What makes a great investment market?

55 Replies

Hey @Mindy Jensen ,

Here are some criteria which comes from a landlord's perspective (who has a Land banking mentality):

1) Area with tenants where you feel confident to manage them (can different from person to person, some are good with dealing with A-class tenants, some are better at dealing with C-D class)

2) All things equal, the closer to where you live, the better.

3) With sustainable cashflow (ie. land banking requires waiting, so if you can sustain the houses (at least break even plus some buffer), then you can at least keep the house forever).  Again, different people have different answer.  Where you can buy will be dependent on what your cost of capital is.

4) Of course, have the potential (NOT guarantee) the town/city will be developed.

P.S. Think of this strategy as buying a house equals to getting a perpetual option to wait for the city to turn (since you run your portfolio with sustainable cashflow per #3).  Worst case scenario, you finish paying off your debt and own the house free-and-clear after X years.  Best case scenario, the city you pick turns around and you hit jackpot.

Here's a great blog post about how to analyze a city for investing if you haven't already taken a look at it. http://www.biggerpockets.com/renewsblog/2015/05/10/invest-out-of-state-how-to-analyze-a-city/ I have been digging into CAFRs for cities I'm interested in and they contain some great information.

@Mindy Jensen

 Great topic. It will be interesting to read others perspective on this.

Our goals are more long term and we do not need a lot of cash flow in the near future. Having said that  we do not want to have negative cash flow so we pay higher than average down payment. So our choices are based on that

1) Neighborhood and tenant class (We prefer A or B class ). We are okay sacrificing cash flow for this.

2) Long term ROI or upside potential ( we are okay with 1 to 3 year with break even i). We are interested in value add and appreciation over long term.

3) Vacancy rate and demand in the area ( we know in the areas we will buy the cap rates will be low so we want to reduce vacancy as much as possible and we want area where there are less rental properties)

4) Job growth and population growth

5) Average rent in the area and rent growth potential

6) Prefer close to where we live as possible. We like to drop by our properties once a month and be able to go there quickly once there is an issue

My partners and I only buy where we have direct boots on the ground. A lot of folks will say we're missing opportunities and they're right, but that's our strategy. 

Neighborhoods can differ street by street and we feel the only way to garner the intimate knowledge of those neighborhoods is to be there, boots on the ground. 

A case in point. Of the founding partners in my company, two lived on the same street in DC. One of them moved to Seattle six months ago and was back in town last weekend. Since he's left, three major projects have started one street over and will completely change the demographics of that street. When he arrived, he couldnt believe how fast the projects started and their current progress. 

I already knew this because I walk the streets everyday, I speak with the neighbors, and I'm constantly plugged in to community events.

Originally posted by @Mindy Jensen :

There is a lot of debate about staying local vs. investing out of town. What factors do you consider when deciding what market to invest in? What do you think makes a great market?

 I'm a simple man....... I just focus on buying any home in any city or market for the RIGHT PRICE and pow.... I have a profitable deal. 

Kinda being a snarkie I know but I'm really not.  It's what I love about this "special knowledge" we all share.  Buy the investment right and the rest is so much easier.

Jim

1) Low vacancy (<5%)

2) The 1% rule is easy to get to, 1.25% of better is available in the market

3) solid employment in the area, not a city that is dependent on one thing

Holy cannoli! Thanks so much, @Brie Schmidt , @Che Chiu Wong , and @Radhika M. for giving such comprehensive lists! 

@Scott Lewis , I have always invested with "Boots on the ground" but I have always had a good market before. Now my market is overpriced and hot hot hot! and even finding anything is tough, let alone a good deal. 

@Jim Keller , I don't think that is snarky. How many times has it been said on BiggerPockets that you make your money when you buy?

@John K. , those criteria make for a great market - and Madison has a great job market and a great pool of renters. (I used to live in Monona and I miss the Farmer's Market!)

My list would be as follows (and of course an area doesn't have to hit every point to make sense):

- Decent sized population (at least >100,000)

- Growing population

- Job growth too

- Low crime rate

- Good schools

- Low unemployment rate

- Relatively low priced homes 

- Good rent/cost ratios

- Increasing rents

Originally posted by @Jermaine McIntosh :

@Che Chiu Wong

 Hey I am newbie to real estate investment..what are the tenant classes that you spoke of in your post?

 Tenant classes refer to the quality of your tenants, often governed by average monthly income.  "A" tenants mainly consist of high-end white collar professionals (think of New York Manhattan high rise buildings), whereas "D" tenants are the other extreme (really low income neighborhoods").

Keep in mind "A" tenants does not necessarily mean that they are easiest to handle.  Yes, they probably won't have much trouble to pay the rents, but they also come with a lot more expectations for the living quality, meaning you need to be on top of your game at all times.  They are also "renters by-choice", that they can always decide to buy their own place to live so they are much more mobile and willing to leave their apartments --> higher turnover rate from the landlord's standpoint.

Originally posted by @Jim Keller :
Originally posted by @Mindy Jensen:

There is a lot of debate about staying local vs. investing out of town. What factors do you consider when deciding what market to invest in? What do you think makes a great market?

 I'm a simple man....... I just focus on buying any home in any city or market for the RIGHT PRICE and pow.... I have a profitable deal. 

Kinda being a snarkie I know but I'm really not.  It's what I love about this "special knowledge" we all share.  Buy the investment right and the rest is so much easier.

Jim

 Do you do mostly flips?  If so, then in-out prices are what it matters.  If you are doing long-term hold, you will also need to consider how you maintain your assets as well.  The gameplan needs to be there.  One thing I agree with you though is that if you get the investment at right price, the rest is much easier (easier to refinance the money you need, easier to flip etc.)

Lots of good advice on this topic.  I will take it all in as I'm considering getting into the buy and hold side of this Real Estate adventure.  Thanks guys for all of the great input.

Originally posted by @Mindy Jensen :

You're right about CO being a super hot market. That being said, there are always situations out there that are unique opportunities that most investors will pass up. 

For instance, we're working with a seller who is the majority heir, but there are four other heirs. We've been working for months to get everyone lined up, as well as working with our tax office and utilities to get her bills reduced. Because of our willingness to work a tough deal, we're buying 30% below market. 

And we're executing our mission to improve lives through real estate.

Hi Mindy,

I work at an appraisal firm and we do extensive research into markets all around the country to value or determine the feasibility of proposed affordable developments. We start by looking at overall population and number of household trends over the past decade, we then look at what they are expected to do over the next five years. We also look at employment and unemployment trends from 2003 to 2015. We consider the best markets to be those that are consistently growing in population, number of households, and total employment and are above the national average in all of those categories. The city's unemployment rate being below the national average is always a good sign, but less reliance is placed on unemployment than the previous three factors. We also look to see if there are any employment expansions in the area that would increase the demand for rental housing.

When looking to invest in small multifamily homes, I would look research vacancy trends and talk to some real estate agents in the area. The populations, employment and household trends are only available at the city level (to the best of my knowledge) and, as was mentioned before, some city's vary street by street. I'd look into crime rates in the property's immediate area and talk to local investors/real estate agents to get the best feel for your market.

Originally posted by @Bryan C. :

@Brie Schmidt  & @Andrew Syrios

Where are you pullling that data from?

 I use wiki, neighborhood scout, and google.  That gets me in the general vicinity.  The rest is really gut instinct.  

@Che Chiu Wong

While I generally agree with your statement, I would add that many A class tenants have good reasons they do not buy and may never buy. Such as:

1) Their job is in flux much of the time. I once got an offer I thought was a good offer but I pushed for more because I would have had to sell my place that I just bought to move. The lack of flexibility was a real problem and is for many people who value a flexible lifestyle as many millennials increasing do. 

2) They got burned by the crash and now view real estate as a bad investment.

3) RE generally is a bad investment for many people who don't buy right in markets that are not zooming up and I know a number of ppl who think this way. 

4) They are older and do not want to deal with a house. 

I would add a few things that were not mentioned such as:

1) Housing stock. Some markets have better housing stock than others. I prefer markets with a lot of well built brick houses. Generally replacement costs are much higher and maintenance lower. 

2) If investing out of state the team I can build there is as important as anything else.  

3) Although this runs counter to point 2, I like to look where the masses are not. Generally the areas that have really strong fundamentals are well-known and seeing appreciation already. 

There are some great criteria already listed. My only addition is this: The rental house you buy is only as good as the management that takes place. If it's mismanaged, even if you buy it right, the asset will not produce as expected. If you buy out of town be willing to fly to that location and make certain your goals are consistent with the management you find. In reality each house you buy is its own business. Your business can have the best product in the world but bad management can keep it from making money. 

@Wynn Meyer

 The CAFR for Milwaukee is from 2013. Is that typical? I would also add that there is often a bit of a tradeoff. The big booming cities also tend to have high price to rent ratios as do the A neighborhoods with low crime. In both cases the tradeoff tends to be cash flow. So in your search you need to have a goal in mind for what kind of investing you are looking to do.

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