Out-of-state investors: What metrics do you use to evaluate real estate markets for long term rental properties?

11 Replies

Hi All,

I live in the SF Bay area and because of the crazy real estate market here, I am looking out-of-state to restart my real estate investment portfolio.  Because I am not investing in my local market, I am going to need to come up with a systematic and objective way to evaluate other markets to determine which markets have the characteristics that will generally be favorable for the type of real estate investing I want to do.  

This analysis will help me "green light" or "red light" different markets.  For the markets I determine are "green light" markets, I will then start a dual parallel-track process of checking investment opportunities to see if the numbers work (generally speaking) and contacting and interviewing property managers to get their take on the market and begin building out a potential team of local "foot soldiers".

The mind dump of metrics I came up with for my analysis so far are (in no particular order):

  • Recent Population growth (2010-2013)
  • Median gross monthly rent (2013)
  • Median gross monthly rent 3-year change (2010-2013)
  • Vacancy rate (2013)
  • 3-Year change in vacancy rate (through 2013)
  • Rent as % of income (i.e. median monthly gross rent as a fraction of median household income)
  • 3-Year change of rent as % of income
  • % of households that are renters
  • 3-Year change in % of households that are renters
  • Median price for all SFHs (December 2014)
  • 3-Year change in median price for all SFHs (through December 2014)
  • Median price for all 3BR units (December 2014)
  • 3-Year change in median price for all 3BR units (through December 2014)
  • Median price for all 2BR units (December 2014)
  • 3-Year change in median price for all 2BR units (through December 2014)
  • Median gross annual rent (i.e. monthly gross rent * 12) / Median price for all homes - I know I am kinda mixing apples and oranges here, but it's the closest I can get using available objective data
  • Unemployment rate
  • 3-Year change in unemployment rate
  • GDP growth (time period depends on data available)
  • Job growth (time period depends on data available)
  • Household income growth (time period depends on data available)
  • Proximity to major international airport (i.e. how easy will it be for me to get there?)

My plan is to spread this data for about 15 different metro areas and compare the results.  Based on those results, I'll identify my top 5 metro areas into which I'll do more research about specific investment opportunities.  My investment strategy is to buy and hold rental properties long term for monthly cash flow and this will be the basis for which I identify my top 5 metro areas.

Can anyone think of any other metrics I should look at when evaluating different real estate markets?

Thanks!

Greg

@Greg Johns  

  all the data you state is easily attainable.. what I like the best is your recognition of the fact that you need to get to the market easily. 

At the end of the day there a many great markets out east.. you can throw a dart really.

It will come down to quality of asset in the beginning then of course PM will make or break your investment.. that is if you buying class B or lower... I have quite a few class A's that I can self manage even from the west coast.. I just use a broker to place tenant then handle it form there just need a really good handy man and your set.. defiantly cannot do that on B and lower though

Medium ksqoekox 400x400Jay Hinrichs, TurnKey-Reviews.com | Podcast Guest on Show #222

This post has been removed.

@Greg Johns  

There is a category of 'softer adds' that I think are nice to consider. These may not factor into the same distribution, but can be placed in another score that could weight similar metros against each other:

  • Diversity of business types / employers. Example: Detroit - Not Diverse, Little Rock & Chicago - Very Diverse.
  • Property tax rates.
  • State Government >> landlord friendliness score. Example
  • Nearby universities can be viewed as a + or -, depending on your tenant base. In my opinion, mostly positive, because of the cultural overflow.
  • State reputation for public schools/education.
  • This is a tricky one, but I would try and derive a natural disaster score. Example: If you were evaluating two similar areas, but one has had two rough tornadoes in the last decade. And the other, none. I go with the other.

Just a few, but should help you get a more rounded picture on two areas that are exhibiting similar numbers in other ways.

@Trevor Ewen  

  but if they were both Tornado prone law of averages would say the one that had the two will not have another  :)... But this is a big issue with insurance.

TAx's insurance are fixed cost that must be accounted for.

Medium ksqoekox 400x400Jay Hinrichs, TurnKey-Reviews.com | Podcast Guest on Show #222

As Jay noted property taxes long term are cash flow killers. Definitely chuck that in your metrics as some of these areas will tax you out of a house and home. I have ran comparisons like Texas vs Cali...for 500k level holdings it becomes a multiple six figure difference over time. I see folks disregard this consistantly. Good luck with your search!

@Jay Hinrichs  

As a big believer in regression to the mean, I do get your point :) 

As a native Illinoisan I am often found on the coast(s) exclaiming the Chicago-area lack of natural disasters. You could argue that winter is a natural disaster, and that Chicago politics is a man-made disaster. 

Nonetheless, certain areas rank high in my mind as well insulated against disasters that are all too common in other areas. It's one of the only things I like about my hometown. It's also why you can't really place a number on this, but I would keep it in the qualitative ratings.

@Jay Hinrichs  you mentioned that the data that @Greg Johns  is researching is easily attainable. Do you mind sharing what resources you use?  I am also looking for rental property and want to do some socio economic # crunching prior to pulling the trigger. 

Originally posted by @Jay Hinrichs :

@Greg Johns 

  all the data you state is easily attainable.. what I like the best is your recognition of the fact that you need to get to the market easily. 

 Yeah, that popped into my head as I was looking for plane tickets to go back east to visit my parents this Spring.  I thought "oh snap, I need to be able to get to these markets easily, without having to take a flight that has 3 stops with significant layovers or uncomfortably close connections.

Originally posted by @Trevor Ewen :

@Greg Johns 

There is a category of 'softer adds' that I think are nice to consider. These may not factor into the same distribution, but can be placed in another score that could weight similar metros against each other:

  • Diversity of business types / employers. Example: Detroit - Not Diverse, Little Rock & Chicago - Very Diverse.
  • Property tax rates.
  • State Government >> landlord friendliness score. Example
  • Nearby universities can be viewed as a + or -, depending on your tenant base. In my opinion, mostly positive, because of the cultural overflow.
  • State reputation for public schools/education.
  • This is a tricky one, but I would try and derive a natural disaster score. Example: If you were evaluating two similar areas, but one has had two rough tornadoes in the last decade. And the other, none. I go with the other.

Just a few, but should help you get a more rounded picture on two areas that are exhibiting similar numbers in other ways.

These are great!  Thanks!  

One question I have is how to quantify something like "diversity of business types"?  Is there a specific metric available that can be compared across different areas? 

 Some indicators like "nearby universities" can be completed with a simple "yes" or "no".  And then you could add in "number of colleges/universities in the area".  Of course, then you have to define "the area", but at that point, you are really getting into the weeds of the analysis.

My market analysis spreadsheet is getting VERY large and I feel myself slowly becoming a "data nerd", lol.

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