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Where in the world should you buy real estate and how important is choosing the right location?! Well, the difference of buying a property in the right location versus buying in the wrong location can have a huge impact on the returns and the success of your investment.
Have you ever heard of the three rules of real estate? Think about it. What are the three rules of real estate?
Well, I've heard its location, location, location. You probably heard that too, right?
Location is tremendously important when investing in real estate but actually just buying a property in a good location is not going to guarantee your success. You still need to make sure that you manage it well and that the physical attributes of the property are suitable for investment. That being said, the difference of buying a property in the right location versus buying in the wrong location can have a huge impact on the returns and the success of your investment. You can have a great property and operate it well but if the property is located in a market that doesn't perform well, your yield on that investment is going to be constrained by the poor location.
The best real estate investments are made by buying the right property in the right location and operating it effectively. If you can check those three boxes, you're going to have yourself a successful investment.
What's great about commercial multi-family is that you don't necessarily need to invest in your own backyard. Now, I wouldn't recommend buying one or two homes across the country but buying a property of scale in another state can be a great investment strategy.
Choosing a good market and location is important because the location is going to provide the organic growth that comes naturally from owning well located real estate and this organic growth should be complimentary to properly managing and optimizing the property for performance.
So, what makes a good market location for investment? Where in the world should you buy real estate? I want to say that the United States is the most desirable place to own real estate in the world. We enjoy property rights and liberties that most other developed countries do not share and that's why you see so many foreign investors buying properties here. I'm not saying investing in other countries is not worth considering but it's just not something that we'll be covering in this article.
Within the US, regionally, I think, it's a good idea to pay attention to the sun belt market. These are states in the southern part of the US and they enjoy warmer climates, business-friendly state governments and a lot of positive net migration.
I don't know if you've noticed, but there are a ton of people moving from New York City, L.A., and Chicago into Florida, Georgia, Texas, Arizona, Arkansas, and other states within the sun belt region.
On a state level, I think, it's important to take a look at the Landlord-Tenant Law and see if it's favorable to do business in that area. We're going to be looking at regulations such as rent control. We also want to know how hard it is going to be to evict somebody if they're not paying the rent. I know I don't want to invest in an area where I'm fighting against the government just to run my business.
Now, once you find a state that you feel like is a good state to take a look at, you'll start digging into some different cities or MSAs which stands for Metropolitan Statistical Area. MSAs are broken down into: primary, secondary and tertiary markets.
Primary markets are going to be your major markets like L.A., Chicago, New York City, Houston - population sizes over 5 million.
Then, you have your secondary markets. That's going to be a little bit smaller market from 1 to 5 million people.
Tertiary markets are going to be up to a million in population as a rule of thumb.
We generally do not invest in primary markets because they don't tend to be very landlord-friendly. I think, while we're talking about market size, one thing to consider is how small is too small. In my opinion, a market is too small when it's hard to find a good management company or if its sourcing materials becomes a problem. If a market doesn't have a Home Depot, how hard will it be to make repairs to a unit when we get resident requests for repairs. You'll also want to consider how far the market is from a major airport. If you have to jump on a plane for three-hour flight and then rent a car for a four-hour drive, the travel time required to visit the property should be something you think long and hard about before pulling the trigger.
We personally like secondary and tertiary markets that fit some of our other criteria. I really like focusing on markets that are growing or emerging. I'm going to give you some of the major indicators that'll help you determine if a market is actually growing.
POPULATION GROWTH
The first thing you want to look for is the population growth which is a great indicator of household formation. This is going to make up the rental demand side of the market. Really, you want to look for markets that have 2% or more population growth especially over a period of at least 12 to 18 months. That's when you know a lot of people are moving there and you're going to have a lot of demand for rental housing.
MIGRATION PATTERNS
You also want to take a look at migration patterns. U-Haul has a survey that shows where all their trucks are going. You can see which states and which cities have the most people moving into them.
JOB GROWTH
The next thing you want to really look at is job growth. A good website for that is the Bureau of Labor Statistics.
INCOME GROWTH
Another economic driver is income growth, City-Data. Look for at least 2% income growth historically to kind of keep up with inflation. If you can find markets that have higher than two percent, it may be a good idea to take a deeper look into those markets.
SUPPLY PIPELINE FOR NEW HOMES
You’ll also want to take a look at the supply pipeline for new homes coming online for rent and for sale. It’s basically supply and demand thing and you want to make sure that you are looking at both sides of that equation. Make sure they're not over-building in that market in relation to demand.
PARTS OF TOWN
Now, there are good parts of town and there are bad parts of town.
Areas have 4 different ratings: A, B, C and D.
A-areas are going to be your most expensive parts of town. Most expensive real estate, nicest areas.
B-areas are going to be maybe a little older than the nicest parts of town but still very nice.
Then, you've got your C-areas. That's kind of your blue-collar areas but they're not high crime locations.
Finally, you have your D-areas where there's high crime, and maybe a lot of drug abuse. I would not recommend you invest in D areas. It's hard to keep good properties and good tenants in those areas. You don't want to be working against the area.
So, if you're looking at a property across the country, how the heck do you know if it's in a good part of town or a bad part of town?
First thing I would recommend is you take a look at the crime statistics. There is a good website which is https://www.adt.com/. That website has a heat map and you can take a look at different areas and see what are the good parts of town or the bad parts of town.
The second thing you're going to want to look for when determining what part of town you might want to invest in is the schools in the area. A great website for this is https://www.greatschools.org. They rank schools from 1-10. Generally, if you can find a part of town that has a lower crime and higher school ratings, that's going to be a better part of town to invest in.
Also, when you're looking at a city, I think it's a good idea to take a look at the economic makeup of the market. We’re looking for markets that have solid economic diversity. A big thing you want to stay away from is markets that have single economic drivers like one employer or one industry that really drives that whole economy. What happens is: if something happens to that industry or that employer, maybe the employer moves or maybe it's an oil town and cost per barrel goes down, you can have a lot of people moving out and literally, you can have a ghost town in a few months just because of an industry coming apart or a major employer going under.
Also, a good thing to look at is affordability. Taking a look at what portion of the average wage goes to pay the average rent. One thing to be said here is the more affordable an area is, the more we can generally push rents after renovating the property. If it's very unaffordable, it's really hard to push rents even if you make huge renovations and you're really upgrading the units. If it's not affordable, you're not going to be able to push your rents. If it's very affordable, it's a lot easier for people to justify that extra disposable income to upgrading their lifestyle.
Another thing to check out is demographics - www.city-data.com
I think it's important to note that Covid-19 has really changed the way that people live and work. Now that people can work remotely, many folks are choosing to move to where they want to live. Some are moving to more affordable areas and working from home.
Once you find a part of town you like, you really want to take a look at what's going on in the area.
If you're not investing in your own backyard or an area you're familiar with, you're going to need to have some boots on the ground. Someone that can go take a look at the area and give you the lowdown about what's going on in different parts of town. Generally, a property manager or local business partner can help you with this.
That being said, I personally believe that it's better to actually visit the property yourself before you put an offer in. Once you're there, you really want to drive the area. It’s best to start at the streets surrounding the property and go out in concentric circles. You're going to want to be looking for everything (positive and negative). Pay attention to any sort of development or redevelopment in the area, anything positive happening but also keeping an eye for anything negative. Think about what might be a deterrent. Is there any noise or air pollution? Smells? Anything that might force a good tenant to not want to stay there. Be on the lookout for things like train tracks, highways, airports and anything that's going to make a lot of noise. It's going to be hard to keep a good tenant if they're being woken up all night long by trains throughout the night.
Here's a few sweet spots we look out for that are generally really good things to find. If you can find a property in these areas, you're going to do fairly well:
Path of progress. Any sort of development or redevelopment in the area, that's going to be a major benefit.
Any new job announcements in an area where you have an employer, maybe building a factory or moving into a new area, you're going to have a lot of high-paying jobs, that's a huge indicator of rental demand coming to the area. If you can get ahead of that, you might be able to buy while prices are still low before all the new development is able to come in and accommodate all the new renters and buyers. It's great to get into a market where there is a short-term housing shortage.
Finding the ugliest property in a good area. You can improve a property, but it's really hard to improve an area.
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This article has really only scratched the surface on what it takes to drill down into a location but I hope you found it helpful. Hopefully, it's pointed you in the right direction. Just to be clear, these are all just rules of thumb. It's important to note there are good investments to be made in investments that maybe don't check all these boxes.
If there's a compelling story or reason, you still may want to invest in a project.
If you have any questions about this topic or would like to see us cover another topic, please comment below and we'll do our best to accommodate you.
Until next time! Go out there and create some passive wealth and income.
