General Real Estate Investing

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Craig Micon
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  • Madison, WI
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Predicting the Future of All Top 50 MSAs

Craig Micon
  • Investor
  • Madison, WI
Posted Nov 27 2016, 16:57

As a new investor looking at markets out-of-state, I found this blog post by @Scott Trench - 2016 Best and Worst REI Markets - to be super helpful. For those who haven’t read it, it provides a ranking of the attractiveness of the top 50 MSAs over the past year.

In the comments to Scott’s blog post, Brian Burke suggested a new analysis that would help investors forecast the future potential for the top 50 markets to complement Scott’s post, which focused on the last year in review.

I've attempted this analysis below. I'm very new to REI (currently looking for my first property), and this is my first BP post, so I'm sure some of the content below is very naive. I'd love to get your feedback for improvement. The full analysis is included in this Excel doc.

TOP 10 MSAs

Below are the top 10 markets expected to improve over the next year ranked by a metric called Future Index.

Nashville takes the top spot. This means that, one year from now, Nashville is most likely to improve its position in the 2017 Bigger Pockets market ranking. Rent-to-price and appreciation should be expected to improve from their currently levels relative to other MSAs.

Interestingly, Detroit took the 8th spot. Now, before all the Detroit fans take shots at @Joshua Dorkin please read the methodology section at the bottom of this post. There are a lot of caveats. In addition, Detroit’s starting with a much higher unemployment rate than other MSAs, which can be viewed as an opportunity or a risk.

BOTTOM 10 MSAs

Virginia Beach takes the bottom spot. Population and employment change are relatively flat. Combine that with a high vacancy rate, and you get a low Future Index.

METHODOLOGY

Future Index takes four components into account:

1. Population change over the past year

2. Employed population change over the past year

3. Building permits issued for new housing units over the past year (relative to population size)

4. Vacancy rate (current)

The basic idea is to use #1 and #2 to project future demand and use #3 and #4 to project future supply.

#1 and #2 are positive signals. #3 is a negative signal in Future Index because new units will add to the supply of rental units suppressing prices. In practice, it can also be a positive signal because it’s “social proof” that a market is expected to experience appreciation. #4 is, of course, a negative signal.

The Future Index calculation is:

Average(#1, #2) - #3 - #4/10

This isn’t a super scientific formula. It’s more of a rule of thumb. I’d love suggestions for improvement. Hopefully, it gives a basic indication of where the local market is headed and is a jumping off point for deeper investigation.

One note on vacancy rate. It was divided by a factor of 10 to help normalize for the fact that there will always be a baseline level of vacancy in any MSA.

If you'd like to dig in further, all of the details are in this Excel doc, along with instructions about how to pull all of the raw data.

CONCLUSION

Being very new to REI and BP, I'd love your feedback and suggestions to improve this analysis and also to hear whether the ranking is in line with your own expectations.

I currently live in CA and am looking to invest out-of-state, which sparked my curiosity about other markets. For other new investors looking out-of-state, I’ve also found it to be helpful to think through who you can partner with locally, travel time, and how much you’d personally like to visit before picking a market.

BP has been insanely helpful getting me started in REI. Thanks to all of the folks out there who post regularly and help new investors like myself get started!

@Scott Trench

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Brian Burke
  • Investor
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Brian Burke
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Replied Nov 27 2016, 18:05

This is an awesome "first BP post", @Craig Micon!

I neither agree nor disagree with your findings because I'm neither a demographer nor an economist, but I do see a lot of the usual suspects on your top ten list (although Detroit was a surprise but understandable).  

The bottom 10 were a bit unexpected but why would I know any of those?  I only hunt out good markets and hadn't placed much focus on the worst. I suspect that the locals from markets on that list will have something to say in defense of their turf.  Or they'll just be glad that a few BP folks will get scared away and give them less competition. :)

Whether the methodology is sound or flawed it's always interesting to see how various data points and ways to use them translate to REI performance prognostications. Now you should start tracking the historical data that develops in future quarters to see if you were right.

Thanks for taking a shot at it!

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Craig Micon
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Craig Micon
  • Investor
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Replied Nov 27 2016, 19:19

Thanks Brian! Appreciate the feedback, and I'm looking forward to hearing the rest of the community chime in too!

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Denny Robert
  • Rental Property Investor
  • St. Louis, MO
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Denny Robert
  • Rental Property Investor
  • St. Louis, MO
Replied Nov 27 2016, 19:23

@Craig Micon

Great first post! Setting an incredibly high bar!

I would love to hear from St. Louis and Kansas City folks, as I know those markets are popular with the cash flow folks.

It would be awesome to see these projections broken down to best/worst appreciation markets and best/worst cash flow markets.

Another thing we should remember is each market has submarkets that do better and worse. I know St. Louis has areas I wouldn't take free property in.

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Account Closed
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Account Closed
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Replied Nov 27 2016, 19:32

I like it, @Craig Micon. Partly b/c it confirms, or at minimum, appeals to my biases (both a Detroit and Atlanta investor since 2011). Not investing as much now b/c prices are higher but still both are decent places to look at it if a good bargain can be found. 

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Carrie Carlton
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  • Nashville, TN
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Carrie Carlton
  • Investor
  • Nashville, TN
Replied Nov 28 2016, 04:47

Great post! I am in the Nashville market since 2012. I have been thinking a lot lately about much my investing was luck. Nashville has seen huge appreciation and rent increases, but there is a lot of chatter about a bubble. I have a 3/2 in East Nashville that I just finished rehabbing and am not seeing the interest I normally do. I think part is due to the time of year/holidays, but I have to wonder if the multifamily market is getting more competitive because of all the condos going in EVERYWHERE. It gives me relief to see your projection of growth for the area at least for next year. I have friends that are looking for places to buy, not because they are ready to own a home, but they feel they won't ever be able to afford a house in Nashville  ( especially interior of the city ) in the future if they don't buy now. That is indeed a crazy thought. If there is a downturn in the Nashville market and/or I invest in another area, I think it will be hard psychologically for myself because the rate of returns I have seen with my first investments. 

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April Crossley
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April Crossley
  • Investor
  • Reading, PA
Replied Nov 28 2016, 06:18

I have found that no matter what these studies and surveys say- if you want to invest in a market outside of your own then you need to go there and spend a significant amount of time in that market. Everyone invests for different reasons (cashflow, appreciation, etc). And everyone has a different risk tolerance. The top 10 MSA's tend to be ones I avoid as they are already way over priced and very competitive. I listened to a podcast the other day where a very experienced investor was slamming an are in TN based on crime rate and saying how no one should invest there and I know a guy that owns TONS of apartment buildings in the area and is absolutely killing it on cash flow and loves the area for investing. So while growth in the area is important and I do believe all these studies are great and can give you some guidance I still feel like you have to explore. I had a coach once that kept it very simple: April - where do you like to travel to? Where do you travel to often? You will have to go check on your buildings so think of markets you like to go to. So I did... my parents live in FL, my sister lives in NC... I travel there all the time. There are a ton of sub markets within these MSAs... so I fly there, spend some time with family and go to the local REIA meetings and I am just relentless about asking people for information on different areas in their submarket. None of these studies, calculations, or surveys be able to even come close to being able to give you the insight that boots on the ground can. I take everything I see in these studies with a grain of salt. For everyone I know that is saying: stay away from that market.... I know someone else that is killing it in that market. You have to find a market that matches your investment criteria and risk tolerance.

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Scott Trench
  • President of BiggerPockets
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Scott Trench
  • President of BiggerPockets
  • Denver, CO
Replied Nov 28 2016, 06:45

@Craig Micon Wow! Fantastic. Thank you so much for putting this together. This is what I think a ton of folks were looking for. Let's connect next year when we put together the next index and see what this works out to!

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Account Closed
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Account Closed
  • O'Fallon, IL
Replied Nov 28 2016, 07:28

Interesting data but in my opinion, it comes down to the submarkets and how the submarket(s) you are operating in complement your strategy. As well as, the personal reasons you mentioned!

Disclaimer: I operate in the St. Louis MSA!

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Shital Thakkar
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Shital Thakkar
  • Specialist
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Replied Nov 28 2016, 09:23

@Craig Micon, Great article.

I like this kind of study but i invest in Texas only as i live here and i can see growth so i can have more confidence.

My only concern with this data is ... different top 10 city comes up in list every year... i prefer to go with long term trends.. as we can not change our investment every year in real estate similar way we can do in stock market. I prefer data shows list of top MSA for next 10 - 15 years.

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Craig Micon
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Craig Micon
  • Investor
  • Madison, WI
Replied Nov 28 2016, 15:56

@Scott Trench I'm happy to help when you refresh the analysis. PM if you'd like me to walk you through anything. There are also detailed instructions in the excel doc.

@april 

@April Crossley based on my very early conversations, I've come to a lot of the same conclusions. I'm looking at Indianapolis because that's where I'm from. I like visiting and always have a free place to crash.

Thanks everyone for the feedback!

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James E.
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James E.
  • Investor
  • Boston, MA
Replied Feb 26 2018, 18:03

Hey @Scott Trench and @Craig Micon ... looks like we're at about the 1 year mark from Craig's original post and analysis. I'm curious to see how these forecasts bumped up against actuals. Are you two still thinking of collaborating on another report?

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Scott Trench
  • President of BiggerPockets
  • Denver, CO
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Scott Trench
  • President of BiggerPockets
  • Denver, CO
Replied Feb 27 2018, 08:18

@Craig Micon - nice work on this. You nailed it with Nashville, although it looks like there were some differences in some of the MSAs. Overall I think you did a nice job with the tough task of forecasting! @James E. tagging you so you know I replied :).

https://www.biggerpockets.com/renewsblog/biggerpockets-2017-investment-market-index/

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Craig Micon
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Craig Micon
  • Investor
  • Madison, WI
Replied Feb 27 2018, 17:37

Thanks @James E. and @Scott Trench. Glad Nashville was on the money! I have no plans to refresh this since I picked a market and it takes a little while to update, but I'm happy to help if others would like to put together a refresh.

Good luck either way!

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Don Wede
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Don Wede
  • Investor
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Replied Jan 23 2019, 17:39

According to my research, commissions will continue to drop making real estate agents disappear and real estate will be more of a technology-driven. By 2020, investable real estate will have grown by more than 55% compared to 2012.

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