Favorite Areas for a Buy and Hold
Pittsburgh · Member since 2023 · 23 posts · 15 votes
Favorite Areas for a Buy and Hold
3 Replies
- 2yEric FernwoodBusiness MemberRealtor · Las Vegas, NV · Member since 2014 · 992 posts · 1k+ votes
Hello @Timothy Miller,
Where you should invest depends on your long-term goals. I will assume your goal is achieving financial freedom for the rest of your life.
Financial freedom is more than just replacing your current income; it's about maintaining your current lifestyle for life. To have lifelong financial freedom, you need a passive income that meets three requirements:
- Rents must keep pace with inflation: Inflation consistently erodes the purchasing power of a fixed amount of money. For instance, if the inflation rate is 5%, what you can buy today for $100 will cost $155 in 10 years. If rents fail to pace with the cost of living, your financial independence will be short-lived.
- Persistent: Your rental income must last a long time, ensuring that you do not outlive your income.
- Reliable: You must be able to depend on your income every month, even during tough economic times.
How rapidly rents increase and how long the income will last depends on the city where you invest. Income reliability is a function of the tenant who occupies your property. I will not talk about tenants in this article.
Rapidly Rising Rents
In real estate, prices and rents are determined by the imbalance between the number of buyers and sellers.
- When there are more sellers than buyers, prices decline until there is a rough balance between the number of buyers and sellers.
- When there are more buyers than sellers, prices increase until there is a rough balance between the number of buyers and sellers.
Rents follow prices.
- Higher prices reduce the number of people who can purchase, increasing demand for rental properties and increasing rents.
- Lower prices enable more people to purchase, decreasing demand for rental properties and decreasing rents.
The level of demand is determined by population growth. If population growth is significant and sustained, rents will rise fast enough to keep pace with inflation. If the population is declining, stagnant, or increasing slowly, there will not be sufficient demand to rapidly increase prices or rents.
So, we know the first requirement for selecting a city:
✅ Significant and sustained population growth.
Income Persistence
The only way for your income to persist is if your tenants remain employed at jobs paying a similar wage. The problem is that most jobs do not last.
All private sector jobs are temporary. If new companies do not move into the area and create replacement jobs with similar wages and skill requirements, eventually only low-paying service sector jobs will remain. As higher-paying jobs disappear, incomes in the area decline. Cities are funded by property taxes and sales taxes. When the area income falls, property taxes and sales taxes fall. Cities are then forced to cut back on services. As services are reduced, this leads to increased crime rates and lower-quality schools, which in turn causes more people to leave.
What are the requirements for a city to attract new employers?
✅ Low operating costs
✅ Low crime rate
✅ Low risk of a natural disaster
✅ Sufficient population to have economic stability, major highways, and a major airport.
Putting It All Together
The process I described can be used to quickly eliminate cities that are unlikely to meet all the listed criteria. Start with cities with a sufficient population. Then, eliminate any city that does not meet any of the additional criteria.
We now have a criteria list for evaluating cities. I summarized the criteria below and provided the source for the necessary information. Start with cities with a sufficient population, and evaluate each city against all the criteria. If a city fails to meet any of the criteria, remove it from the list.
✅ Sufficient population: cities with a metro population greater than 1M. Small towns may rely too much on a single business or market segment. Wikipedia
✅ Significant and sustained population growth: Never invest in any location with a static or declining population. Wikipedia
✅ Low crime rate: Never invest in any city on Neighborhood Scout’s 100 most dangerous cities list.
✅ Low operating costs: Good indicators of a pro-business climate include:
- Property taxes: State Property Tax Rates - Rocket Mortgage.
- State average insurance cost: Insurance - ValuePenguin
- State income taxes: Tax Foundation
✅ Low risk of a natural disaster: The cost of homeowners insurance is the best indicator of the likelihood of a natural disaster in an area. Choose a location with low-cost homeowners insurance because they have the lowest risk of natural: Insurance - ValuePenguin
Next Step
After vetting all the cities against the above criteria, you will have a shortlist. The next level of elimination will be based on subjective considerations. For example, if there are two cities that pass all the criteria and one is 1,000 miles away and the other is 50 miles, I would likely choose the closer city.
In reality, it doesn't matter whether your property is located in your neighborhood or across the country. If you have a good investment team in your chosen city, you may never need to visit it. In our case, we have successfully delivered over 480 investment properties to more than 180 investors worldwide. How many of our clients visit Las Vegas each year? Only two or three, and they are not there to look at their real estate.
Conclusion
Instead of listing cities, this post outlines a process for selecting a city that will meet two out of the three criteria necessary for financial freedom.
Timothy, I hope this helped.
FERNWOOD Team, KW VIP Realty520 Reviews - 2yWyatt WolffPro MemberLender · Charlotte, NC · Member since 2019 · 466 posts · 278 votes
I personally live in and invest in the Carolinas. Good climate, generally a lack of natural disasters, job and population growth, landlord favorable, any kind of market you can ask for... whats not to love
- Real Estate Consultant · Cleveland · Member since 2020 · 6k+ posts · 3k+ votes2y
Quote from @Timothy Miller:
What are some of your favorite areas of the country to buy and hold for the long term?
Would love to see where people are bullish but also hear where people are bearish for the future.
Cleveland. and Mississippi, double digit net caps
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