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When you’re researching potential real estate markets to invest in, what do you look for? We all know the basics:
- Look for below-market value.
- Find areas where rentals cash flow well.
- Look for affordable areas popular with renters.
This leaves a prospective investor with a lot of areas to choose from.
The truth is that the U.S. is an incredibly diverse collection of real estate markets, and it will take you time and patience to really drill down into local market detail to identify the areas with real potential.
Of course, you can choose to outsource the research to a local real estate team that will present you with investment options. That can be great if you don’t have the time to do your own research or if you are a complete beginner and want to minimize risk.
Having said that, the downside to this approach is that you will only have access to a limited range of options that the local team will show you. Doing your own research will require a lot of time and effort—and there is always the possibility of making an expensive mistake. In my experience, though, putting in the work pays off in the long run; you just need to learn to think outside the box.
Here are the less researched, less conventional things I look for in a real estate market before investing.
1. Properties Are Just About Affordable for My Budget
As a real estate investor, one of the first things you’re always told is to set a budget and make sure to stick with it. The question is: Do you then buy 10 cheap properties with the money you have or two higher-end ones? How you answer this question will determine where you end up looking for properties to invest in.
Look for areas that you can just about afford at your price point. That may mean buying fewer properties, but the choice will come with more positives in the long run.
Yes, cheap is good. Investors want cheap home prices; renters want cheap rents. What they don’t want, however, is cheap homes in undesirable areas. The ones who do are not the type of renter you want anyway.
You want the unicorn: The below-market-value home in a nice, attractive area where rents are high and people want to live (for longer than a year). Always think about the caliber of tenants you want to attract, as well as appreciation, if that’s your ultimate goal. This won’t be the cheapest property you’ll find, but it will be the one that performs better over time.
So, once you’ve worked out how much you can afford, look for markets that have nicer homes at that price point. There’s absolutely no point going for 10 cheap homes on the outskirts of an expensive area. You may cash flow from this option, but then you may also end up having to deal with constant trouble from everything that comes with a less desirable neighborhood—times 10!
2. A Young(er) Local Population
Amazingly, many real estate investors still ignore demographics when looking at potential areas to invest. That’s why automatically investing in somewhere like Florida without doing your research can be so risky.
A lot of people do an internet search for home prices, see that they’re high and rising in a particular area, and deduce that that makes for a good investment prospect.
Wrong. Rising home prices in and of itself tell you little about the investment prospects of an area. If you end up investing in an area with limited economic growth and an aging population, you will be in trouble.
Since we’re taking it as an example, Florida is a diverse state, with some areas known for communities of wealthy retirees and very seasonal economies. Other areas are much more diverse demographically and, crucially, have diverse economies that drive up employment for younger populations.
Census data sets are a gold mine of useful information if you know what you’re looking for. In a nutshell, you are looking for areas with high demand for rentals and a growing, diverse economy. I tend to pull up the following details of the local demographics to really gauge the potential of a local real estate market:
- Age: Too young will likely mean a transient population who won’t be able to pay higher rents; too old, and you’re looking at primarily homeowners, with a likely limited and stagnant local economy. Ideally, I look for areas where there is a robust and growing population of young professionals aged 25 to 45.
- Local unemployment rate: The lower, the better. Anything higher than the national unemployment rate should give you pause because that means there’s something wrong with the local economy.
- A diverse local economy: Next, I look at where local people are employed. It’s an important piece of the puzzle because it will tell me whether the local economy is diverse. This data won’t be in the Bureau of Labor Statistics census, but you can easily obtain it from local county or city chambers of commerce and similar organizations.
For example, a quick look at the Detroit Regional Chamber website tells me that Detroit has a diverse local economy, with an even distribution of jobs between health, government, manufacturing, and retail sectors. This type of breakdown is good news for an investor: If one element of the local economy declines, the whole of the local economy will keep afloat.
3. Longer Local Occupancy Times
High demand for rentals in and of itself doesn’t always translate into a great real estate investment opportunity. Of course, if your aim is to rent out to college students, then a college town is what you’ll be looking for.
But the issue with a college town is high tenant turnover. Your average student will move on within a year or two, and those quiet weeks or months during the summer before someone else moves in will cost you.
I like zooming in on areas where rental demand is high and occupancy times are typically long. Longer occupancy times mean stable cash flow and less maintenance and repairs. Tenants who rent long-term take better care of your property. They tend to be better settled overall and have steadier employment. That’s your gold standard of tenant as an investor.
Of course, sooner or later, you may have a problem with one of your tenants. That’s life. You need to be prepared for every eventuality, including issues with squatters and evictions.
Again, you’ll need to do your research here and make sure you understand local housing laws and regulations. Some areas are a lot more pro-landlord than others.
4. Look Beyond Large Metro Areas
This is my secret sauce in the recipe for real estate investor success. Most people only look at large metro areas—because they have only heard of large areas.
Everyone has heard of New York, Miami, and Chicago. Again, you’ll be surprised by how many budding investors limit their property search to large metros. Or they simply don’t do any in-depth research at all, automatically going for the big cities.
And yet some of the best deals are in emerging or secondary markets. These secondary markets are typically located within 30 miles of large metro areas. They offer more affordable home prices than the big cities, but still deliver high rental rates and demands.
A perfect example of this is the area around Orlando, Florida. Orlando has very high home prices and significant regulations on rentals. My strategy is to invest in suburbs and towns just outside Orlando. One such area is Polk County, just south of the city, where home prices are a fraction of those in Orlando, but rents are still relatively similar to those in the metro.
You’ve got to think like a potential renter here. If you were moving your family to a new location, would you go for an ultra-expensive apartment in downtown Chicago/Miami/Orlando? Wouldn’t you rather move a bit further out, say within a 30-minute commuting distance, and have more space, a nice yard, and less air pollution?
Typically, prosperous suburban areas outside major metros boast higher rental demand as more families are moving to suburbs and adjacent towns where the cost of living is more affordable.
One rule of thumb: Don’t go too far out. Most people don’t want to swap an urban life for a rural one; they still want the same perks of urban life, just better value for money and a slightly slower pace of life. Small differences are crucial here.
Look at Harvest, Alabama, for example. Technically, it’s in the Huntsville, Alabama, metro area and is a mere 25-minute drive from Huntsville. But it offers a different vibe to Huntsville itself, with a serene, close-knit, small-town atmosphere and local parks.
The median rent in Harvest is a very healthy $1,883—higher than Huntsville itself at $1,478. This just shows you that people will still pay more for what they perceive to be an overall more attractive area that’s commutable to where their jobs are.
Final Thoughts
Armed with these lesser-researched details, you can build a real estate portfolio that delivers better cash flow and is less likely to fail over time. Dig deep, do your due diligence, and you’ll reap the rewards.
This article is presented by Rent To Retirement
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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.
