How to Know if Any Given Real Estate Market is Wise to Invest in (With Real Life Examples!)


You’re thinking about investing in rental properties out-of-state, you find some deals that look amazing, and you can’t see any reason why they may not be a good deal. Have you looked at the market they are in? The market itself may be the reason you should be leery about buying a particular rental property.

Why Does the Market Matter for a Rental Property?

Let me tell you something to get your brain juices flowing when it comes to markets. Let’s say you find two properties in two different markets that are offered as potential investment properties you can buy. In Market #1, you are offered a nice property priced at $50,000 with a cap rate of 14%. In Market #2, you are offered a very similar property in terms of quality and size for $80,000 with a cap rate of 9%.

What should jump out at you right away when you see these two offerings?

The very first thought that would run through my head at seeing these two offerings would be, “The offering in Market #1 is riskier.” Why? Because most often there is a trade-off between numbers/returns and risk factor. A whole other article could be written detailing this trade-off (just came up with next week’s article!), but what you need to know now is that you should never just go off of projected numbers on a rental property.

In fact, you should know that numbers can tell you a lot. In this case, the more appealing numbers in Market #1 should automatically suggest to you that there is some kind of risk tied in there somewhere. It could be with the property condition and specific neighborhood or other things, but since I said the two properties in each offering are comparable, the risk isn’t tied to those things. The risk is most likely with the market.

Before I list out the things that can be impacted by a market, let me explain very briefly the three types of markets out there.

  1. Growth Markets: These markets are growing. The population is trending steadily upwards.
  2. Stable Markets: These markets aren’t necessarily growing at a rapid rate, but they are steady enough where they aren’t likely to experience much decline either.
  3. Declining Markets: These markets are heading downhill. The population trend is trending steadily downwards.

What causes the differences between these three types of markets? Jobs, industry, general desirability. I’d say those three things just about cover it all. A market can obviously change between any of these three categories, but it typically doesn’t happen in a quick timeframe. “Gentrification” is a popular word to describe an area (more often a neighborhood rather than an entire market) that changes over from declining to growth. You’ve all heard of these and how much money can be made in them if you get into them at the beginning of the growth cycle.


Related: BiggerPockets Real Estate Investment Market Index: The Best (and Worst) Major Markets for Real Estate Investors, 2015

But look too at how long those gentrification periods take, and those are just for neighborhoods. So you can imagine the time associated with an entire market switching from a declining to a growth market. Unfortunately it can be much easier and faster for a growth market to become a declining market; all it takes is one major industry crash to completely switch the direction of the market. There is more to it, but you get the gist of the basic differences in market directions.

Now, what can the direction of the market affect in terms of owning rental properties there?

  • Exit Strategy. What is your ultimate plan with your rental property? Do you want to sell it down the road? Are you looking for appreciation on it? Do you want to continue to rent it? The direction the market is going will drastically impact all of these things. For example, if you buy a rental property in a declining market, what do you think is likely to happen down the road? It will doubtfully go up in value, that’s for sure! What does that affect? A decrease in value affects how much you can sell the property for later, and it certainly won’t give you any appreciation. In more severe cases, it can send you underwater on your property with no chance of recovery. How will a declining market affect your property if you just want to rent it for the rest of your life?
  • Rentability. What happens to the rentability of a rental property in relation to the direction the market is going? Basically, it will impact your tenant pool down the road. If your property is in a growth market, you can expect a continuous pool of tenants, and the quality of those tenants should typically remain higher quality (depending on the specific neighborhood, of course), and if anything should only get better. In a declining market, you should be concerned that your tenant pool will shrink, and of those left in the pool, it would be a fair assumption to say that the likelihood of the quality of those leftover tenants declining is pretty high.
  • Profit. The point of owning a rental property is financial gain, right? Well what do exit strategy and rentability have in common? They both are key factors in determining whether or not you end up profiting off of a rental property!

Well, that all sounds great, but how do you know if a market is growing, declining, or stable? No worries — I got you!

How to Determine a Market’s Trending Direction

How about instead of listing out various things to look at, I give you two examples? One market I like for investing and one I don’t. Then at the end, I’ll kind of summarize what factors I pointed out in each, so you can look for similar factors in markets you are evaluating. Cool? Good. Here we go.

Example Market #1: Cleveland, OH

I don’t like this market for rental properties. Why? (Note: I haven’t actively investigated this market this year to know if anything has changed since these stats, but these are the reasons I bypassed Cleveland last year while shopping for rental property markets.)

  • Leading into August 2013, Cleveland led the nation in job loss over all of the 37 metro areas in the U.S.
  • It has shown historic loss of industry.
  • The population has gone down to about 400,000 people, with a housing stock built for more than one million. Of that aging stock, about 15,000 houses are vacant, with more than half of those being condemned and waiting demolition.
  • Rumored gentrification of the market exists, but that same rumor has been talked about for roughly 20 years, and there are no sign of the turnaround yet.

That may not seem like a lot of detailed stats to go off of to make such a definite determination, but in fact that small pile of stats is all I need to decide I don’t want to invest in a market. At the point the population is at a steady decline, the industry and job stats solidly suggest a continued decline, and there are so many vacant houses — I want nothing to do with any of it.

Need me to explicate a little more? With stats like these, I would expect the following issues if I were to buy a rental property there, due to the job loss and population declining:

  • There will likely be less demand for buying and renting properties.
  • There will likely be an increasingly smaller and less stable tenant/renter pool.
  • There is a possibility of higher tenant default rates (as people lose their jobs, they suddenly can’t pay rent).
  • There will likely be longer vacancy periods due to the market having way more properties than the number of qualified renters (vacancy = extremely expensive).

All of that ties right back around to property values as well. It’s a supply and demand thing. Do you think with those kinds of market fundamentals that the value of a property will be going up anytime soon? I certainly wouldn’t assume so. A declining value on my rental property? No thanks, I’ll choose another.

I would personally deem this a declining market.


Example Market #2: Kansas City, MO

I’ll skip the schmooze-talk and get right to the stats. I think you’ll quickly see why I’m in favor of investing in Kansas City right now.

  • The population in downtown KC has quadrupled over the last 10 years.
  • New residential high-rises have massive waiting lists.
  • 16,000 jobs are expected to be created with the $4.5 billion campus for Center Corporation alone; construction has already begun.
  • A $1.45 billion project is already underway for BNSF Railway, a company supported by a $44 billion investment by Berkshire Hathaway (Warren Buffet’s company).
  • It’s seen a steady 8.5% increase in the median rent over the past year (top 5 in the country).
  • It has a lower than average unemployment rate compared to the nation (5.2% vs. 5.6%).

How are those looking? Pretty good to me. Quite encouraging, actually.

I would personally deem this a growth market.

So how do the two markets compare to you? How do you feel about each? I can pretty much promise that the prices will be lower and the projected returns will be higher in Cleveland than they will in Kansas City. But what it comes down to is not what the projected returns of either market are on paper, but what returns actually happen if you buy the property.

Now keep in mind, none of this is to say that if you buy a property in Cleveland that you won’t achieve the projected returns. Maybe you will, and some have. Some investors have gotten away with buying there, or in cities like it, and had great success. And this also isn’t to say that if you buy in Kansas City that you are guaranteed success. What should be your consideration instead, since none of us have a crystal ball and know what will happen for sure with any property we buy, is risk factor. In these two examples, the stats suggest that Cleveland is a much riskier market to invest in than Kansas City.

Related: The Real Estate Market: How to Analyze and Predict Cycles

See the differences? Now let me sum up the basics of what factors I consider (and I mean strongly consider) when I look at different markets:

  • General population trend. Easy. Is it increasing or decreasing?
  • Industry. How many industries are present in the market, and how strong are they? A key thing here is that a market with only one big industry is a much riskier market to invest in because it only takes one big industry fail to tank the whole city. And don’t forget things like universities and sports fall into this category to some degree. And I’ll give you a quick secret insight — I won’t invest in Vegas for exactly this reason! (Among other reasons, but this is a big one.)
  • Jobs. This ties a lot into industry, but there should be growth in the number of jobs, not a decline, for all the reasons mentioned about Cleveland.
  • General desirability. Do people want to live in the market? Sounds dumb and like a horrible generic thing to consider, but to me it says a lot. Why would I assume a market that nobody really cares to live in is actually going to grow or increase that much?


Just start there. I don’t think starting with things like crime is the way to go. Crime is certainly a consideration at some point, but crime stats in general are very hard to verify (I would’ve already been beheaded if the Venice Beach crime stats were that revealing), and I think that if all of the other things (population, industry, jobs, desirability) are intact, I’m not as worried about crime. Where that would come into play is more about choosing a specific neighborhood to invest in.

So, there you go. Next time you are presented an out-of-state deal, look at everything going on behind the numbers — especially the market the property is located in. Don’t just jump at the excitement of some good-sounding numbers because reality is that those numbers are usually just on paper and not necessarily indicative of reality. A lot more goes into numbers than meets the eye.

How about you? What are you favorite and least favorite markets for investing right now? For the newbies out there, are there any markets you are currently considering investing in and not sure if it’s the right one or not?

Let’s talk in the comments section below!

About Author

Ali Boone

Ali Boone(G+) left her corporate job as an Aeronautical Engineer to work full-time in Real Estate Investing. She began as an investor in 2011 and managed to buy 5 properties in her first 18 months using only creative financing methods. Her focus is on rental properties, specifically turnkey rental properties, and has also invested out of the country in Nicaragua.


  1. Matt R.

    Hi Ali, I am sure there are good opportunities in both sub markets but are you sure KC 2.7 % is a growth market? KC ranked 38th out of the 50 US cities joining the bottom list of slow growers including Philadelphia at 2.2 percent; Albuquerque at 2 percent; Wichita at 1.6 percent; Milwaukee at .8 percent; Memphis at .8 percent; Baltimore at .3 percent; Cleveland at -1.8 percent; and Detroit at -4.7 percent.
    It would seem that a growth market would be ranked higher for growth or are you just comparing KC to Cleveland maybe?

    I get the concept still.

    • Ali Boone

      Hey Matt, I am just comparing growth markets to declining markets for this…not overly concerned about ranking. More so because stats are more widespread across different variables and sources, so I don’t typically stick with just one source for stat numbers.

      • Matt R.

        Cool Ali. I thought you were talking population growth. Those are pretty straight forward numbers to determine and source. The only way to give any measurement number meaning is to rank for comparison. Pockets of population growth can exist in any city still. ( Location, Location, Location;)

        For the midwest market example, KC and Cleveland, these are generally considered very slow growth markets and have been for decades now. Thus the thousands of abandon properties in each city. I have not heard any market researchers deem KC a growth market before. Compared to Cleveland there is a the difference as you noted and both have great opportunities obviously still. thanks!

  2. Trey Williams

    Thank you Ali. This was the article that I was waiting for. I’m looking at properties in a town near me (Hagerstown, MD) and was wondering what factors I should look at when buying in this town. I think this article will give many people the confidence to pull the trigger if they know all the numbers work out with the property itself. Thank you again

  3. Curt Smith

    Hi Ali, You can use current data to rank rental risk and likelihood of finding good renters by:

    – go to craigslist for your area
    – enter the sub-area name in to the appartments / houses search field
    – count the number of pages of rentals.
    – Notice how many subjects are ALL CAPS
    – how may 1/2 off or free months to move in?

    Areas you want to stay out of have the all caps, free months, 10 pages of rentals.

    Use to gauge rents and craigslist for current ads.

    I always do test ads in craigslist before I buy!!!!! I add $25 to $50 to the expected rent to test at a higher rent than I’d really do.

    • Matt R.

      That is a great idea for glancing at a sub market and totally makes sense. Another good source to dive deeper is rentfaxpro. Lenders use this they claim. You can get a look at vacancy and tenant durations and some other real management numbers expectations that are exact hood specific. In the general overlook that vacant/abandoned ratio is telling. Like Cleveland with 16k and KC with 7k abandoned. Most of these are abandon by out of state landlords so always check that too.

  4. Jerry W.

    Exceptional article. Well thought out on very important subject, and well written. I have usually confined myself to neighborhoods in my local area. When you go out of area you have to choose area before you worry about neighborhoods.

  5. Derrick Snearl

    Here’s a description from a podcast I recently listened to concerning Clevland:

    The number of people moving to downtown Cleveland is up 32% from 1990 to 2000—the largest population increase of any Midwest city (including Chicago) and far above the regional average (7.7 percent), according to Brookings.
    And the pace is picking up, with an all time high of 12,500 moving downtown just last summer, mostly comprised of the coveted Millennials (ages 18-34).
    This demographic shift is referred to as the “brain gain,” since there’s been a 139% rise in the number of young residents with bachelor’s degrees.
    Why? Downtown Cleveland has experienced a renaissance over the past 5 years, with an estimated 19 billion in development completed or planned since 2010. Occupancy rates are at an astonishing 98% and home sales are up 12% year over year.
    The area has the fastest growing healthcare economy in the U.S., with the world renowned Cleveland Clinic, the nation’s first Global Center for Health and Innovation, and a new medical convention center. 10 Fortune 500 companies, 27 area colleges and universities, the world’s largest metropolitan lakefront and three major sport teams all bring billions of dollars to the area every year.
    Plus, few people know that Cleveland has the 2nd largest live theater district in the U.S., second only to New York City!

  6. In my market, a similarly nice property will probably cost $800,000 (no mistake). and you will be likely to get a 4% cap rate. This market is very risky in terms of cash flow, and many investors here are praying they will come out in the black on appreciation. As many experienced investors have pointed out, depending on appreciation is more like gambling, and that is true of my market as well.

    The salient feature in my market is not so much risk, but the prices of everything. This could be true for other markets as well. Or maybe my market is simply an extreme outlier.

    • Ali Boone

      Hey Katie! Probably not that extreme. What market is it if you don’t mind me asking? LA and San Fran and NYC and all those are right on up there.

      I assume you aren’t investing locally then? Are you investing anywhere?

  7. Rachel Luoto

    Hi Ali, thank you for writing the article! I can spot the growth and decline markets around me but it’s much more difficult to judge at a distance. What do you think about cities that are built around government/military jobs? Obviously their industries thrive during times of war when other industries might struggle.

  8. Ali Boone

    Hey Rachel! Thanks for commenting! I’d say–I’d have to know more about the market. Just government/military jobs aren’t enough info to go off of. For example, DC obviously is the queen-bee of those jobs, but the numbers don’t work out there so where DC is in the expansion cycle doesn’t really matter (unless the whole RE economy has tanked, then maybe grab some property for appreciation potential, but that isn’t the norm or current…).

    What cities specifically are you thinking of?

  9. Gianni Laverde

    Awesome post Ali, and you provide great indicatives of what to look for in a market before investing. I was actually thinking about Cleveland and surrounding markets to start my investing career. Will need to do some more research to make sure i take the right steps.


  10. Ed Neu

    Indianapolis has been a destination for Investors for years. Large market, stable work force and affordable housing. There are certain areas where there are opportunities for accelerated growth.

  11. Wendy Forbes

    Great article, Ali! Excellent summary of things to consider. This will be a long question, but any feedback you can give would be much appreciated!

    I live in a very underpopulated state, Vermont. It’s a challenging place to try to invest due to limited inventory and limited sales – limited movement overall, I guess. However, I’d like to start my investing career near where I live so that I can keep an eye on things, and make quick adjustments, while I’m learning.

    I’m looking for rental property in a nearby town, considered a city by VT standards, with a population of a little over 9,000! Most of the population stats are comparing 2000 with 2010, but the city’s population has supposedly started growing since 2010 due to some major infrastructure improvements, the relocation of a state office building to the town, and the determined efforts on the part of the mayor to bring entrepreneurs and retailers to town. Sperling’s for some reason is predicting that job growth, which has been at 1.74%, will go up to almost 40% in the next 10 years.

    My question is – how do I get accurate current population growth statistics along with an accurate idea of possible job growth and where that growth might be coming from?? If I ask the town I expect I will get a lot of boosterism.

    Also, there is a new apartment building opening this Spring with 27 affordable one-, two- and three-bedroom apartments and a community space and retail on the ground floor. The apartment stock in town has historically been very low-quality and, like most of the state, very limited especially for low-income tenants. Does this new building signal good things and growth for the town which will improve the situation for other owners of rental units, or does it pose too much competition?

    Thanks for any advice you can offer!

  12. Sean Coonce

    Wonderful article. I had one question about this statement:

    > And don’t forget things like universities and sports fall into this category to some degree.

    Can you expand on this? Would you steer clear of investing in a university town like Lawrence, KS (University of Kansas) or La Mesa, CA (SDSU)? I had always found the idea of investing in a college town would provide a reliable, consistent tenant pool with the upshot of young professionals staying in that town post-graduation to start their careers.

    • Ali Boone

      Hey Sean! No, I meant that they fall into the category in a good way. Universities and sports and all that…the more the merrier. It’s suggestive of continued population and demand, and a sign of a strong market (usually, and in conjunction with other stats). So yes, colleges are good!

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