How to Choose Your Market
A Google search for “best places to invest in real estate” will bring up millions of articles about the pros and cons of different markets. If you need a starting point, decide on one or two sources to review and narrow it down to three cities.
Choosing your market comes down to understanding the nature of a city, looking at the numbers and determining which investing strategy you plan to deploy.
Then you need to dive into the City metrics and decide which ones matter to you. One of the best (and free) places to start is the Census Bureau. You can find a ton of statistics to help you analyze a market. Our favorites, in no particular order, include:
- Crime Rate – is this trending down, steady or increasing? You can also see by type of crime. Metrics of particular interest include violent and property offenses.
- Ratio of homeownership to renters – a high rate of homeownership may mean this market is not good for rentals and may be better suited for flips.
- Population – if the population is growing, it’s definitely a good sign that people want to live there.
- Unemployment rates – what is the trend?
- Cost of living – is it high or low compared to national averages?
- Employers – what industries are prevalent? Is it mostly one or several types? Who will your tenants be?
- Median home prices – how much are the most homes worth?
Local news groups are another free and easy resource to tap. Read articles about your place of interest. Are the headlines about crime or large corporations moving into the area? Do you get the sense that people take pride in the city? Are locals feeling priced out of the real estate market? Is there a lot of new development whether commercial or residential?
Another organization with helpful (and free) info is a city’s chamber of commerce. The chamber usually has a membership of local businesses and can provide information of the types of businesses prevalent in the area. Chamber staff often come out with marketing reports that identify business opportunities, trends in the city and more. These reports also tout investments being made by the local government. This is especially a good sign if downtowns or infrastructure have funding for improvements. It can mean the city is experiencing growth or that it’s trying to improve the area to become more appealing to potential residents. Just remember that the chamber is trying to sell you the city, so you should cross reference any claims with your research.
Cross-checking your sources and learning more about a city is best accomplished by networking with local investors and real estate professionals. One way to meet real estate professionals in the area is to find local real estate investing groups whether a Real Estate Investor Association (REIA) or a Meetup in your area and network. If you find others that are also investing in that city, they may be willing to share additional resources and any intel they have on it. For us, this networking opportunity was critical and our generous mentor shared all of her contacts. I hope you will be as lucky. Your team and contacts are critical to the success of your investment strategy. If you plan to use a property management company to deal with your tenants, it won’t be possible if you can’t find a good manager. The same goes for finding deals (investor-focused real estate agent) and doing renovations (contractor). The right team members will make all the difference.
Lastly, you’ll want to look at property prices across different neighborhoods. In Oklahoma, we are able to find a lot of investments for less than $100,000. Among many things, this means that for a down payment, we only needed to have around $25,000. Most banks will require 25 percent down for a loan. If you look at cities where home starts at $1 million, the amount you need to make a purchase increases significantly. Once you have a general sense of a city, you can determine if it’s right for you. For example, if you don’t have a lot of capital, finding a city with low housing prices might be preferable.
Information on home prices allows you to check if the 1 percent rule applies in terms of collecting rent. This is a preliminary test whether a property will cashflow. The rule indicates that rent should equal at least 1 percent of the purchase price. Rentometer.com can give you an estimate of rent in an area. You can also determine your mortgage based on your down payment and potential purchase price through free online calculators. If the home is worth $100,000 and you can get rents for $500 or less, the market may not be a good place to deploy the buy and hold strategy.
Once you determine the market and your investment strategy (buy and hold, flip, wholesale, etc), you can start analyzing properties. BiggerPockets offers a ton of free calculators to help you determine whether an investment will be profitable. Hop onto Zillow and start running the numbers to practice. You’ll start to see the patterns and you’ll be itching to get your real estate investment team together.
My husband Chad and I often talk about real estate investing as part “science” and part “art.” Information is readily available and you need to look at it in aggregate. Then, whether to take the plunge is a mix of data and gut feeling. For your first investment, you may have a lot of concerns and feelings of anxiety. That’s completely natural. You can read our story about plunging into the Oklahoma City market here.
The most important part of your decision to invest is determining what you’re willing to lose. That amount will also let you know what you can afford in terms of a down payment and any renovations. Real estate investing is a calculated gamble. The results are not guaranteed, though with the crazy rate of appreciation lately, it feels like it’s hard to fail. The best you can do is arm yourself with information, understand your personal finances and come up with a budget for your investments.
Need more resources? Check out MsFire Mama’s “Get Smart” page for ways to get a completely free real estate investing education.