Best cities to buy and hold
Rental Property Investor · Los Angeles CA · Member since 2017 · 100 posts · 37 votes
Best cities to buy and hold
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Developer · Nashville, TN · Member since 2016 · 484 posts · 406 votes
7yWe are 400 doors deep in Indy. Perfect city for inexpensive buy/hold. Not much for appreciation, but stable and growing. Cash flow, cash flow, cash flow. PM me if you want more info on what we're up to.
70 Replies
- Denver, CO · Member since 2018 · 17 posts · 19 votes7y
@Patrick Soukup only one property under my belt. It is a home run, but it was a fluke. I doubt I'll be able to find another like it. I got super lucky. As a bonus, my contractor is force appreciating the neighborhood, so kind of cheating a bit.
How's your luck North? With the business growth of Thornton I think the obvious path of progress will follow 1-25 Fort Collins/Den. That's were I'm putting my money anyway. We'll see. Good luck!
- Denver, CO · Member since 2018 · 17 posts · 19 votes7y
@Patrick Soukup Sorry, hope I'm not messing up the thread. PM if you want to talk more.
- Flipper/Rehabber · Houston, TX · Member since 2019 · 12 posts · 2 votes7y
@Marisa Rowe I am from MI as well . Work in Dearborn. I am but apprehensive about Detroit City for buy and hold . Quick flip maybe . Unless you are investing in the surrounding areas . I am new to investing . So any help would be appreciated
- Flipper/Rehabber · Houston, TX · Member since 2019 · 12 posts · 2 votes7y
@Jeff Schechter interested . Please keep me posted . Thanks
Originally posted by @Stan Thampi:
@Marisa Rowe I am from MI as well . Work in Dearborn. I am but apprehensive about Detroit City for buy and hold . Quick flip maybe . Unless you are investing in the surrounding areas . I am new to investing . So any help would be appreciated
At the end of the day if you can do both you have an opportunity to create and income stream and also make money from flips then why not?
I am looking at both. The idea at the moment is buy the properties suitable for flipping but just hold until I see further growth. That's the plan
- Real Estate Broker · Cleveland, OH · Member since 2018 · 227 posts · 133 votes7y
@Marisa Rowe That's very interesting! I imagine the market is similar to the Cleveland market, I'm finding investment deals all the time with over a 20% ROI, and I do believe both cities are on the upswing, that's very interesting, I must check this out!
- Rental Property Investor · San Antonio Texas · Member since 2018 · 16 posts · 3 votes7y
To all the Investors in Michigan i have an excellent Demo/Cleanout crew at the lowest price. Dm me if you want more information.
- 7yMike D'ArrigoPro MemberTurn key provider · San Jose, CA · Member since 2010 · 4k+ posts · 3k+ votes
Originally posted by @Aristotle Kumpis:
Go to where there is massive job growth, which is mostly in the south and southeast part of the country. Dallas, Houston, Austin, Atlanta, Orlando, Tampa, Jacksonville. Of course there are certain areas within these large cities that have more growth than others.
- 7yEric FernwoodBusiness MemberRealtor · Las Vegas, NV · Member since 2014 · 997 posts · 1k+ votes
Hello @Justin Franklin,
Sustained profitability is what I believe you are seeking. While it sounds simple, you have to get the location, investment team, rehab and the right property to achieve long term profitability. So we have a common goal, I believe any long term buy and hold property must meet three criteria:
- Sustained profitability - The property must generate a positive cash flow today and into the foreseeable future.
- Likely to appreciate over time - Properties appreciate in locations that have increasing demand, which is the key driver for sustained profitability.
- Located in an area where you can make money and business risks are low. Only in such an environment can you achieve both current and long term profitability.
Below are comments on what the above actually encompass before I cover the criteria I followed when selecting my long term buy and hold location.
Static Prices And Rents Are Not Static
Official inflation is running at about 3%, which does not include food or energy. I will use 5% as a more realistic inflation rate (if you drive a car or eat). If you are renting out a property today for $1,000/Mo. and rents are static, what is really happening with buying power?
This is why rent and price appreciation must equal or exceed inflation.
ROI and Cash Flow are Only Snapshots in Time
Too many people choose an area due to the current ROI and cash flow. However, ROI and cash flow are only a snapshot in time. They only predict how the property is likely to perform today; they tell you nothing about how the property is likely to perform in the future. See the diagram below where two properties in two different markets currently have the same ROI.
The red line represents a declining market (rents are constant or declining) and the green line represents an appreciating market (rents and prices are increasing). If you only looked at ROI, the markets would appear to be the same. You need to carefully consider how the location is likely to perform in the foreseeable future and not just assume it will remain as it is today.
Rents Lag Prices
Rents lag prices by 2 to 10 years. See the illustration below.
In a declining market, the current rent actually reflects property prices or 2 to 10 year ago when prices were higher. In an appreciating market rents reflect property price 2 to 10 years ago, when prices were lower. This is why declining or static markets have the highest return, today. Over time, they will continue to decline. In an appreciating market rents (and ROI) and prices will continue to rise over time while your major cost (debt service ) is constant.
Population Growth
If people are moving into a location, it is probably a good location for jobs and a desirable place to live. If people are moving away, demand will drop and prices will be static or declining. Do not buy in places with static or declining populations.
Urban sprawl
Not talked about much but you have only to look at any major city and you will see locations that were once the best in town and are now distressed. This is usually the result of urban sprawl. You need to be very aware of which way the city is expanding and buy in areas where the population is moving. See this site for time lapses. Try:
- Memphis
- Atlanta
- Austin
- Las Vegas - Almost no urban sprawl
- Cleveland
Crime
High levels of crime and long term profitability do not go together. I would not consider any city on the top 100 most dangerous cities list. You might know one of these cities well and know that there is a great area in the city. The problem is that companies looking to open new locations will not choose high crime cities. So, even though there may be good areas in these cities, companies will not choose cities that are perceived as a high crime location.
An Area Where You Can Make Money
There are many locations that have enacted regulations that limit property owners rights to control their properties. A good example is rent control. I would never consider any location where rent control is implemented. Beyond rent control, the next best barometer is the time and cost to evict. As a comparison, in Las Vegas, a full eviction is $500 and less than 30 days. In some cold weather states you cannot evict people during the winter. Or, if someone is sick or over 65. In other locations it can take 1 to 2 years to evict. Tenants are very aware of such laws and know how to work the system. Some people might say that nightmare evictions are rare. I agree. However, I view nightmare evictions like cancer. As long as someone else has the cancer, it is a statistic. If you have cancer, it is a nightmare.
Operating costs vary greatly between cities. Significant cost factors include: property taxes, insurance costs, state income taxes, property age and construction and climate. As an example, we have a home in both Las Vegas and Austin. Below is a comparison of three cost differences:
Remember that it is not how much money you make, it's how much money you keep. Construction and climate are also cost drivers. When I owned properties in Houston and Atlanta it seemed that I was always replacing: roofs, siding, wooden windows and dealing with landscaping issues. Below is a typical Las Vegas property. Not a lot of maintenance cost with Las Vegas properties due to the climate and construction.
The Steps I Followed
Before I continue, the steps below were the result of false starts and failures. Do not think I figured all this out at once. Also, there is no perfect city, you want to choose the best city for you. My criteria:
- Metro size > 1,000,000. Small cities are too dependent on narrow market segments and single employers. High risk over the long run.
- Increasing population - I discussed this earlier.
- No location on the top 100 most dangerous cities list due to declining (or static) property prices and rent.
- Increasing job quality and quantity - You need new employers setting up operations.
- Investor friendly - Check for rent control (os similar restrictions) and the actual cost and time to evict.
- Property cost - There is a tendency for new investors to choose locations with very inexpensive properties. Remember that price is a function of demand. No demand, low price. High demand, high price. Of course, you need to hit a balance. If your budget allows a maximum of $250,000, do not consider coastal California.
- Climate - Properties in areas with hard freezes and excessive moisture will tend to require more maintenance than in milder and dryer climates.
- Property age - The older the property, the more maintenance it will require, unless all the major systems and components have been updated recently.
- Taxes - Both income tax and property taxes are a direct hit on profitability. Look carefully.
- Insurance cost - Insurance cost is a good barometer of the likelihood of damage, usually due to climatic or seismic events. Be certain to take the cost of landlord insurance into account when comparing locations.
This post is already long so I will end here with three additional considerations:
Investor team
You simply cannot do it by yourself and there is no reason to try. You need a solid investment team and the most important member is the property manager followed by the Realtor. Keep in mind that extremely few Realtors have any investment knowledge or experience. And, while property managers know what rents well, they generally know little about profitability. You need a strong team that can work together or I would skip the location. (I can expand on this if interested.)
SWOT
When you are comparing different locations you will have a combination of objective data (numbers - easy to compare) and subjective data (opinions, interpretations, points of view, emotions and judgment - hard to compare). An excellent tool of organizing the date is SWOT Analysis. If there is an interest, I can provide more information on SWOT.
Local Knowledge
Books, seminars, podcasts all provide general knowledge. When you buy a property, you are buying a specific property in a specific location subject to the local costs and regulations. If there is interest in how you can get this local information, let me know.
A long post but I thought your question was a good one and wanted to provide the best answer that I could.
FERNWOOD Team, KW VIP Realty520 Reviews - Rental Property Investor · Houston, TX · Member since 2018 · 13 posts · 8 votes7y
@Eric Fernwood Thanks for the extremely thorough post! Tons of really great info to absorb there, and a ton of good resources dropped in as well. Just went digging online for more info about SWOT Analysis - I like the process!
If you're willing to expand on some of these topics, I'd love to hear your take. What's your strategy for getting that local information? What's your strategy for evaluating if you're able to build a strong team in a new location, and if you determine that you can get a good team together, what steps do you take?
- 7yEric FernwoodBusiness MemberRealtor · Las Vegas, NV · Member since 2014 · 997 posts · 1k+ votes
Hello @John Finch,
Thank you for your kind words. People were very kind to me when I first started investing in real estate. My way to repay their kindness is to help others. In this post I will respond to your question concerning obtaining critical local knowledge. Note that the assumption is that you will be evaluating a potential remote investment location.
It is critical to keep a property consistently occupied by a good tenant. So we have a common understanding of "good tenant", below is my definition.
- Has stable employment in a market segment that is very likely to be stable or improve over time.
- Pays all of the rent on schedule
- Takes care of the property
- Does not cause problems with neighbors
- Does not engage in illegal activities while on the property
- Stays for multiple years
Good tenants are not common. Good tenants are the result of targeting the right tenant pool and careful selection by the property manager. In order to have enough applicants so the property manager can select a good tenant, you need to target the right tenant pool.
In my experience you can subdivide tenants by the amount of rent they are willing and able to pay into three groups. While not always true, you can make certain assumptions that are valid a high percentage of the time. See the chart below.
1. Transient - The people in segment ① are primarily hourly workers. They are different than segments 2 and 3 because they live cash based lives. They may not have a bank account, credit card or loans and they tend to have little or no financial history. Without a financial history, there is no effective way to screen out bad actors. Also, since they do not depend upon credit, their actions today have little or no impact on their future. Therefore skips, evictions and damage judgements are more common. In times of economic stress, they are the first to be laid off and the last to be rehired. In my experience, there are relatively few "good" tenants in this segment.
2. Permanent - The people in segment ② are primarily credit based. You can obtain a detailed financial history which includes how often they move and how good they are at paying bills. This is the type of information the property manager needs in order to select good tenants. They tend to follow the "rules" and pay the rent on schedule. This segment knows that a skip, eviction or property damage judgement will hurt them financially for years to come. Most are "permanent" renters, they stay a long time. This is the pool with the highest concentration of "good tenants" and is the tenant pool we target for our clients.
3. Transitional - The people in segment ③ are also credit based but they make sufficient income that they would normally buy a home. Typically they will only stay one to two years before they buy a home and move out. I call this group "transitional" because they do not stay long. With the short stays it is hard to make money with this pool.
How do you determine critical information like the right rent range to target, property type, and configuration from the other side of the country? Talk to local property managers. Local property managers deal with tenants every day. They have a wealth of information.
Start by Googling for property managers in the location you are considering. You will likely find many. However, not just any property manager will do. Select property managers with the following characteristics:
- They are mid sized for that area. If they are too large, you will not appear on their radar. If they are too small, they will not have the processes, procedures or software to be effective .
- Property managers tend to specialize in specific types of properties in specific areas. You want a property manager that specializes in the geography and type of property you are considering.
Once you have identified 5 to 10 interesting property managers, create a written list of questions. You will ask the same questions of each property manager and write the answers down for later comparison. You will learn a lot about the area from the property managers during this exercise. Below are some example questions.
- How many properties are you currently managing?
- I am looking for properties to attract long term tenants that will take care of the property. If you were looking for such a property what type and where would you buy?
- What is the rent range for such properties?
- What is the average length of time your tenants stay in such properties?
- What is your typical time-to-rent for such properties?
- Is there anything you can think of that I should have asked about. (This is a hugely valuable question. You would not believe how much insight I got from this question.)
- What advice would you give a new investor buying their first property in this area?
- What geographical area do you service?
- What is your mix of properties (single family, condos, commercial, etc.)?
After talking to several property managers, you will have a pretty good idea about the area, tenant pool, major employers, regulations, etc. Plus, you should have a pretty good idea of what types of properties do the best and where they are located. Armed with this information, time to do some homework on Zillow, Redfin or whatever real estate site you prefer. Look for properties that match what you learned from the property manager interviews. You now have what you need to do some guesstimating on whether the location is worth further investigation. The data you will need includes the following:
- Property price(s)
- Taxes
- Landlord insurance cost - call a local agent
- Management fee - You learned this from the property manager phone calls
- Periodic fees - the property details
- State income tax rate
You can now plug this information into the proper formulas. Below are the formulas we use:
- ROI = (Income - DebtService - ManagementFee - Insurance - RETax - PeriodicFees) x (1 - StateIncomeTax) / ( DownPayment + ClosingCosts)
- Cash Flow = (Income - DebtService - ManagementFee - Insurance - RETax - PeriodicFees) x (1 - StateIncomeTax)
The results will enable you to make an informed decision on whether this location makes sense or if you need to look for another location.
Another long post but I hope it helps.
FERNWOOD Team, KW VIP Realty520 Reviews @Brandon Foster Check out this thread
- Investor · Colorado Springs · Member since 2016 · 234 posts · 150 votes7y
Thanks for many great posts everyone!
- Member since 2019 · 23 posts · 1 vote7y
Hello Chris looking to buy some inexpensive property for good cash flow and appreciation. Please PM me for more details. Thank you Originally posted by @Chris Michael:
@Justin Franklin T-A-M-P-A
Clearwater beach voted #1 beach in the nation USA Today
Ybor City, Seminole Heights, Dunedin, Tarpon Springs, Indian Rocks Beach, Madeira Beach. It is a gold mine here. Get in before the billions of dollars are dumped into the infrastructure and economy.
I am a Realtor as well and happy to help you out in any way if needed.
- Rental Property Investor · Los Angeles CA · Member since 2017 · 100 posts · 37 votes7y
Originally posted by @David Leggett:
@Marisa Rowe That's very interesting! I imagine the market is similar to the Cleveland market, I'm finding investment deals all the time with over a 20% ROI, and I do believe both cities are on the upswing, that's very interesting, I must check this out!
What type of deals are you finding with this type of ROI? Buy and hold or fix and flip??
- Rental Property Investor · Los Angeles CA · Member since 2017 · 100 posts · 37 votes7y
Originally posted by @Mike D'Arrigo:
Originally posted by @Aristotle Kumpis:
Go to where there is massive job growth, which is mostly in the south and southeast part of the country. Dallas, Houston, Austin, Atlanta, Orlando, Tampa, Jacksonville. Of course there are certain areas within these large cities that have more growth than others.
Mike, help me make sense of this graph...as a long term investor, I'm thinking it's better to buy into a market with a higher cap rate where home prices are low, with potential for those prices to increase driving the CAP down. I'm assuming the population and job percentages are 2018 trends?
- 7yMike D'ArrigoPro MemberTurn key provider · San Jose, CA · Member since 2010 · 4k+ posts · 3k+ votes
@Justin Franklin alot of the high cap rate markets do not typically have much appreciation or have already seen price pushed up over the last several years. Personally, I like markets that have the best combination of cash flow and economic/demographic trends like Indianapolis and Kansas City as the chart shows. Most of the other high cap rate markets have stagnant or declining populations and jobs. markets like Dallas have booming poulations and job growth but week cap rates, It's a matter of finding that sweet spot,
- Rental Property Investor · Mount Dora, FL · Member since 2017 · 33 posts · 35 votes7y
I can't help but think Detroit would be a great area to buy & hold. Does anyone have any extensive experience or thoughts on the Detroit area?
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