How do you evaluate markets for investing?

[Annette Barnett]

What resources, information, services, tools, publications, professionals, etc. do you utilize to evaluate markets for investing?

[Eric Fernwood]

Quote from @Annette Barnett:

What resources, information, services, tools, publications, professionals, etc. do you utilize to evaluate markets for investing?

Hello Annette,

Selecting the right investment city is the most important decision, not the property. Rent growth and appreciation are not property features; they are driven by the city. Think of the city as a harbor and rents and prices as boats. When the population grows, all boats rise. When population growth slows or declines, rents and prices stall or fall.

Financial independence is not a one-time event or a fixed number. It requires income that meets specific conditions, most of which are determined by the investment city.

• Rents outpace inflation: Your rental income must increase faster than inflation to cover rising costs. Cities with significant and sustained population growth are likely to meet this requirement.
• Lifelong income: To have rental income for life, your tenants need to keep their jobs and earn more money over time, or you will not be able to increase rents fast enough to outpace inflation. But most companies only stay in business for 10 to 18 years. Cities that keep bringing in new companies usually have three things in common: they're safe, they have over one million people (which means good roads, services, and workers), and they're affordable for businesses to operate in (lower taxes, less regulaitons).
• Low risk of natural disasters: A city with a low risk of natural disasters. Major disasters damage property and disrupt the local economy. Businesses close, jobs disappear, and people move away. Insurance may cover repairs, but it doesn't restore demand. Recovery can take years and in some cases, it never fully happens. During that time, your expenses, such as mortgage payments, taxes, insurance, and maintenance, continue.

Evaluating every potential city is impractical, so use the following elimination filters:

1. Population Growth: Start with cities having a metro population over 1 million and consistent and significant growth. Wikipedia
2. Low Crime: Avoid cities on this list: CBS: The 50 Most Dangerous Cities in America.
3. Low Operating Costs: High operating costs can turn a profitable property into a money pit. Consider property taxes and insurance. Insurance - ValuePenguin, Metro Property Taxes - LendingTree. Insurance costs also indicate the likelihood of natural disasters. For example, insurance in Las Vegas runs about $800/year, while Florida insurance averages over $10,000/year.
4. No Rent Control: Rent control may prevent you from increasing the rent fast enough to keep pace with inflation. It may limit your property manager's ability to select the best tenant. It may make evictions of non-performing tenants difficult or impossible. Never invest in any location with rent control. Do a Google search on something like “[city] rent restrictions”.
5. Rising personal income: you're making a 20 to 30 year investment. Rents cannot increase long-term unless the personal income in the area also rises. For example, here is a federal reserve chart showing personal income growth in Clark County Nevada (Las Vegas).
6. Local Investment Team: While general knowledge from seminars and books is helpful, local expertise is crucial for specific purchases. Only an experienced local investment team can provide the resources and knowledge you'll need.

After filtering out cities that don't meet all the requirements above, you'll have a shortlist for further consideration. If you invest in a city that fails to meet these criteria, you're almost guaranteed not to achieve—or sustain—financial independence.

A similar process exists for selecting properties that are likely to perform best. Contact me if you'd like more information.