Research for first RE Investment Opportunity

3 Replies

I am very new to real estate and BP but I have been spending every minute of my free time reading books, blogs, articles, listening to podcasts, and talking to other real estate investors to try and soak up as much knowledge and advice as I can. I'm trying to decide what my plans and goals are so that I can strategize and get tactical in obtaining these goals. I would love for people to give me advice on buying my first property. Also, where do RE investors go to analyze and research cities/neighborhoods to determine whether or not a place is a good market and what are the key indicators that I should be looking for within those cities/neighborhoods. 

Hey @Tyler Santos , welcome to the platform! 

As you stated, it's important to first define your investing goals. That is, what is your appetite for cash flow vs appreciation. How risk averse/affine are you? Also are you looking to buy and hold, fix and flip, or maybe house-hack. The choices you make will dictate where and what kinds of properties to look at. 

As for researching cities and neighborhoods, here are my suggestions.  

I suggest beginning your search by looking at the data, such as demographic data from the Census. This info will give you a decent idea of what to expect and help filter down your search to a few cities.

Some of the metrics that I find valuable to understand are:

- Population

- Home Values

- Household Incomes

- Rental Vacancy Rate

- Homeowner Vacancy Rate

- Poverty Rate

- Educational Attainment Rate (High School/GED & Bachelors)

- Number of Housing Unit

- Rent to Income Ratio

- Rent to Price Ratio

- Population on SNAPS (supplemental nutrition assistance program) percentage

- Property Tax Rate

- Median Age of Buildings

- Number of Structures by Units (SFR, Duplex, Triplex, Quadplex, etc...)

- Median Rents by Number of Bedrooms

- Unemployment Rate

- Employment Sectors Percentages 

- Owner to Renter Ratio

- Family and Household Sizes

These are just some of the indicators that will help you understand the quality of an area as well as the kinds of returns one is to except.

Also take into consideration the direction in which each of these market indicators are trending. This will better help you get an understanding of not just where market is today, but also where it may be heading.

Once you have selected a few cities that meet your criteria, it's then time to dive deeper into researching the sub-markets that comprise each of them.

The sub-market selection will have more of an impact on price as well as investment performance than the city itself.

Since this is your first investment, I don't suggest trying to find the highest cash flowing property however. The reason being that this will likely be in a D/F neighborhood, which will expose you to more risk than needed when starting out.

Hope this helps

@Art Perkitny

This was very helpful Art! Thank you so much! You reminded me of another question I’ve been meaning to ask...what constitutes a neighborhood being either A, B, C, D. And what resources do you use to find this type of data other than the US census? Or can most of that data be found there?

Thanks again!

@Tyler Santos

Glad you found my answer helpful!

Here is a great blog post on BP regarding location grades.

As for my take on the matter, I tend to think of location grades as a sort of risk score, similar to how bonds and credit are measured by bond ratings and FICO scores respectively. 

The lower the grade the riskier the investment and the more enticing the returns. This will be true on average, however real estate is a less efficient market meaning it's possible to find good returns in very low risk areas. 

That being said, don't think that the first property you find with a pro-forma claiming to yield 2% rents is a slam dunk. 

The data listed above is a good starting point for determining the grade of an area and will help you avoid erroneously investing in a riskier area.

Also, all of the metrics I mentions are from the American Community Survey and are available at market granularities ranging from the state level all the way down to small groups of blocks within cities.