Market Research Help

[Andres Aleman]

Hey everyone,

I'm a new investor looking to buy a property in Maryland (Goal is to have property #1 by the end of 2019). I need some help in identifying good markets in Maryland. My real estate agent keeps pushing the Dundalk/Essex area saying that this area is good for cash flow. And while I know appreciation shouldn't be your top priority when investing, I also want an area that can appreciate a fair amount over the next 20 years. I'm concerned that markers like a declining population in the Baltimore area might not be a good sign for rental or property value appreciation. Is this a valid concern, or should I just focus on cash flow? What are some good identifiers for a good area when looking for investment properties? 

Thank you!

[Russell Brazil]

There is no such thing as a good or bad market. There is only the underlying risk of the market and the asset, as measured against your goals and your risk tolerance. 

Cash flow, or yield is a measure of the underlying risk of the asset and market. So the areas with the highest yields are going to be the areas of the highest risk. That higher cash flow is your reward for taking on a higher risk asset.  Higher risk assets tend to have dampened appreciation (thats why they are so cheap as measured against the cash flow), and more volatility.  The lower risk areas are the areas are the areas that will then have higher appreciation, as that lower risk is reflective of the higher demand for the asset, and with that higher demand comes higher asset price growth over time.

And yes, as you allude to, declining population in Baltimore, (a 70 year trend) is a huge risk of that market, and thus why Baltimore has some of the highest yields in the country.

But lower risk markets, with high appreciation due to higher demand, like DC, Montgomery County, are thus going to have very low yields upon initial purchase. But of course with the higher demand assets/markets, you get not only higher asset price growth (appreciation) but you also get outsized rent growth.

The ability to properly understand, assess, and measure risk is the greatest challenge for investors, as most simply get the risk analysis 100% backwards and initially think that the higher cash flow provides safety, when in fact its a huge blinking red warning sign, just like it is any type of investment vehicle whether that be real estate, dividends, bonds etc.