Where to invest in the US

Question

Hi All, I am a newbie RE  investor and currently using /learning with a mentor to do my first RE investment. My budget is around 80-120K for my first investment and I have explored those markets below:

Cleveland OH Columbus, OHRochester,  NY Jacksonville, FLIndianapolis, IN

All look like great markets to invest( Large cities, still affordable, growing, low unemployment rate, etc) however, I find it hard to pick one for start. I would love to get some advice from other members and from guys with experience with investing in those markets.

Thanks in advance, Omer

Zeke Liston · Answer

Hi @Omer Zakai, I suggest Columbus, OH! This is the market I invest in, the job growth is prime as there is a lot of development happening in the area!

Eric Fernwood · Answer

Hello Omer,

You are right to focus on selecting the right location. As long as you buy property in a good location, all but the worst mistakes will be corrected over time through appreciation, inflation and rent increases.  If you buy in a bad location, you are doomed from the start. So, what are the characteristics of a good location?

ROI - Too often new investors only consider ROI. ROI is only a snapshot in time; a prediction of how the property will perform day one of a long time hold. You will own the property for a long time so consider the location’s trajectory. Fortunately, locations change slowly and, once headed in a direction, are likely to continue in the same direction. Start by comparing what the area was like 20 or 30 years ago to today. In the past, were there a lot of high-paying jobs and today mostly service sector jobs remain? If that is the case, I think you can see the trend that will continue into the future. Buying in a declining market is a path to a future serious financial situation.

Metro size - I would only consider metro areas with a population of at least 1 million. You want a stable economic environment and small towns may depend on a single company or commodity.

Population - Increasing population is a critical factor for two reasons. First, if the population is declining, demand will decrease and property prices and rents will fall. If the population is increasing, demand will probably increase, and prices and rents will rise. Second, one of the primary motivators for people to move is jobs. So, if people are moving to a location, it is likely that there is an increasing number of jobs. Below is a (2018) map showing net domestic migration by state. I would not invest in a state that is losing population.

Jobs - Rental properties are no better than the surrounding jobs. The location must have increasing job quantity and quality because if it is not increasing, then it is probably falling. You are buying a property you may hold a lifetime which totally depends on jobs. However, jobs do not last. What would you guess is the average life span of an S&P 500 company? Would you believe less than 18 years? How long do you expect a typical business survives? About 10 years. Most of the current employers in any location will be gone in 10 to 20 years, from the day they started. As the current employers die out, your tenant pool’s jobs will vanish and so will their ability to pay the current rent. Unless companies are moving into the area creating new jobs that replace the vanishing ones, your investment will drop in value and rents will follow.

Safety/Crime - People and businesses will not move to cities perceived as unsafe. A good list of places to avoid is NeighborhoodScouts Most Dangerous Cities 2020.

Appreciation - Inflation is constantly eating away buying power. Unless rents are rising at or above the rate of inflation, your rent is declining in current dollars. The best way to spot such trends is to look at $/SF for housing prices over the last 10 or 20 years, adjusted for inflation.  Rents follow housing prices so what you see happening with housing prices today is what will happen in the future to rental rates.

Investor Friendly -  There are many factors that can make a location investor friendly or unfriendly. Below are a few:

• Property taxes - It is hard to make a profit on a property with high property taxes. For example, we own a home in Austin and one in Las Vegas. The property tax in Las Vegas is about 0.55% and in Austin it is about 2.5%. Such taxes are a direct hit to the bottom line.
• Insurance cost - High insurance costs not only increase expenses, they indicate a location where climatic or other factors are more likely to cause significant losses.
• Landlord/tenant legislation - Only invest in landlord friendly states. Rent control or long and costly evictions are a clear indicator you should look somewhere else. For example, in some parts of the US it is difficult or impossible to evict anyone over the age of 65, during winter months, or it may just take a long time. Remember that your monthly expenses remain the same, whether there is a paying tenant in the property or not. Could you afford to pay the mortgage and other expenses for many months plus legal fees? If not, talk to local property managers about the time and cost to evict.

Operating Costs - This is a catchall for all the expenses that will drag down your cash flow. Some are relatively fixed, like debt services, taxes, insurance, and management. The wildcards are vacancy and maintenance cost. Vacancy cost is property specific but you can get a good understanding of a location by looking at time to rent. If median time to rent is in days, you are likely OK. If time to rent is in months, you will have a serious problem. Maintenance costs are property specific as well but there are some generalizations that might help.

• Older properties require more maintenance than newer properties.
• Composition roofs require more maintenance than tile or metal roofs.
• Properties in climates with hard freezes require more maintenance than properties in milder climates.
• Properties in locations with a lot of moisture require more maintenance than properties in dryer climates.
• Wood siding requires more maintenance than aluminum, vinyl or stucco siding.
• Properties with lush vegetation require more maintenance than properties with little or no vegetation.

Investment Team - Lastly, do not forget about an investment team. You are totally dependent on having the right team of people working for you in order to succeed in investing. Unless you can put together a strong team in the location you are considering, look somewhere else. Contact me if you would like details on assembling a team.

Omer, I wish you success.

Mike D'Arrigo · Answer

@Omer Zakai we've been active in Indianapolis for about 10 years. I'd be happy to share my insight on Indy and help if I can.

Caleb Brown · Answer

@Omer Zakai

Kansas City is similar to those. I’d be happy to chat :)

Tom Ott · Answer

Cleveland is very nice as it is not flooded with as many investors like Columbus is. Competition is lower and so are the prices!

James Wise · Answer

Welcome aboard. Many markets available. Cleveland is the one I am most familar with and it's also very popular with investors across the USA so I figured you'd get some value out of reading The Ultimate Guide to Grading Cleveland Neighborhoods. I also have similar guides that you may want to look over for Kansas City, Missouri. & Birmingham, Alabama.

In addition there are tons of other turnkey markets out there besides those listed above. Many of these markets are very well represented by sellers & turnkey operators here on BiggerPockets. In no particular order I have listed some of the most popular markets for out of state investors

• Cincinnati, Ohio
• Dayton, Ohio
• Toledo, Ohio
• Youngstown, Ohio
• Cincinnati, Ohio
• Memphis, Tennessee
• Saint Louis, Missouri
• Indianapolis, Indiana
• Detroit, Michigan
• Erie, Pennsylvania
• Louisville, Kentucky
• Milwaukee, Wisconsin
• Jackson, Mississippi

Each of these markets is popular with turnkey investors because of the low barrier to entry, high rental demand & high rent to price ratio. I recommend setting up keyword alerts for each area as they are discussed in the forums daily with advertisements posted in the BiggerPockets marketplace hourly.

One thing to note when looking at the individual markets, you can make or lose money in any market. Don't think that one particular out of state market will shoot you to success or abject failure. It's not really that complicated to buy out of state. It only becomes complicated when investors try to over complicate or over think everything. Whenever you are buying a property out of state you should do a few things to ensure it's as smooth as possible.

• Don't buy in the roughest neighborhood in the urban core. Pick a solid B-Class suburban area. Perhaps a nice 1950's built bungalow.
• Always hire a 3rd party property inspector to give you an unbiased feel for the home. The reports are 40-90 pages long and go through the entire house in great detail.
• Get an appraisal. If your using financing the bank requires this. This is good. The bank isn't going to let you blow their money. They have more skin in the game then you do.
• Make sure you get clear title. If using a lender this is a non issue. They will make you do this. It's those maniacs that buy homes cash via quit claim deed off of craigslist that really get screwed.
• Make sure your property manager is a licensed real estate brokerage.
• Google Clayton Morris scam and/or Morris Invest scam for a cautionary tale of what not to do when buying turnkey real estate
• Understand you can not eliminate all risk, only mitigate it. If you are risk averse, real estate, (especially out of state) is not for you.

Where to invest in the US

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