Rental Property Investor · Minneapolis, MN · Member since 2017 · 6 posts · 5 votes
Hi everyone,
A few weeks ago I attended a local investors meet up and one of the presenters said something interesting when asked about areas of the city that he thinks will produce strong rental property investments. He said to “follow the hipsters” because the areas they gravitate to tend to become strong markets.
I’ve thought about it more the last few days and it seems to be a fairly good indicator from what I can tell. At least in the Minneapolis area. Though I’m sure there are many exceptions. But it got me thinking:
What are some other good indicators/trends/things that you look for when analyzing an area for investment properties?
I suppose I’m more wondering about neighborhoods that could soon be transitioning from a C or D to an A or B area. Basically, early indications that an area will be profitable in the near future.
Cheers!
Andrew
That is a stock market mentality. You need to think about real estate differently.
Find good cash-flowing properties at a discount. Profit is built-in, regardless of how the community performs. Buy one. If you like the direction the community is headed, hold long term. Otherwise, sell at a profit. You will outpace your friends that try to guess what is the next hot spot.
That is a stock market mentality. You need to think about real estate differently.
Find good cash-flowing properties at a discount. Profit is built-in, regardless of how the community performs. Buy one. If you like the direction the community is headed, hold long term. Otherwise, sell at a profit. You will outpace your friends that try to guess what is the next hot spot.
GDP increase -> jobs increase -> people increase -> rents increase -> prices increase.
Throw in city/ jurisdictional specific factors like major employers and legislation affecting them etc and you’ve got your system. Don’t buy based off beard length, homeless guys have beards too.
I disagree with the previous two responses....with the provision that you're a reasonably experienced investor and you don't mind holding onto a house for a few years.
Cash-flowing rentals are great. But they're like buying a CD at the bank (back when CDs paid reasonable rates).
When you buy a property in an area that's just on the cusp of gentrification, it's more like buying Amazon or Google early in their lives.
Cash-flowing rentals will make you a good income. But dramatic appreciation on your houses can make you really wealthy. If you put 25% down on a house that's $100K when you buy it, and it cash-flows a little bit each month, and then 7 or 8 years later that house is worth $450K, you've created far more wealth than a house that brings better monthly returns, but only appreciates at the same rate as the general market.
This should definitely not be your ONLY strategy. Like, if all you can afford is one or two houses, this isn't the strategy for you. But if you have several houses, and are in a position to be buying a few houses a year, then seeking out areas that are ripe for gentrification is something that should be part of your strategy.
Interesting stuff, thanks for the responses everyone. It seems like the general consensus here, and most elsewhere, is that trying to time a booming market (aka speculating) is unwise unless you can afford the risk. I’m just starting out so I’ll stick to searching for cash flow, but it sure would be nice to have a property double in value in just a few years.
There’s no reason you shouldn’t be able to cash flow $500+ monthly on a suited home and experience 10% + annual appreciation,.. if you’re willing to force some of that appreciation.
Andrew. Good question. I now am a real estate attorney, but used to broker small multifamily properties in Minneapolis St. Paul. I continue to invest on the side. These pockets and opportunities remain, but you have to be active, know your metrics, pay attention, and act fast on good opportunities.
1) Ignore all answers here and in your network that do not provide a metric based answer. Those answers are "noise" and will steer you towards an emotional decision and a bad investment. Some people are looking to pad their BP stats, others really know their stuff and are here to help.
2) If not already, start pulling and reviewing sales comps for rental properties in specific submarkets from A to B- (say Lowry Hill East, to Whittier to Powderhorn--as an example). I would use a map feature for the sales--not zip code. In Minneapolis now you can search by Minneapolis neighborhood--you need review down to that micro level. Export the sales data for the different submarkets into a spreadhsheet and start to review the data. Make sure you have columns for (at least): Purchase price per above ground SF, Purchase price per gross building PSF, Foundation Size, Gross Rent Multiplier (the purchase price is X.X times the annual gross rents). You have to be very precise and look at the data because a lot of it throws you off (attic top floor space rented as ASF that you cannot stand in, improved basement space, etc).
[GRM quickly: $300,000 sold price, $1,100 in place unit rent, $1,200 in place unit rent = $2,300 per month * 12 months = $27,600 gross annual rents. $300,000 / $27,600 gross rents = 10.87 GRM sales comp.] That is a data point. You need to work through many data points across a line of submarkets. Over time you will begin to see patterns. You need to use your homework to your advantage. You should start to see patterns and a range--A location sales selling well over 10x GRM and B- sales selling in the 7 to 8 range (this will fluctuate). Also look for best of breed properties and impact to GRM. For instance, a converted SFH turned into a rental typically does not have the same quality interior space (as a whole) as an original rental duplex from the 1920s with large open spaces and high ceilings). If you have missing data, select a broker who can help fill in the gaps--missing rents, etc.
3) Start reviewing properties for sale (on or off market) and also exporting that data and dropping it into a chart. Quickly ask or search for the asking price and the in-place rents. If a property is old or AS-IS you need to search and find AS-IMPROVED rent comps. They may be in sale comps of renovated properties, you may have a friend who shared his/her data on a recently rehabbed property in that area. Either way--you need to know--AS-IMPROVED, not have an idea.
4) Ultimately, "following the hipsters" is not emotional, but performing arithmetic we all learned by the 2nd grade and organizing and acting upon the data properly. Look for the sweet spot--a best of breed property in a B/B- location with great livable space (not a converted SFH with tiny rooms), with an asking price GRM that is much lower than A area GRM sales comps (based upon your range) you may have something. Obviously run the cost of the improvements necessary to deliver AS-IMPROVED rents once under contract and walk away n due diligence if you cannot make the #s work.
Don't forget to drive the neighborhoods--you will see old tired storefronts closing, new ones opening, etc.