We know real estate is a great way to diversify your investment portfolio. Investing in multiple markets, creates diversification within your real estate portfolio and protecting yourself from the ever-changing market cycles.
Once you decide to invest outside your local area, the possibilities are limitless. This can be exhilarating and overwhelming at the same time. Anytime that happens, we go back to our personal investing goals.
Here are some data points we look at while selecting markets. This should also provide you a framework to do some of your own assessment:
- Population and Population Growth
- Employment Growth
- Economic Diversity
- Median Household Income
- Income Growth
- Landlord/Tenant Laws
- Path of Progress
- Crime Rate
- School Districts
- Rent Growth
- Rental Vacancy Rates
- Cost of Living
- The X-vantage Factor
Population & Population Growth
The population of the metro is a big indicator of how favorable it is. But more important than the total population is the population growth. Finding an area with long-term upward population growth trends (not a temporary bump) is key, and a major factor supporting that trend is job growth in the area. Also, more population means the property would have more buyers when it is time to exit.
Since steady job growth is indicative of a healthy local economy that’s likely attractive to new businesses, developers, and residents to the area, this is a very important metric to evaluate in each market. The more jobs, the more residents, the more likely the area will maintain a strong tenant base. When more people are attracted to an area, the demand for housing increases, which drives up rent and real estate prices.
You want to find an area with a variety of industries supporting the local economy. Strong job growth is much less enticing if you discover that most of the jobs in the area are, say, in the tourism industry. A diversified job market is much more attractive since a hiccup in any single industry likely wouldn’t affect the area as a whole.
Median income in the 5-mile, 3-mile, 1- mile and census block level is really important to identify good sub-markets. General rule of thumb is to avoid sub-markets and blocks which are less than 40k Median Income.
If when you have determined markets with a certain minimum median income it is pertinent that the incomes are not declining
It is very important to learn about the local laws governing rental properties. Rent control, for example, is great for tenants but makes it incredibly challenging for landlords to make a return on an investment in an area where costs for contractors, pest control, and property management are skyrocketing. As an investor, you want some insight from local property managers who are intimately familiar with these laws, so you can find landlord-friendly areas.
Path of Progress
A Path of Progress is where the greatest amount of building and development is currently occurring, or soon will be. This is where major national retailers are trying to move in. Buying real estate in the path of progress is a great way to earn higher yields and appreciation.
Taxes can make a huge difference on the bottom line. State income taxes and property taxes will both impact your operating budget thus, your overall return. Each state has a different tax structure and it’s good to understand what you’d potentially be getting into, so you won’t be surprised later.
Make sure the overall crime index in the market/ state is in downward trend. This is really important to see if the market/ state is going in right direction. This is also important at the submarket level.
Good school district is preferred by families living in apartments and they stay long term. Crime is also relatively low near good schools.
The market should have a positive Rent Growth which has favorable underlying factors. Once we analyze the property we will determine if the tenant profile can support that rent growth.
Rental Vacancy Rates / Concessions
It is important to know what the vacancy rates and concessions in that particular area. This will be critical for the property’s pro forma assumptions
See if that market doesn’t have severe weather or numerous natural calamities in the past which effect the operations, insurance requirements and returns to investors. Also, physical barriers like a body of water, a mountain range, or any other geographical features that could inhibit the physical development of the area. As an example, coastal cities are limited by the ocean. Development can only get so close to the water, which forces them to build upward or expand into the suburbs. This drives up the value of centralized real estate, especially in a time of job and population growth.
Cost of Living
By seeking out an area where the cost of living is low, especially in comparison to the median income in the area, you’re more likely to experience growth. If people can afford to live in the area easily, there is room for the cost of living (i.e., rent) to rise as more jobs and people move into the area.
Th X-vantage (Your personal edge)
There’s always the chance that you have greater insight into a certain area, more so than other investors. Maybe you have family/friends who lives there, maybe you went to college there, or you grew up there. Any time you possess an edge, more weight should be given to that market. Local connections or a little history with a particular area can put you leaps and bounds ahead of other investors.
What About Investing Passively in a Real Estate Syndication?
As a passive investor, you’ll focus on finding a strong sponsor first. Once they let you know about potential deals, you can use these 15 factors, in combination with your personal criteria and goals, to conduct your own thorough research and make an informed decision whether to invest or not.
Serious about investing in Real Estate syndications? Sign up to join our community of like-minded investors at Smart Passive Investor Club.