Comparing US Markets

27 Replies

Can people give me some unbiased opinions on a list of markets and what they’re seeing in those areas? Using a scoring system can people rate these markets on a scale of 1-10 for population growth, job growth, and vacancy rates decline? Even just the one you’re familiar with. 5 is average.

Charlotte, Dallas, Tampa, Orlando, Cleveland, Indianapolis, Milwaukee, and Memphis

Eg. Charlotte: PG (population growth)-8, JG (job growth)-9, VR (vacancy rates)-8.

Unbiased opinions? They dont exist. Everyone is going to be biased towards the market they invest in

Originally posted by @Nathan Wiebe :

Can people give me some unbiased opinions on a list of markets and what they’re seeing in those areas? Using a scoring system can people rate these markets on a scale of 1-10 for population growth, job growth, and vacancy rates decline? Even just the one you’re familiar with. 5 is average.

Charlotte, Dallas, Tampa, Orlando, Cleveland, Indianapolis, Milwaukee, and Memphis

Eg. Charlotte: PG (population growth)-8, JG (job growth)-9, VR (vacancy rates)-8.

Nathan,

I wouldn't be able to provide you an unbiased list of which markets would be best as 

A) Cleveland is my market

B) I have no professional experience in a market outside of Cleveland. 

However I can give you some more information to assist you in your research of the Cleveland market & the varying neighborhoods & assets we have here. Check out The Ultimate Guide to Grading Cleveland Neighborhoods.

Good luck in your research of these markets.

This post has been removed.

Ya, you’re right. Alright, can people try to sell me on those markets? 

@James Wise Ya, I’ve gone through that article a bit. The grading was really informative. I enjoyed the method.

Originally posted by @Nathan Wiebe :

Can people give me some unbiased opinions on a list of markets and what they’re seeing in those areas? Using a scoring system can people rate these markets on a scale of 1-10 for population growth, job growth, and vacancy rates decline? Even just the one you’re familiar with. 5 is average.

Charlotte, Dallas, Tampa, Orlando, Cleveland, Indianapolis, Milwaukee, and Memphis

Eg. Charlotte: PG (population growth)-8, JG (job growth)-9, VR (vacancy rates)-8.

I do not know much about those others markets, but I can tell you that Cleveland is HOT right now. Investments are being sold very quickly. Prices are still good and rent has gone up!

The question, I think, is where's next to get "hot?"  Austin, Dallas, Memphis, Birmingham, Indy, Little Rock, OKC, etc... are all too busy so where will the next hot spot be?

@Nathan Wiebe I can tell you that Cleveland is still a hot market for both individual homes and multifamily.  Also a lot of areas around the city are seeing new development so it's still a good time to invest. 

@Nathan Wiebe - @Russell Brazil is right.  We are all biased towards the markets we invest in or sell investment properties in.  You will probably be better of doing a google search for reports based on your criteria.

Something like this Forbes article on fast growing cities:  https://www.forbes.com/sites/samanthasharf/2018/02...

Or  the US govt census data:

https://www.census.gov/newsroom/press-releases/201...

Also something to think about is how easy is it to get to your investment properties?  Some of these cities may have better/cheaper flights for you.  Not a big deal but could add up if you go see your properties regularly.

(PS. We are traveling to your neck-of-the-woods next week!  I LOVE Banff and Jasper national parks!!)

@Nathan Wiebe

Orlando

Pop growth: 8

job growth: 6

Vacancy rate: 9 (very limited inventory -- 30-35 days on market average) 

My vote is for Cleveland....then again.....I'm biased because I invest there and get at least the 3% rule on my rentals there vs. in the Bay Area where I also have rentals and I don't even get the 1% rule.  I also don't care much about appreciation.....I care about cash flow.....which is the beauty of Cleveland.

@Brian Garlington you got to admit Bay Area appreciation has been pretty amazing though .
It seems very difficult to get cash flow in the Bay Area as it is in SoCal too .

What neighborhoods in Cleveland do you invest in ?

Nashville has done pretty well.

4.7 percent increase in 2018

Population of 684,410

Average home price of 254k

This is my unbiased opinion ; -)

Originally posted by @Jared Maltbie :

@Nathan Wiebe

Orlando

Pop growth: 8

job growth: 6

Vacancy rate: 9 (very limited inventory -- 30-35 days on market average) 

I find it interesting that 30-35 days on market on average is a 9.  In the last 5 years I think I have had one unit that took as long as 30 days to fill.  I normally have it filled in a 1 hour open house, on a rare occasion it takes two one hour open houses.  I have had 2 vacancies filled in the last couple of years by contacting people on a waitlist.  More than two open houses I think has happened only 1 or 2 times in the last 5 years.

It just shows how there are differing perspectives based on history.  Going from our current vacancy rate to a rate that takes 30 days to fill a vacancy would warrant a low score because of what I am used to.  It is not that 30 days is long, it is just much longer than I am used to.

It is one of the reasons that the scores provided may not accurately reflect reality.  Add in the bias toward their own RE market and the numbers become virtually useless unless provided with justification.

My scores for San Diego:

If you buy in "hot" markets with a limited supply you are setting yourself up for failure.

Go back over history & you'll find the majority of the time the first 2 years of every presidency a bounce in the market. Both sides of the aisle. 

Look for markets that remain stable in good times & bad. Some markets don't suffer the rate of depreciation or appreciation that others do. Their bell curve isn't steep in either direction. 

Major MSA's typically get destroyed in economic downturns only to rebound at an accelerated pace when times are good. The roller coaster analogy. Data supports this because the infrastructure can't sustain the large population in a downturn. The population begins moving to secondary & tertiary markets because they function based on the infrastructure catch up game. They are always 10 years behind catching up to the growth in population from people moving away from major cities. 

Find the little engine that could city that keeps chugging away regardless of economic conditions. 

B/C areas get hit the hardest with the cycle, appreciation & depreciation. These areas hold the most people that lose jobs in a downturn & move to find employment. They appreciate more rapidly when the economy rebounds also. It's the average Joe areas. 

I used to appraise. I've seen firsthand what I have stated because I had to put the value on it & explain the reasons for the house, as well as the market as a whole. 

Check historical migration maps that correlate to economic conditions to further support my statements. You'll see who lost population & who gained population. 

Best of luck to you investing. 

Thanks everybody! Unbias doesn’t exist and I’m seeing a strong leaning towards Cleveland on the thread. 

@Jason Cory that was a great post. Thank you for the concise economic breakdown. 

What are some good free websites to research markets on? What’re some people’s process for researching or looking for a new market when there are so many markets?

@John P.  Austin, Dallas, Are already Very hot, somewhat to hot for my liken... 

Some of the areas mentioned above are "hot" but more of a steady markets not boom and bust....

I follow the cities in Florida (Orlando, Tampa, Miami & Jacksonville), I do not follow the other cities  on your list.  The first three are  over heated.  Google, "can the average person in xxx afford the average house"?    If the answer is "no" you are overheated and will face some challenges.  

In full disclosure, I live ,invest and work as an RE agent in Jacksonville.  I clearly have my own bias!  I would check out Jacksonville for yourself and see if you should add it to your list.

Every market works fine for investors.  I would suggest becoming and expert in 1 market first.

@Dan Heuschele The 30 days on market were for sales. That was my bad. Rentals are pretty quick if priced correctly. Right under 14 days on market for rentals. 

Hello @Nathan Wiebe ,

You brought up a great topic, but one without an easy answer. No one can tell you the best investment location. However, I can tell you the process I used for selecting my investment location.

The first step is having a clear definition of what you are seeking. I think Yogi Berra stated it best:

If you don’t know where you are going, you might wind up someplace else. - Yogi Berra

It took me a long time but I developed the three criteria that I feel every investment property must meet.

  • Sustained profitability - The property must generate a positive cash flow today and into the foreseeable future.
  • Likely to appreciate over time - You would never buy a property just for appreciation but appreciation is very desirable. Especially when using a 1031 to reinvest equity or adapting to market changes.
  • Located in an area where you can make money and business risks are low. Key factors include state income tax, property tax, insurance cost and landlord favorable regulations. Regulations include property related laws like the time and cost of evictions, rent control, code compliance requirements, etc.

I created a graphic that illustrates the process I would follow (click on the image to see full size):

Potential Locations

The following is a reasonable set of location criteria to start with.

  • Locations with a stable or growing population.
  • Locations with a population of at least 1 million. You want a stable economic environment; small towns may be too dependent on a single company or commodity. Also, I would choose a place you would like to visit because (check with your accountant) trips to check on your properties may be tax deductible.
  • Locations with property prices you can reasonably afford. For example, if your maximum is $150,000, it would be a waste of time to consider single family homes in San Francisco.
  • Locations with a reasonable level of risk. There is no risk-free location. However, there are areas with much higher risk than others. What is an example of risk? The ability to evict non-paying tenants in a reasonable time and for a reasonable cost. If you don’t think this is important, watch the movie Pacific Heights. More about this later.
  • Locations with reasonable landlord insurance and property taxes.

Location Validation

Now that you have a small number of candidate locations, we need a way to valid each location. Remember that there is no perfect location so use the following only as guidelines.

Short Term Factors

There are three easy to determine factors that have a direct impact on profitability.

  • State income taxes
  • Property taxes
  • Insurance - Insurance by State. Note: I was unable to find a single site that compared landlord insurance cost by state so I used homeowner’s insurance which is reasonable for comparison purposes. Landlord insurance is typically 10% to 20% more than home owner’s insurance.

The following table shows the effect of just property tax and insurance on cash flow for an “identical” property in three different locations.

[If you would like the details on the above table, drop me an email.]

You should be able to quickly eliminate some of the locations using the above factors. Longer term factors are critical as well. Remember that ROI and cash flow are just a snapshot, how the property is likely to perform today. ROI and cash flow tell you nothing about how the property is likely to perform in the future. You will hold the property for a long time so what will happen in the foreseeable future has a greater impact than what is happening today.

Longer Term Factors

Longer term factors can slowly change a high performing asset into a financial nightmare. Below are the primary factors I would consider but each location might have others.

Business Risk

Investing, like everything else, involves risk. Some risks can be minimized by careful research before you buy. The most common business risk is eviction. For example, in California an eviction can take up to one year and cost thousands. In Las Vegas, evictions usually take less than 30 days and cost less than $500. However, just because you own investment properties in a tenant rights focused state like California does not necessarily mean a nightmare eviction will happen to you. You might own 50 properties in California and never have to evict anyone. I view eviction nightmares like I view getting cancer. The odds of your getting cancer are relatively small. But if you do get cancer it is devastating and “odds” mean nothing.

Population Trend

Population stability is critical. Only buy properties in a location where the population is growing at a sustainable rate. (Do not buy in boom towns, they tend to go down as fast as they go up.) Why is population stability so important? If people are moving out of an area, housing prices and rental rates will fall due to decreasing demand. If people are moving into an area, housing prices and rental rates are likely to rise due to increasing demand.

However, you cannot simply look at metro area numbers and feel you have the entire picture. In every large city there are good locations, bad locations and most that are in-between. There may be good deals in any of these locations but you need to know the type of area in which you are buying and the return must be consistent with the location risk.

Urban Sprawl

Since investment properties are held for long periods of time, understanding the potential impact of urban sprawl is critical.

In every major city I’ve seen there are areas which were once the best location to live and over time became distressed areas. The major cause of such a change is urban sprawl. People want newer floor plans, newer homes, less crime, better schools, etc. If people have the income, they will move to newer areas. As people with money move out of an area those left behind will, on average, have lower incomes. Property prices will then fall because the remaining residents have less disposable income and landlords will price their properties to keep them rented. As property prices fall, property tax revenues will fall. City services are largely dependent on property tax and sales tax revenue. As revenues fall, cities have no choice but to cut services. This starts a downward trend from which few locations have ever recovered. There are exceptions but not many.

Below is a diagram showing what can happen to a property over time due to urban sprawl. The colors represent monthly rent. Green represents a high rent and red represents a low rent. The important factor here is understanding that property prices lead rental rates. Depending on the study, 2 to 10 years lag between property prices and rental rates is typical. So the rents you receive today may actually reflect property prices 5 or 7 years ago. A good barometer indicating this is happening is relatively high rents with low purchase prices.

Not every city is subject to urban sprawl. For example, San Francisco is almost completely surrounded by water and what land there is has already been developed. Another example is Las Vegas, which is completely surrounded by federal land and has built out almost all desirable land. See the animated map below. The green areas are federal land. Very soon, Las Vegas only growth path will be redevelopment. This virtually ensures that today’s class A properties remain A class properties into the foreseeable future.

To see how cities with no barriers to expansion are impacted by urban sprawl, click on the various cities below (you will need to zoom out). Think about investors who purchased properties in the suburbs in 1984 (the starting year of the time lapse aerial views) and where the suburbs are now. As an investor in such a city, you virtually have to chase the suburbs as they move further from the city center. If you don’t, you are likely to see your property’s market value and rent decline over time. With your overhead fixed (debt service), it can become a very difficult situation.

Job Quantity and Quality

Rental properties are no better than the jobs around them. Declining job quality or quantity results in declining property prices and rent.

In many parts of the US, manufacturing and similar jobs have gone away and what remains are service sector jobs. Service sector jobs tend to pay less than manufacturing jobs so the families of these workers have less disposable income. Less disposable income means that they cannot afford to pay the level of rent they did in the past. In such situations, declining rents and property prices are inevitable. One factor that can change this trend is new businesses relocating into the area. New businesses are critical because sooner or later, all the current businesses will fail or leave. If you doubt this, check out Detroit or most of the former manufacturing cities in the “Rust Belt”.

The 2018 Tax Act will result in companies bring manufacturing back to the US. However, only some cities will benefit. Which cities are more likely to get the new businesses? I believe that when senior management is looking for a new location they will reject cities that:

  • Safety - Are ranked among the top 100 most dangerous places to live in the US. A business will need to relocate a core team to the new location and most people will not consider living in what is perceived as a dangerous location.
  • Control - Businesses compete on a world wide scale so they need maximum control of their businesses so I believe they are far more likely to select locations in states with Right to Work Laws. So far, 28 states have implemented right to work laws. According to multiple studies I have read, all right to work states experienced significantly higher business growth than states without right to work laws.
  • Taxes and regulations are a direct impact to a company’s bottom line. I think it is unlikely corporations will open new facilities in high taxes and high regulations states. Why would they choose a location where taxes and regulations will make them less competitive?

You need to take a dispassionate look at each location under consideration in terms of present and future desirability to new businesses. Will the location you are considering be among the top locations in the US where businesses will want to locate operations in the future? If not, look at another location.

Ongoing Maintenance

It’s not how much money you make, its how much money you keep. Maintenance costs have a huge impact on profitability. When I owned properties in Houston, Atlanta and other places, I was always replacing roofs, siding, aging plumbing, faulty electrical systems and dealing with vegetation and termites. Below are some generalizations about locations and ongoing maintenance costs:

  • Older properties require more maintenance than newer properties.
  • Composition roofs require more maintenance than tile roofs.
  • Properties in climates with hard freezes require more maintenance than properties in milder climates.
  • Properties in locations with a lot of moisture require more maintenance than properties in dryer climates.
  • Wood siding requires more maintenance than aluminum or stucco siding.
  • Properties with lush vegetation require more maintenance than properties with little or no vegetation.

Summary

Using the above criteria and considerations, I believe you will be able to narrow your focus to a small set of cities. Once you do, the next step will be determining the best tenant pool to target and determining whether you can profitably operate conforming rental properties today and into the forceable future.

Fortunately, real estate is very forgiving. As long as you buy properties in a good location, all but the worst mistakes will be corrected over time through appreciation, inflation and rent increases. I hope this post will increase your odds of selecting a good location.

Nathan, I wish you success.

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