There are many opinions about how to identify and qualify good residential investment markets. Here are my core criteria with brief explanation.
- Population higher than 100,000 people.
- Lower Property Taxes.
- Positive Economic Growth.
- Positive Demographics.
- Positive Real Estate Growth.
- Low Median Price : Gross Rents ratio.
- Low Median Family Income : Gross Rents ratio.
- Stable Market Cycle.
Other considerations:
- Age of properties.
- Number of units.
- % of owner occupancy.
EXPLANATION –
Population higher than 100,000 people. This is important for 2 reasons. First, property managers are crucial to out of town investing. Small towns have fewer rental and therefore property managers, so chances increase of not being able to find a good property manager. Second is there are more renters in an area with larger population. PS. I also prefer positive population growth over population loss.
Lower Property Taxes. I made this mistake with my 1st investment out of state. My property taxes were about 2.5% of the value of my property which turned into a tax bill that cost me between 2 and 3 months of my gross annual rents. I since make sure that I factor property taxes when I invest in a market.
Positive Economic Growth. Basics here are unemployment and positive job growth. Both can be found on the bureau of labor statistics website.
State Unemployment here
Metro Unemployment here
Misc. data from census.gov here; including population, poverty, % owner occupied, median family income – and you can search by metro area.
Positive Demographics. I think of these as Crime and Poverty. I generally find them in the census numbers.
Positive Real Estate Growth. Check if the real estate market is going up or down, compared to where it was 1 year before. You can find this on www.zillow.com or www.realtor.com.
Low Median Price : Gross Rents ratio. The higher the price relative to the rents – the lower the returns from cash flow and return on capital invested. This is also an easy way to compare market areas. I use www.rentometer.com where you can search for rents by property or city.
Low Median Family Income : Gross Rents ratio. Renters should make enough to be able to afford the rent payments where they live. If they are too close together that is a problem, so when I am comparing areas against each other I take this into account.
Stable Market Cycle. Does it go up rapidly and drop off quickly, or rise slowly, or do something in between. You will want to know what kind of cycle does the market have, and where are you in the cycle. To find out I took the National Association of Realtor data and www.zillow.com historical zestimate data and graphed it in excel so I could see the trends and change over time. You can do that, or just call me 916/747-5635 (Joel).
Hope this is useful and guides you in your search for great markets.
