How do you research the best areas to invest in?

Question

I am new to the real estate investing space and was wondering how do you go about researching the best areas to purchase properties? Also if you have any areas you recommend and why I appreciate that. Thanks in advance!

Michael Smythe · Answer

@Melissa Sejour

Recommend you first figure out the property Class you want to invest in, THEN figure out the corresponding location to invest in.

Property Class will typically dictate the Class of tenant you get, which greatly IMPACTS rental income stability and property maintenance/damage by tenants.

If you apply Class A assumptions to a Class B or C purchase, your expectations won’t be met and it may be a financial disaster.

If you buy/renovate a property in Class D area to Class A standards, what quality of tenant will you get?

Similarly, if you put several Class D tenants in a Class A 4-plex, what do you think will happen to the property?

So, when investing in areas they don’t really know, investors should research the different property Class submarkets.

Here’s our OPINION for the Metro Detroit market (use as a template for your target area!) that we’ve learned in our 24 years, managing almost 700 doors across the Metro Detroit area, including almost 100 S8 leases:

Class A Properties: Cashflow vs Appreciation: Typically, 3-5 years for positive cashflow, but you get highest relative rent & value appreciation. Vacancy Est: Historically 10%, 5% the more recent norm. Tenant Pool: Majority will have FICO scores of 680+ (roughly 5% probability of default), zero evictions in last 7 years.

Class B Properties: Cashflow vs Appreciation: Typically, decent amount of relative rent & value appreciation. Vacancy Est: Historically 10%, 5% should be applied only if proper research done to support. Tenant Pool: Majority will have FICO scores of 620-680 (around 10% probability of default), some blemishes, but should have no evictions in last 5 years

Class C Properties: Cashflow vs Appreciation: Typically, high cashflow and at the lower end of relative rent & value appreciation. Can try to reposition to Class B, but neighborhood may impede these efforts. Vacancy Est: Historically 10%, but 15-20% should be used to also cover tenant nonpayment, eviction costs & damages. Tenant Pool: majority will have FICO scores of 560-620 (approaching 22% probability of default), many blemishes, but should have no evictions in last 2 years. Verifying last 2 years of rental history very important! Also, focus on 2 years of job/income stability. Class D Properties: Cashflow vs Appreciation: Typically, all cashflow with little, maybe even negative, relative rent & value appreciation Vacancy Est: 20%+ should be used to cover nonpayment, evictions & damages. Tenant Pool: majority will have FICO scores under 560 (almost 30% probability of default), little to no good tradelines, lots of collections & chargeoffs, recent evictions. Verifying last 2 years of rental history and income extremely important to find the “best of the worst”.

Make sure you understand the Class of properties you are looking at and the corresponding results to expect.

Jonathan Small · Answer

@Melissa Sejour a good property manager will give you a lot of information that you care about. They will tell you about rent rates and vacancy. They will tell you what areas want to buy and areas that are more difficult to rent.

Figuring out the best areas to invest can be a game-changer. I usually start by analyzing data like population growth, job opportunities, and rental demand. City-Data and Census.gov are solid resources, and sites like Rentometer can give you a good sense of rental prices.

After that, I narrow it down to neighborhoods with strong fundamentals—good schools, low crime, and convenient amenities. I’ll also connect with locals through BiggerPockets or Facebook groups for first-hand insights.

If visiting isn’t an option, lean on a reliable local team (agents, property managers) to help vet the area.

Stuart Udis · Answer

Best neighborhood and best assets are subjective and largely based on the individuals capabilities (balance sheet, skill set, time etc.) Once this is determined you can select the best neighborhood and asset that fits your capabilities.

Rod Hanks · Answer

If I were new I would simply stick to areas close to where I live. Go to some networking events in the area and meet other investors.

Eric Fernwood · Answer

Hello @Melissa Sejour,

Choosing an investment city is the most important decision you will make, so you are wise to carefully consider your options.

Where you invest depends on your goals. If your goal is financial independence, then selecting an investment city is a straightforward process due to the income requirements for financial independence. In this post, I will explain the criteria and the information sources.

Income requirements for financial independence:

• Rents increase faster than inflation: Inflation erodes the value of money over time, causing prices for goods and services to rise. To maintain your standard of living, your rental income must increase faster than inflation. If rents don't outpace inflation, you cannot achieve financial freedom.
• The income must last throughout your lifetime. This means you must always be able to rent out your properties at faster than inflation rents. Your tenants can only continue paying similar rents if they remain employed at similar wages. However, the average lifespan of companies is 10 to 18 years, so every private-sector job your tenants have will eventually disappear. Unless new companies move into town and create replacement jobs, all that will remain are lower-paying service sector jobs. When this occurs, area incomes fall and cities reduce spending on police and schools. The result is rising crime and decreasing population. Companies are unlikely to consider cities with high crime or cities with high operating costs.
• You will need multiple properties to replace your current income. The amount of capital required depends on the city's appreciation rate. If you buy in a city with limited appreciation, every investment dollar must come from your savings. How much savings will you need? If you need $5,000/Mo to replace your income and each rental property generates $300/Mo cash flow, you will need to acquire 17 properties ($5,000/$300). If each property costs $200,000 and your only acquisition cost is a 25% down payment, you will need $850,000 (17 × $200,000 × 25%) in savings, an almost impossible amount for most people. With rapid appreciation and cash-out refinancing, you will only need a small portion of that amount.
• Low risk of natural disasters. Too many people choose cities, ignoring natural disaster risk. Florida, California, Texas, and many other states are prone to such disasters. Natural disasters can devastate your property and the surrounding community, leading to job losses and the closure of shops and businesses. This forces people to relocate. While insurance might cover the reconstruction of your property, the community's recovery could take years or, in some cases, never occur. Meanwhile, your expenses, like debt service, taxes, insurance, and maintenance, continue.

These are the requirements necessary to attain and maintain financial independence. What information do you need to select cities that meet these requirements?

• Significant and sustained population growth with a metro population >1M. Data source: Wikipedia metro population data. Only consider cities with a metro population >1M and have increasing populations. Companies need a sizeable population for their tenant pools.
• The price of homeowners insurance is an excellent barometer of disaster risk.
• Low operating costs. This isn't easy to measure directly. Instead, look at your major location-specific operating costs as an investor. For example, below is a comparison of three states with no state income tax. Sources for insurance and property taxes: Insurance - ValuePenguin, State Property Tax Rates - Rocket Mortgage. Every dollar you lose to overhead is one less dollar for you to live on.

• Low crime. Never invest in any city on this list.

If you select cities that meet the above criteria, you should do OK.

Natalie Allie · Answer

The best way to go about this is to use Google and pay attention to the markets across the US where there is still opportunity for value in real estate investing. For example, there is not much value in purchasing a home in NY vs here in Detroit. If the price of a home is $5,000,000 in NY, how much more will it rise over the course of 5-10 years vs here in Detroit? I would also recommend paying attention to the landlord restrictions, rent control and overall laws as it relates to owner/tenant relationships. Let me know if I can be of further assistance. Always happy to help!

-Natalie

Patrick Albright · Answer

The reply immediately above is an excellent way to look at what you want. If you are going to invest outside your area you should try to find a group that has a presence in the markets you want to look at for your investment.

Michael K Gallagher · Answer

Welcome! lots can go into this somewhat simple question and most of it is personal preference.

- you'll want to define "best", and what that looks like for you as a success.

- How much money do you have to spend? that will cut out many of the "best" areas even in cheaper markets.

- You can look into call kinds of economic growth and financial indicators as well to help narrow the list.

- I've also heard of people choosing a market because the team they could put together in that market was the best team they found.

- Outside of that, I'd encourage you to visit cities you are considering investing, and get on the ground even for a weekend. The investment in the plane ticket and hotel can pay off huge when you are able to find and focus in on a specific area. Zip codes are often too big and you'll be dealing with nuance at that level.

Alan Asriants · Answer

Compare it to the area you grew up in. Spend a lot of time there. Online metrics can be good, but they wont paint the whole picture.

Mackay Oakey · Answer

BiggerPockets has some pro tools that let you see rent to price ratios and other cool stats, I use this to check out various markets and which seem to have better/worse profitability. Could be a good place to start!

How do you research the best areas to invest in?

How do you research the best areas to invest in?

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