals out there that reach over that threshold. Does that jive with your understanding of those two markets so far?

Jamie:
Absolutely.

Dave:
Did you expect that one would have better cash flow than the other?

Jamie:
I expected Cleveland to have a better cash flow and, potentially, that Columbus would have a better appreciation.

Dave:
Okay, great. Let’s talk a little bit about appreciation here. Over the last one year, you are absolutely correct. Columbus has appreciated, on average, 8% in the last one year and Cleveland just 5%. Both are really good, actually. I mean, if you got that kind of appreciation in pretty much any market you should be pleased with it. But I also went back and looked at the last five years because I wanted to just get a good sense of how things have been trending of the last few years. And over the last five years, Cleveland has averaged a higher appreciation rate.
It has average 12% per year for the last five years whereas Columbus has averaged 9% per year for the last five years. It is a little bit different than what your expectations were. Now I should say, I think any investors should say, “If I am getting 9% appreciation per year or 12% appreciation per year, that is a excellent number.” Of course previous appreciation is not an indicator of future appreciation, but I did dig into a little bit more and a metric I really like to look at is just historical performance through cycles.
The first metric I used was the rent to price ratio. The second one I like to talk a little about is just historical performance. How did Cleveland and Columbus do over the last 20 years? What happened in 2007 when it crashed? Did it spike down and come back up? Are we back to where we were? And this data is super easy to get. There’s a very famous statistic called the Case-Shiller index. I’m not sure if you guys have heard of this. But it basically tracks-

Ashley:
I read it in my free time.

Dave:
Do you?

Ashley:
I read it in my free time.

Dave:
It’s great.

Ashley:
But we will link it to the show notes for anyone at biggerpockets/rookie16.

Dave:
Yeah. Again, I don’t want to get overly nerdy and make people feel like this is intimidating. If you Google Case-Shiller index Cleveland, it will basically just show you how home prices have trended over the last 20, 50 years. And it’s really fascinating. In certain markets, literally you can see in the trend a bubble in 2007, or you could see a bubble emerge. And you don’t need to be a data scientist. You don’t even need to know what numbers a line represents. You could just see how it’s performed.
And the interesting thing about Cleveland, that I looked at through this, is that, while it’s showing this amazing appreciation over time it’s prices only 5% higher than it was in 2007. Really what happened was it tanked and now it’s just getting back to where it used to be, so the appreciation numbers look really good. Whereas, Columbus is 37% higher than it was in 2007. It’s really interesting looking at appreciation. The timescale tells you everything.
Cleveland looks great because it’s recovering from terrible performance whereas Columbus looks not as good but it’s been very steady over the long-term. I think my take-away from that is that your inclination is right and that Columbus does provide a better appreciation opportunity than Cleveland.

Ashley:
Would you say that because it’s more reliable, it’s a more reliable appreciation than Cleveland?

Dave:
Yeah, I think it’s more stable.

Ashley:
Mm-hmm (affirmative).

Dave:
It only went down about 4% or 5% during the financial crisis and now it’s well beyond that. And, personally, I look for markets like that. Of course, it’s all dependent on your risk tolerance. You could invest in places that go up and down because if you catch it when it’s low and sell when it’s high that’s great. I don’t find myself particularly great at predicting markets, so I look for things that just consistently go up. And I think that’s a safer bet, particularly for new investors.

Felipe:
Let me jump in there a little, David. When you’re talking about a market that is going slowly but continuing to go up versus a more risky market, what are some of the factors that you would say contribute to one market being more risky than the other?

Dave:
That’s a great question. The number one thing I look for in trying to predict appreciation is the population growth. I think it’s very simple, but pricing is based on supply and demand. And if demand is going up, prices are likely to go up with it. If demand is going down, prices are likely to go down over the long run. That is the main thing. Just for the record, I did pull those numbers and Cleveland has been on about a 20 year slide with population declines; and it’s declined 3% in the last eight years whereas Columbus has grown 13% in the last eight years.
And that’s all census data. You can just get that publicly available. But that’s a great question. It’s so hard to predict appreciation across different things, but I think one of the easy things to understand is are more people moving there than are leaving. If so, there’s going to be more demand for houses which drives prices up. I know that’s my fundamental thesis why I invest in Denver. It’s a very popular city. The population is growing really rapidly. And so that’s clearly not the only one, but it’s one thing I think about.
The second thing I think a lot about and you mentioned this earlier, Jamie, is the diversity of employment and the type of employment that is there. I think having strong universities, healthcare systems, and government jobs tend to be very stable whereas private sector jobs are more variable. They follow more of a boom and bust cycle but also have more upside, if you look at San Francisco as an extreme example there.
Those are two things I would recommend people to look at. It’s just how is population trending over time and who are the big employers. If you go and look in the city and all the big employers you don’t recognize any of the names there, that’s probably not a great sign. But if you do see a nice diversity of big companies, I think it tends to lend itself to stability for a city.

Felipe:
It’s interesting that you say about the job market because, for example, my parents would have moved to a city that had a Ford plant or a Firestone, big manufacturing company. But we saw, during certain recessions that have passed, that that’s not always the best thing within a city. David, could you tell me, Ashley and Jamie what are some of the jobs that you would say… For example, I would be scared of Detroit because of everything that happened with the automobile industry. Is tech great? What are some jobs that I should be looking for if I’m going to be investing out of state, that you would say, “I think these would do pretty well.”

Dave:
Well, I know I’m no expert in this. I should say that. But I know that tech tends to be a very high paying job and it’s what I’ve spent most of my life doing outside of real estate. I feel strongly about cities that have strong tech infrastructures, where there’s a lot of investment going into startups and there’s a lot of M&A activity. I also think healthcare is extremely stable job. Manufacturing has been a little volatile over the last year, but I think colleges and universities are also very stable. Columbus, one of the largest universities in the entire country, is there; and probably one of the largest employers there as well.
I think those are really strong. And then some of the blue chip companies, like if you look at the Dow Jones and some of the biggest companies like insurance companies, banks, those kinds of things tend to be relatively stable as well.

Felipe:
Yeah, that's really helpful. And let's clarify. The data and everything that you can look up, the metrics and everything that's going on in a certain market, is very, very important. But, like we touched on before you got to have a stable team, a boots on the ground if you will. You got to have a good property manager, a good real estate agent to help you through and through. David, what are some of the key things that you've looked for that maybe you can help me and Jamie understand?
What are some of the key things outside of the realm of just data that you would look for in a team outside investing out of state? I think you don’t even live in the country that you’ve invest in, so you got to have a real tight grip on this. Tell us a little bit of what you look for in a team.

Dave:
That is correct. Yeah, I don’t live in the country that I invest in, so it does make it a little bit challenging. But, like you said, it really-

Felipe:
Out of Country Investing, that’s the name of the show for today, Out of the Country Investing.

Dave:
Yeah. I really look for reliability. I think that’s the number one thing that you can look for, more than price, on who I’m going with. But particularly with property management and the trades, people who can do maintenance and repairs. There’s nothing worse, as an investor, when you get a call that the heat went out in the middle of the winter. And you feel terribly that your tenants are having a hard time and you need someone to go and fix something you don’t know how to fix in the middle of the night or so.
That is really what I look for. And it really requires some networking to be able to find those people, so finding other investors in these markets who can refer someone who’s great to you. And those people aren’t usually the cheapest but I promise you, from my experience, it is much cheaper to pay a reliable person a bit more than it is to look for the cheapest person to help you with these kinds of problems.
In terms of a real estate agent, I’m very fortunate. I have a real estate agent. His name is Andrew Keel, also I’ll give him a shout out, who I’ve been working with for years. And he does a really excellent job of understanding the market. I mentioned earlier that I found out that a park was being built, and that’s because Andrew goes to community meetings all across the city of Denver to understand where different projects are going, infrastructure is being built. And I think that’s hugely, hugely important.
I go to him and I say, “Here’s my strategy, here’s my budget, here’s what I want to look for,” and he usually has two or three neighborhoods within our market that I should look at. And then he and I go and attack that and look for things. I think it really does matter a lot which real estate agent you choose; and making sure that someone who is investor-focused is of huge importance.

Jamie:
I totally agree. I 100% agree. In fact one of my principles, if you will, is I want to treat every property like I have 100 but I want to treat every tenant like I only have one.

Dave:
That’s awesome.

Jamie:
And so, if you build it to scale from day one then you can do that. Right? And then have that culture on your team of customer service. Because re-tenanting a property is way more expensive and doing the right thing for that tenant to begin with. And, of course, there are situations that we can’t envision, but if you always try to make the right next choice you’ll have a better outcome with knowing your business but with the people that are tenants in your property.

Ashley:
Yeah. It's really important to remember and have those key relationships with those people too so that they want to keep working with you going forward and you want to keep working with them. And it will be a lot easier than finding new people. If you talk to any employer, it's a lot more costly to replace someone than it is to keep someone. Well, that goes out when you're looking for a contractor too, because these contractors get to know your properties, they get to know what you like.
Then if you hire someone else new, it takes a while for them to train and to get used to what your expectations are. Now I want to take it back to the data. And, Dave, is there anything else that Jamie should be looking at? And we talked about rent to price ratio, historical performance through cycles, how to gauge the appreciation of that property.

Dave:
Yeah. There is one and it actually touches on a question you asked earlier, Felipe, about the economics of the different city. And so there’s one last one. It’s very similar to rent to price but it’s basically rent to income. I want to understand how much of my tenants’ income they are putting towards their rent. And if it’s a super high number, that’s not a good situation for anyone. That’s risky for me, that’s risky for the tenant. You don’t want to be in a situation like that.
For me, I look for properties and markets where my tenants can comfortably afford the housing that they are or occupying. And so the way I do that is, again, I look up the data just to understand what that median income in the city is and then I divide that by the rent. Basically I did this for both Cleveland and Columbus, just bringing it back to those two markets, and Cleveland has a 36% rent to income ratio. That means that on average a tenant is devoting 36% of their income to rent. And that is close to the rule of thumb.
A rule of thumb is generally one third of income goes to housing. It’s a little high, but it is not overly concerning. Whereas Columbus has a much higher median income at 51,500 and that comes out at a 29%. 29% of income is devoted towards rent. And so, again, none of these are be all and all metrics. They’re just three things that I look at when I’m trying to understand if a market makes sense to invest in. The rent to price ratio, their historical performance, and then this rent to income ratio.

Ashley:
The rent to income ratio is very interesting because I’ve never thought to look at anything like that. But when someone applies for one of my apartments, I make sure that their rent to income ratio is at a certain point, a certain percentage, to afford that apartment. But I never thought of actually looking into it before I analyze the market.

Dave:
Yeah, and it makes sense to me. You don’t want to just keep raising rents and putting people in a situation where they can’t pay. You want to find the true fair market rent. And I think by looking at this and having it around one third, which both of these are, it is generally a rule of thumb not just among real estate investors. But people who talk about personal finance and budgeting typically recommend or understand that housing is going to cost about a third of your income. I think that, to me, it seems to be a good rule of thumb if you’re looking at different markets.

Ashley:
Jamie, now that we’ve talked about the two different markets, what’s your decision? This is like a TV show where we show you two different houses and at the end you have to one.

Jamie:
Where’s the drum roll? I think that the analysis that I did without all the BP Insight numbers I was leaning towards Columbus, and I think the numbers bear out that Columbus is a better market for long-term investing. That’s where I’m going to be putting my focus in. I really look forward to starting to build my empire, hopefully, this year.

Ashley:
Well, we’re really excited for you.

Dave:
Good for you. That’s awesome.

Ashley:
I can’t wait to see what you do in Columbus.

Jamie:
Yeah, definitely.

Felipe:
I definitely agree with that. Jamie, one last question. What resources do you plan on using in that area for finding a good realtor? I know that Ashley’s going to say joining an REI meeting because she focuses a lot on that, and I love that and it’s so true. I mean, networking is key because that’s how you’re going to get the most insight on a certain city. But what are some of the ways that you are potentially going to?
And then David, if you’ll give us some insight on what you would recommend some of our listeners to do when out of state investing or even out of the country investing to find great team members in that area. Jamie, I’ll let you go first.

Jamie:
Yeah, absolutely. I'm in an international networking group right now with my commercial real estate business and so I've been reaching out to contacts in the Columbus market that are in that same group; starting that interview process again when I go to Columbus at the end of the month, having coffee or whatever is socially acceptable for both parties. Just getting to know people. Along with the fact that I went to school at Ohio State, I have people who are in the mortgage industry.
Obviously, I have my real estate agents already locked down but also family members who are in the trade business. Things like that, where I can really pull from, not only from the people I went to school with but also my family resources as well.

Dave:
Great. Well, I can make a couple of recommendations. First and foremost, I do work for BiggerPockets and believe strongly in what we do here, so I’ll just say that we are offering BP Insights, which is a new tool that allows users to get data about pretty much every property in the country. It will give you an estimated rent and it can also help you find a market. If you’re in a similar position to Jamie and you’re not exactly sure where you want to invest, BP Insights is built really exactly for that.
And we are launching that as a beta right now, which in software speak is like a pilot program. And so for the first thousand people who want to do it, we are offering that. You can use the code rookies for all the rookie listeners there for BiggerPockets pro or premium and you get 20% off. You will get to attend a live event with me where I’m going to be teaching people about the basics of data analysis. We also have some free spreadsheets and bonuses for you. Feel free to check that out if you guys are interested.
Basically, if you’re thinking about going pro, this might be a good time to do it. We’re giving away a lot of stuff. But all of this other data is available, again, through the census. It’s really good. It’s a little outdated, but there is a lot of good information in the census particularly about economics and some of the demographic profiles of a city. Zillow does have some good sales and rent data. And then, again, the Case-Shiller index. I know it sounds very nerdy, but Google the Case-Shiller index, it will be super helpful.
And then lastly, on the team side of things, I think building your network on BiggerPockets or in the Facebook group for rookies is a great way to do it. Referrals, I always think are the best way to find great team. If you know someone or can find an experienced investor in a market, that’s always great. And again, on BiggerPockets we do have a directory of really investor-focused real estate agents, which is another good place to find resources.

Ashley:
Yeah. As a BP pro member myself, I highly recommend it. But it’s not only just the insights. I mean, the calculator reports, everything. There is so much value there. But I just want to wrap it up, what we talked about, before we move on to our next segment. We talked about three different metrics to use to really analyze the market, rent to price ratio, rent to income ratio and historical performance through cycles.
Then you also took us through two examples of what to look at in a market such as what is the employment like, what are the kinds of jobs that are there. And then population growth, is the population growing/declining, and taking all that into consideration. And then also, we touched on finding yourself a good reliable team. Felipe, do you want to take us into the next segment here?

Felipe:
Yeah, absolutely. Let’s move on to the next segment of the show. This part of the show is called The Rookie Request Line. All right, we’ve got a few more questions but before that I really want to take this here. But for any of our listeners, you can always reach us at 1-885-rookie to leave a voicemail and we might use it on the show, so make sure you reach out at that number. Again, that’s 1-885-rookie. Leave us a voicemail and we might play it on this show.

Susanna:
Hi, my name is Susanna. I will be moving to Athens, Georgia in a little over a year to start graduate school. I'd like to be able to buy my first property and start house hacking right away. My question is what is a good timeline that I could use in this next year to have most everything squared away before I arrive?

Dave:
I think the first thing to decide when you’re talking about house hacking is whether you’re going to do the strategy where you by several units, a duplex or triplex, and live in one or the other or get out a house with multiple bedrooms and rent by the room. Both are great ways to do it, it totally depends on where you are in your lifestyle. People with families, significant others, tend to not want to rent by the room; but younger single people tend to do rent by the room, so either one of those.
Just think about which one you're comfortable with and which one aligns with your budget. That brings me a second thing, come up with a budget for how much you can afford. The great thing about house hacking, the reason it's such a great tool for rookies, is that you can get an FHA loan and put as little as 3.5% down on a property that has up to four units in it. You could get a duplex, triplex, single family, or a fourplex with 3.5% down. Knowing that I would come up with a budget and then just start looking.
One of the great things about house hacking is the financing. And since you’re going to be on site, so the property management you can do yourself. It really comes down to just understanding your budget and looking for a great deal.

Ashley:
Yeah, that’s great advice. And just to add to that a little bit, is find a realtor to send you listings. You can sign up for their emails and just, ahead of time, look at those properties and start analyzing them. Use the BP calculator reports, use Excel; but just practice analyzing those deals to get to know what would be a good house hack for you. What kind of cashflow are you looking for? Are you looking for your mortgage paid, half of your mortgage paid? And just practice, practice, practice.
And then before you even move, go ahead and go and get pre-approved by a lender if you're going to use financing. Because usually I think that a pre-approval letter is usually good for six months. It's probably depending on the bank, but that is something you could do a month before you move. Just get that in place so that you're ready for that. But now let's move on to our fun part here. This is where we have some random questions that really don't even have anything to do with real estate investing but just to get to know you guys a little more.
Jamie, I’ll give the first question to you. Let’s see here. What is something you’ve changed your mind about, that may be once you believe that and now you’ve completely changed your mind on it?

Jamie:
Oh, man, it’s a great question. Honestly, it’s going to go back to real estate. I was a big cashflow guy until I started looking into the numbers and I really where wealth generation has created. It’s obviously through the equity and the appreciation of the property. I know that’s not where these questions are going, but that is definitely something that’s recently changed my mind.

Ashley:
No, we love it when you turn it into a real estate answer.

Felipe:
David, I’m going to take the next one here, and I’m really interested in what you were like in high school. What clique are you a part of?

Dave:
Oh, I don’t know. I was just a jerk in high school. I cut a lot of classes. I was a really bad student, I’ll also say that.

Felipe:
Did you calculate how many classes you could skip before you had to pass/fail type of thing-

Dave:
No.

Felipe:
-based on the data?

Dave:
That’s actually really interesting. I got terrible grades in math. I got Cs and Ds in math all throughout high school. I was just a jerk. I just wanted to hang out with my friends all the time. But, I don’t know. I think I was just a pretty average kid.

Felipe:
I love that.

Ashley:
Jamie, tell us something about your morning routine. Do you have a special morning routine you do to get ready for the day? We’re big advocates of the… What’s the book? The Miracle Morning. Do you do anything like that?

Jamie:
Yeah. I do actually. I wake up 5:30, 6 o’clock every day and I read a little bit. It could be the news, it could be a book, something like that. And then I have a German Shepherd, his name is Willie. He’s got one eye, so he’s one-eyed Willy; and so he’s usually looking for a walk. And we have a lot of wooded areas in my neighborhood, so I’ll take him through some of the paths and it’s really a peaceful way to begin my morning.

Ashley:
Nice.

Jamie:
That’s awesome. One-eyed Willy, that’s really cool. David, I got a question, man. And I know that our listeners are going to want to know this because you’re a data guy.

Dave:
I don’t know.

Felipe:
What is a city that you would invest if you weren’t in Denver? What’s a good second city that you would be looking at?

Dave:
I’d say Columbus.

Felipe:
Now Columbus.

Dave:
Yeah. Yeah.

Jamie:
David, you’re going to have to go and get a property under contract before this podcast gets released because you’re going to get so much competition. One city I’ve been really interested in is Boise, Idaho because it reminds me a lot of Denver. It’s becoming more of a tech city. We didn’t talk about this earlier, but I really think a lot about quality of life and cities where people want to live. And Boise just seems beautiful. I’ve never been, but it seems really cool.

Felipe:
Good. I think that’s a metric that a lot of people don’t think about when investing. They’re like, okay, cash flow, work this. But what about just the natural stuff? What about, is there plenty of hikes? Is there plenty of things to do outside? During this unfortunate events of COVID, I think we’ve all come to realize a little more of the importance of just being outside and having some fresh air and community.
And I think that’s a metric that, I think, we’ll start seeing a little bit more in the future. Like you just said it, how is the life there? Is it interesting? Is it fun? Or are you just going to work for 16 hours a day and then coming home? I don’t know. That that appeals to me as well as me and my wife think about if we’re ever wanting to move or things like that. We live in Nashville right now. We love it here. There’s hikes everywhere. We live surrounded by mountains. It’s beautiful.
And I think that’s another thing that people are starting to realize that’s important when investing out of state. It’s like, do people actually even like to live there? Because just because they can afford it doesn’t mean that they’re going to like and want to live there for a while.

Dave:
Absolutely. I completely agree. Again, showing that not everything is data. That’s almost impossible to quantify. You can’t really come up with a number for that, but it is important just like people are going to want to live in a beautiful city that is well run and has access to the outdoors and fun things to do. As you start to look for a market, try and dig into what’s available and how much people enjoy living there if you can.

Felipe:
Agreed.

Ashley:
Now, can you guys tell us where can people find out a little bit more about you?

Jamie:
David, would you like to stew it up and I’ll bet that I’ll cleanup?

Dave:
I’m very lame and don’t really do much social media, but you can find me on BiggerPockets. I read all of those messages and respond to them, so that’s probably the best place to find me.

Ashley:
And the Wealth Magazine now. You’ve been writing articles for there, all your data in there.

Dave:
Yes. Thank you. Yes. Thank you.

Jamie:
And you can find me on LinkedIn. Just search Jamie Gallagher on LinkedIn. And then also on Instagram, [jamegcommercial 00:49:47]is my Instagram handle. Also, if you are a general contractor or a mortgage person or someone like that in the Columbus market, and you’d like to have a conversation with me, please reach out to those channels and I’d love to have that conversation with you.

Ashley:
That is a great idea. We’ve never had a guest ask for people to contact them before, but great way to get some people to talk to that you need. Awesome. Awesome. Okay, so if anyone wants to find out some more information we can put that in the show notes for you. We’ll have everything that both Jamie and David talked about today at biggerpockets.com/rookie16. I’m [email protected] on Instagram and he’s [email protected] And don’t forget to join our Facebook group if you guys haven’t. It is blowing up. We’re at over 6,000 members right now. It’s crazy.

Felipe:
I think we’re past 7,000 members.

Ashley:
Yeah. And it’s [inaudible 00:50:51].

Felipe:
But, let me remind everyone. Let me remind everyone. Okay, when you’re filling out the form to join the group, if you do not accept the terms and conditions you will be denied. There is people at BiggerPockets that are just like deny, deny, deny, deny, deny. You have to accept because people will get on there and be like, “Hey, I need 17 tenants and dah, dah, dah,” or, “Hey, I have this great company that does this.” And it’s like, “Dude, that’s not what we’re here for. Go do that somewhere else.”
Make sure that you definitely adhere to the rules and regulations that we have on there. They go through this long questionnaire and then they just don’t hit the accept the rules button, so make sure you do that at the end of the Facebook group. Sorry, go ahead Ashley.

Dave:
Thank you. Good point.

Ashley:
Yeah. I hop on meet-ups, Felipe hops on that, so we meet each other out. But thank you guys so much for joining us today. And I might’ve joked about having to read data, but I actually love it. And I love that data sheet that you had given out already for BP insights and showing the different markets, so thank you Dave. And, Jamie, thank you so much for joining us. Make sure you’re in our Facebook group, so we can watch what but you actually purchase in Columbus and watch your empire grow. Thank you guys.

Jamie:
Awesome. Thanks for having me.

Dave:
Thank you.

Felipe:
Bye Jamie. Bye David.

Watch the Podcast Here

In This Episode We Cover:

  • The most important data points to consider when choosing a market
  • What rent-to-price ratio is
  • What rent-to-income ratio is
  • How to look at a market’s performance throughout economic cycles
  • How job and population growth affects appreciation
  • What types of employers to look for
  • Quality of life factors
  • Analysis of Cleveland vs. Columbus, Ohio
  • Advice for a future house hacker
  • And SO much more!

Links from the Show

Dave and Jamie’s MVPs

Books Mentioned in this Show:

Connect with Dave

Connect with Jamie

Ready to go take action? Every Wednesday, the Real Estate Rookie Podcast will arm you with tips, tools, and inspiration to help you launch your real estate investing career. Hosts Ashley Kehr and F...
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    Tony Moreno Rental Property Investor from Madison, AL
    Replied about 2 months ago
    Great episode Guys. This is very helpful!