How to decide between two markets?
Member since 2019 · 29 posts · 4 votes
Hell there!
So I live in Wisconsin and I'm currently trying to decide which of two cities I should start investing in, these being Madison and Milwaukee. From what I can gather they're both good cities but I just can't decide which one to choose. I plan to live in Madison so there's an advantage to investing closer to home, but at the same time Milwaukee has the bigger population and area. Any of you wonderful people have any input?
Preferably I'd be able to invest both cities after a while but for now I'm just looking at investing in one( I say that but it'd be in a couple of years since I'm still in High School).
Also for later reference how do you decide which markets are worth investing in? And if you're willing to share (AKA tell me your secrets, wise old user) what resources do you use to find out if a particular market is worth it?
@Victor Martinez Lazaro there are many criteria you can apply to determine where to invest - it's a little bit like asking "What is the best car?" - reply: "For what? Robbing a bank, towing a boat, hauling kids,..??"
I believe the best market for you, is the one you know well and you invest in. Every metro area has many submarkets and satelite markets you can sidestep into - if you don't like the center.
Scott likes rural areas and is highly successful. I invest in Milwaukee, but not in the center. In fact we pulled out of Milwaukee propper and consolidated and expand into the northern suburbs. Why? We are moving more money with fewer properties. And a very practical reason: because that's where I live and I don't want to drive 45 minutes to meet up with a contractor and check on todays progress.
I stay away from the bigger cities, they tend to be bigger headaches, if you can afford and the cash flow is the same tho, I would rather be in Madison. however I dont see the cash flow being even close with Madisons high prices, dont write off some of the surrounding areas, up to an hour out of Mad Town, your interest there sounds based on where you will live, and starting out thats probably what you should do, especially if you will be self managing.
@Victor Martinez Lazaro there are many criteria you can apply to determine where to invest - it's a little bit like asking "What is the best car?" - reply: "For what? Robbing a bank, towing a boat, hauling kids,..??"
I believe the best market for you, is the one you know well and you invest in. Every metro area has many submarkets and satelite markets you can sidestep into - if you don't like the center.
Scott likes rural areas and is highly successful. I invest in Milwaukee, but not in the center. In fact we pulled out of Milwaukee propper and consolidated and expand into the northern suburbs. Why? We are moving more money with fewer properties. And a very practical reason: because that's where I live and I don't want to drive 45 minutes to meet up with a contractor and check on todays progress.
Congratulations on deciding to get started early. In my opinion, deciding which market to invest in can be broken down into two overarching questions.
1. Based on the economic data I can gather, is this market poised for long term growth?
2. Do I have a competitive advantage in this market which I can utilize to generate returns which meet or exceed my own investment return criteria?
In order to answer question number 1, here are a few resources you can leverage:
-Bureau of Labor Statistics - bls.gov
-Trulia - trulia.com
-We Are Apartments - weareapartments.org
-City Data - city-data.com
-Vendors and Professionals who operate in that market - Real Estate Agents, Mortgage Brokers, Contractors, Small Business Owners, etc.
-Attend Local Meetups and get a gauge for that market
In order to answer question number 2, you will have to ask yourself the following questions:
-What is my specific RE strategy?
-Which market is this strategy best suited for?
-Do I need a team in order to execute this RE strategy? If so, which market is this team best suited for?
-What relationships can I leverage in these markets? If none, am I able to more effectively build relationships in one market versus the other?
These are just a few things that you can think about before jumping in, and in doing so hopefully one market will stand out to you. The main point here is that whichever strategy and market you decide to pursue needs to be something that makes sense for you. It will be your business, your money, your time and your life, so figure out what's important to you, where you can capitalize on the resources you have, what you're good at and build your business around those things.
Another thought, why not invest in both? Good luck!
@Victor Martinez Lazaro I'll chime in as someone with experience investing in Milwaukee while living in Madison. The reason I chose Milwaukee is for the great rent/price ratio compared to Madison. It is very difficult to find deals in Madison, whereas Milwaukee appears to have a plethora sitting right on the MLS.
The distinction to make is appears to. As Marcus points out, the market you choose should be based on what your needs are. I was looking for cash flow so I went to Milwaukee first. Now that I've got some cash flow and stabilized properties (after many hard lessons) I'm looking for convenience.
I recently sold my primary residence in order to house hack a duplex here in Madison. I'm also going to be focusing all my efforts on finding deals in the Madison and surrounding area (specifically west side) since that is where I'm living and I'm tired of long drives. Similar to @Marcus Auerbach I'm tired of driving 45 minutes+ (1.5 hours to Milwaukee) in order to see deals and talk with contractors. I've got good PM there and am happy with my current holdings. I've hyper-focused my geographic area now in Milwaukee and plan to only see properties that fit certain criteria within this tight range.
Since you are young and likely have more hustle than money, you may be fine driving all over the state to find deals. I'm past that stage so it isn't as attractive to me. That said, only 2 years ago I was more than happy to make multiple trips to Milwaukee per month because I was chasing cash on cash return.
Lastly, if you are interested in looking outside of these two markets, reach out to @Garrett Davis. He runs a PM company down in Rock County and finds lots of solid cash flowing deals.
@Victor Martinez Lazaro. If you need a realtor in the area or have questions. Reach out anytime.
Great question Victor. Well a great place to start is looking up the key three as we refer to them - the Population Growth, Job Growth and Unemployment. When picking an investment market we like to see those numbers either match or exceed the national average. For example, population and job growth needs to be as good or better than the national average and unemployment should be lower than the natl. average.
Next we like to look at the housing market vs the median income. Is the median house price more than 3 times the median income? If so then its likely to be a good renters market.
And if you want to really dive into it, how many new homes are being built? If new homes match the population and projected growth then there you're probably going to have issues with occupancy rates, i.e. a lot of competition.
And even more into the weeds, whats the demographic of each city? Does the city have a large millennial or retirement population? Whats the job market like? Large amount of college students, military, traveling professionals such as nurses, doctors, teachers, etc? They tend to rent more these days.
Hope that helps, best of luck.
I stay away from the bigger cities, they tend to be bigger headaches, if you can afford and the cash flow is the same tho, I would rather be in Madison. however I dont see the cash flow being even close with Madisons high prices, dont write off some of the surrounding areas, up to an hour out of Mad Town, your interest there sounds based on where you will live, and starting out thats probably what you should do, especially if you will be self managing.
I see, what kind of headaches did you encounter while dealing with bigger cities?
Also thanks for the advice I'll check out the surrounding areas to see if any markets look appealing or have any good deals!
I should've clarified earlier, I'm currently looking at buying and holding, sorry about that! With that aside, I do see the benefit of investing in a market I know, but the possibility of gaining more cash flow by investing in a further away city keeps nagging at me. I figure that as long as have my drive I should go for routes that other may consider strenuous. Either way thanks for the advice it's really appreciated!
Wow! Thanks for all of resources and information you've given me! I will definitely use it when I'm looking at expanding!
If I can ask what would poise a city for long term growth? Employment rate that's higher than the national average would be ideal, I assume? Among other factors that I just can't seem to grasp.
Also I can hopefully invest in both markets in the future after I've gotten a couple of properties under my name, for now I don't want to overwhelm myself with choices.
I see I'll check both cities for deals and decide if Milwaukee is worth driving back and forth, but I'm also going to consider other factors as well. If you don't mind me asking, what kind of hard lessons did you have to learn? How'd you deal with having to learn them? If I'm ever interested I'll definitely check out Garrett Davis.
Thanks for the advice!
This all sounds very useful thanks very much!
So if you don't mind me prodding a bit, at one point does the housing market vs. median income become favorable for REI? (More specifically buy and hold REI)
Also which demographic(s) is more favorable to rent out to? I'm assuming college aged tenets may not be the best but I'm not too sure about other demographics.
Thanks again for the advice!
I see, I'll try not to be too hesitant on picking a market, but I figure since I'm in HS I think I have a lot of time to decide which market I want to begin with, I don't want to be too hasty!
Thanks for the advice though!
I should've clarified earlier, I'm currently looking at buying and holding, sorry about that! With that aside, I do see the benefit of investing in a market I know, but the possibility of gaining more cash flow by investing in a further away city keeps nagging at me. I figure that as long as have my drive I should go for routes that other may consider strenuous. Either way thanks for the advice it's really appreciated!
Your drive and motivation is essential to your success, but you can choose to spend it in different ways. The willingness to take routes others consider to strenuos will give you a competitive edge, but apply it wisely. If it means for you to invest in a distant market with extra effort, keep in mind you compete with local investors who live there. You exhaust yourself just getting there. In contrast, if you compete in your home market, the willingness to work harder will give you an edge.
Sorry I was not very clear with my car analogy - if you compare buy and hold in two markets on a technical level you have to calculate IRR (or at least apply that type of thinking). You can look back and say what would have happened to $50k down invested in Madison and in Milwaukee. The former has seen stronger appreciation, the latter has seen maybe more cashflow etc. - but you also have to consider average income, employment, age and condition of housing stock, regulations and so much more. The result depends on the measure you apply - maybe it's net worth, or cashflow, or convinience etc
My advise, study both markets and observe what you can see, but ultimatly trust your instinct to make the right decision.
A few things that can help drive Rental Growth and ultimately returns from Investment Real Estate in a specific market.
1. Population growth year over year with expectations of continued population growth
2. Growing demand for Rental Properties
3. Large Fortune 500 companies moving into town, growing workforce or expanding operations
4. Large development projects led or supported by the local government
5. Steady positive job growth year over year with expectations of continued job growth
6. Landlord friendly legal trends. An example of the opposite of this would be movement towards rent control, for example the recent legislation passed in New York City.
At a high level, you are looking for positive trends that influence supply and demand in your favor. You want as much evidence pointing towards an increase in demand versus supply for the Real Estate that you own. If you can buy in a market and product type where this is true over the long term, you will increase your likelihood of doing very well with those investments.
This all sounds very useful thanks very much!
So if you don't mind me prodding a bit, at one point does the housing market vs. median income become favorable for REI? (More specifically buy and hold REI)
Also which demographic(s) is more favorable to rent out to? I'm assuming college aged tenets may not be the best but I'm not too sure about other demographics.
Thanks again for the advice.
@Victor Martinez Lazaro
Well to answer your first question, if the median home prices are more than 3X the median income in an area, well then you have a market that is favorable to the buy and hold investor. Obviously there are many other factors that can affect this but a simple rule of thumb for banks when deciding whom to loan to is - if the individual makes over 3 times the mortgage payment amount then they should be able to afford the monthly payment and will not need to rent. So we look for area where the median housing is MORE than 3x the median income, because then we know that there is likely a large pool of renters. Again, this metric alone will not determine your success but it will help you make smarter choices.
https://www.longtermtrends.net/home-price-median-annual-income-ratio/
Demographics that make good renters - ones that pay on time. Kidding... but seriously. College tenants are not bad, especially when their parents are paying, but retirement homes are probably going to be the next big thing. With more and more of the baby boomers retiring there will soon be a deficit in assisted living communities, and retirement money. Read anything by Harry Dent for more on that.
Hope that helps, all the best.
Ashton
The proximity will help your learning about the process(es). That would be my gut instinct.
The other way to evaluate is the kind of tenant and property types you want to work with. Milwaukee and Madison have some areas of overlap, but I imagine the student housing vertical is bigger in Madison, for instance.
@Marcus Auerbach, I see I haven't thought about the competition part of it all yet, but I now see more clearly why it might be easier to invest in a market your close to.
And that's why I want to know how to decide between two markets! (I mean that playfully of course). I know they're both good markets but for different reasons (From what I can gather). I personally am leaning over to investing in Milwaukee for the cash flow available, I'm hoping this'll play into my psyche and motivate me to invest more and better (Hopefully my brain will see the "quick results" and push me further, though I will admit investing is a slow game). But that doesn't mean I'm going to neglect Madison, if a good deal does pop up I'll definitely check it out!
That leads me to another question, if your willing to answer of course, to you professionally what is more important, in whatever standard, appreciation or cash flow? From what I've read cash flow will get you through hard economic times but appreciation might yield better profits. Any response is appreciated!
@Kevin Dean I see, I'll definitely use these points when looking at markets, as always thanks for the advice! (Also I had no idea that I'd have to stay up to date with changing laws, I should've known now that I think about it)
@Ashton Levarek okay that seems simple enough, I'll keep this in mind when browsing markets. As for the demographics I'm not necessarily looking at retirement homes just yet, I don't believe I've read up enough about them, plus the potential of lawsuits for neglect worries me. But if I ever feel like expanding my horizons I will definitely check him out, thanks as always!
The proximity will help your learning about the process(es). That would be my gut instinct.
The other way to evaluate is the kind of tenant and property types you want to work with. Milwaukee and Madison have some areas of overlap, but I imagine the student housing vertical is bigger in Madison, for instance.
I see why investing closer to home would be helpful for me as I grow as an investor, I'll keep that in mind. Also I plan on house hacking as I start off but I want to go into large multi-unit properties afterwards, do you have any advice in which city that might be best in? Thanks as always!
@Victor Martinez Lazaro Most of the really hard lessons were personal in nature. Once you really get out there and start putting plans in motion you'll come face to face with your strengths and weaknesses. You'll have to make adjustments where necessary.
For instance, I love to crunch numbers and play with spreadsheets, but I'm not naturally gifted at managing contractors. I've had to learn how to simplify my analysis so I don't spend all day analyzing. I've also spent a lot of time reading and listening to resources concerning finding and managing contractors.
I just try my best to go forward with the mindset that I am never an expert. There is always more to learn.
If you're free on Wednesday nights you should consider attending a local meetup. We've got one that meets every other Wednesday. Here are the details of a previous event. The next one is actually tonight.
@Marcus Auerbach, I see I haven't thought about the competition part of it all yet, but I now see more clearly why it might be easier to invest in a market your close to.
And that's why I want to know how to decide between two markets! (I mean that playfully of course). I know they're both good markets but for different reasons (From what I can gather). I personally am leaning over to investing in Milwaukee for the cash flow available, I'm hoping this'll play into my psyche and motivate me to invest more and better (Hopefully my brain will see the "quick results" and push me further, though I will admit investing is a slow game). But that doesn't mean I'm going to neglect Madison, if a good deal does pop up I'll definitely check it out!
That leads me to another question, if your willing to answer of course, to you professionally what is more important, in whatever standard, appreciation or cash flow? From what I've read cash flow will get you through hard economic times but appreciation might yield better profits. Any response is appreciated!
Hi Victor, excellent question! As you know you have four sources of "income":
1.) Cash Flow
2.) Equity (de-leveraging your loan)
3.) Appreciation (forced: remodel, natural: in cycles)
4.) Tax shelter
You can dial those in how you like, but typically if you push one up, the others will go down. It's a little bit like picking your avatar in a 90's computer game, some have extreme speed, some are very tough, some are average without a real weakness.. Your choice, Milwaukee will provide a playground for every gameplay you choose.
For most investors it makes sense to emphazise cash flow in the beginning. You need cash to keep growing, pay the bills and pay for your education (formal or otherwise). Later you can dial cashflow back (never to zero or below) and focus more on the other three. Buying more expensive properties with lower cash flow typically provides larger rents, larger loans with larger principal payments and often more opportunity for appreciation. And more tax shelter for your portfolio. This is where wealth is generated.
Here is an exercise to gain a deeper understanding: go to the BP calculators and plug in $1,000,000 property value (could be 5 properties 200k), 20% down, 1% rental income ($10,000), 5% for all expenses, and 3% for all increases. Now look at the results and study the difference between year 1, 5, 15 and 30.
Let me know what you think.
I don't have great experience with either market. My gut would suggest that Milwaukee is the stronger bet for it, only because of more population and variation in neighborhoods. Granted, if you find the right niche, I am sure Madison can manage as well.
Thanks I'll keep that in mind when I finally set my plan into motion!