Wait…. Back up. How do you decide which markets?
Recently a BiggerPockets member asked me about broader market research in order to narrow down areas of the country that would be good areas to invest. This person said “I understand the local research but how do you decide where to focus before you get to this point?”
This is a great question. Let’s dig into criteria to think about and some ideas to explore.
Management from a distance?
With your first couple of multifamily properties will you be self-managing, using a property manager or implementing some type of hybrid approach?
For this analysis, we’ll say that you have decided to use a property manager. Logistics to think about include how often do you plan to visit in order to build your local network and relationships? Once you own property, what time commitment will you be making to check on things in-person? How will travel (in whatever frequency) impact your schedule? Will you have to take time off work? Can you visit by day trips or overnight stays? What are the costs involved between airfare, hotel and meals? Ultimately, how does the location impact your profitability and ability to support the property?
I have a friend who just bought his first property out of state after spending close to a year trying to find something that fit his budget and situation. Frustrated with options where he lives in Arizona, he started looking at Missouri and Florida. Why those two? By considering the questions above, his thought process was:
- Where do I already travel as part of my job that I could take an extra day to establish local relationships and check in on a property? Missouri
- Where do I like to travel for fun that I would want to take time off for? Florida
- Where have I’ve lived before and still know some people? Florida
- Where can I purchase a property in my budget and return criteria? Both states
Because he and his family really liked traveling to Florida and he knew (non-real estate) people he could ask for help he felt comfortable buying his first property in this state.
Where is it easier to be a landlord?
If you are able to choose any market from the beginning, make it easier on yourself and add landlord friendly states to the top of the list. Why does that matter? Well... have you heard the stories of evictions that took months? Tenants that violated their leases but still stayed in the property?
Choose the right state, and your rights as a landlord will enable you to quickly remove bad tenants, recoup damages and reduce loss of income.
If you do a simple Google search on “landlord friendly states” and you’ll find many articles on BiggerPockets and a variety of other sites.
Economics
At this point, you can gather various sources of economic data to understand the trends in various markets. Some data to look for includes job growth, resident growth and new multi-unit construction trends which can saturate the market, increase vacancy rates and take time to absorb.
Some example resources include:
- Commercial real estate brokerage reports (such as Marcus & Milichap’s MFH outlook)
- United States conference of Mayors economic trends
- Joint Economic Committee’s State-By-State reports
- Compare50 website
- FreddieMac’s multifamily outlook which includes this recent table:
Something to think about...since you make your money when you buy, do you want to purchase property in a market that is hot right now? Or, would it be better to find an area that has some kind of temporary decline?
Types of questions to consider could include:
- What is this area’s future opportunity for growth? Are there cyclical industries that can rise and fall (oil, tourism, transportation, etc.)
- What resources does the area have that are always in demand? Desirable weather? Beaches? Mountains for skiing?
- Am I interested in cash flow or appreciation? Or both? All markets can have strong cash flow if you buy right. Conversely, markets with more desirable features or significant job growth will have higher appreciation.
Getting Local
Once you’ve narrowed down potential areas, you can now start establishing relationships and work to understand more of the market details. How? Here’s some ideas:
- Use the BiggerPockets search to find potential local team members including wholesalers, agents and mortgage professionals. Connect, start to develop relationships and schedule in-person meetings.
- Schedule your trip so you can also attend local real estate club meetings. You are looking to hear about market updates, trends and then also meet fellow investors.
- Spend time driving the areas you are looking at so you can get a feel for neighborhoods and the places you are more interested in investing.
- Keep a regular activity schedule of fostering the relationships you’ve established, looking at properties remotely and in-person and making offers.
For those that have invested outside of your primary residence, would love to hear your thoughts. What criteria did you use to decide where to invest?
