US
I
|
get
asked quite a bit… “Well how do I decide which market to invest in?” Great
question, how do you know? The first step is to narrow down the markets that
will be advantageous to invest in at all. For flippers, this isn’t as big of a
deal because you can flip properties in just about any market.
Some markets will be better than others, but
you can really do that anywhere. More so for rental properties, it’s imperative
you find a market that will actually put a profit in your pocket.
The primary factor in an advantageous rental
market is the price-to-rent ratio. You have to be able to rent a property for
enough money to cover the cost of the purchase of the house and all expenses,
and then hopefully have some left over for profit. I talked about this concept in more detail in
The 5 Fastest Ways to Lose Money with a Rental Property. Note the example of an
Atlanta property versus a Los Angeles property to understand this concept.
So, let’s say you have found a handful of
markets that have good price-to-rent ratios and, therefore, can definitely put
a profit in your pocket. Of those markets, how do you know which to choose? For
the purpose of this article, I’m only going to look at known (as of today)
investor-advantaged, larger markets and compare the advantages of those in
order to explain how the benefits of various markets differ. I’m only going to
look at the larger markets to keep it simple. There are many smaller markets
out there that would be great for investors, and you can apply what I’m about
to say to those.
Different
Markets, Different Perks
You are looking at your handful of
investor-advantaged markets. You may already have a list that you gathered
yourself, maybe some experts suggested various markets, or maybe just from reading
BiggerPockets you have taken note of several popular markets that a lot of
people seem to be working in. We already know the price-to-rent ratios work in
these markets, so that is one perk. What are other perks that may be present in
a rental market?
Price. Some markets are going to be more expensive than others and some
may have a really cheap entry price. You may be restricted as to your purchase
price due to how much capital you have to invest, so price may have to be the
deciding factor when it comes to choosing a market. But, as I’ll point out,
you’ll realize you usually get what you pay for.
Cash flow. This is probably one
of the most obvious perks that people want. If there is no cash flow, there is
no point in buying (unless you just get warm fuzzies in your belly knowing you
own property in a really cool place, likely a beach city or somewhere you want
to vacation). Since the price-to-rent ratios in all of the markets we’re
looking at are good, all of the markets are expected to cash flow. So no
problem there, but realize different markets cash flow different amounts.
Appreciation potential. As I say all the time, never buy based solely on
appreciation potential. That is called “speculating.” Ask all the speculators
from pre-2009 how well the market crash served them! So while I never advocate
buying for appreciation potential but, rather, always buy for cash flow, some
markets do have significantly more potential for growth and appreciation than
others.
Age
of property. This wouldn’t seem like it should matter, but it certainly does
when it comes to what you will need to expect for maintenance costs. An older
house, even if it’s in decent shape, will cost you more money to maintain
throughout the years. All houses will need maintenance but the newer the
property you get and the better built, the less you will have to spend in this
department. Some markets have notoriously newer houses than others.
Quality of the neighborhood. The age of the property may even be
semi-representative of this. Not in all cases, but oftentimes. What are the
typical neighborhood qualities of a particular market that you would be buying
in, in order to turn a profit? Profits can be made in both higher-quality
neighborhoods and lower-quality neighborhoods, but there will be differences in
the level of effort you have to put forth in order to make properties in
different types of neighborhoods work.
Industry. Another major factor that goes into determining an
investor-advantaged market is one that not only has good price-to-rent ratios,
but also has enough industry to support population sustainment and growth. If
you buy rental properties in a market that has only one major industry, and
that industry goes bunk, what happens to your investment?
Michigan cities
experienced a lot of just that over the past few years and some people think
North Dakota with the oil boom will experience that once the oil gig is over.
There are some seriously enticing deals for investors in ND right now, with
extreme profit margins and cash flow, but if the oil boom disappears, what else
is in ND that people will want to go there for?
Not to say you are in the wrong
to buy there but be wary of what will happen to your property should the oil
folks go away. Same with Vegas. Vegas has one primary industry (if you group
them together)- gambling and entertainment. The bad thing about gambling and
entertainment? In a market crunch, people stop spending money on gambling and
entertainment. Effect on Vegas? Pretty substantial. But if you find a market
with multiple big industries, you are staying safer because if one industry
flunks out, you have others to keep the town running.
Read
more here
No comments:
Post a Comment