How to Choose the Right Real Estate Market to Invest in?

I’m a firm believer that the most important choice you’ll make when investing in Real Estate after choosing the right sponsor to invest with is choosing the right Real Estate market.

A rising tide truly lifts all boats in Real Estate. If you invest in markets that are already growing, you can make a lot of mistakes and generally still come out ahead. On the other hand, if you invest in a bad market, you’ll be catching a falling knife, and you can put a lot of effort and work and still end up not making as much as you could be making had you spent a little more effort to invest in the right market to begin with.

I’ve analyzed thousands of deals over many years, and the most common theme of the best performing deals is they were almost always in the right location with obvious growth patterns that were very easy to track.

Now the question is, what exactly makes a good market?

When we talk about markets it’s important to divide that into 3 separate categories:

  1. State
  2. Region (MSA)
  3. Neighborhood

 

Let’s start off with state, here is the criteria I like to follow that has served me well:

1. State

High population growth

  • Follow migration patterns, Uhaul moving data, and other reports to see where people are moving to
  • Population growth will lead to higher demand for Real Estate which tends to increase home and rental prices

High rent growth

  • Use Apartments.com or CoStar data to see historical rent growth across different markets in the US

Proven historical appreciation

  • You want markets where home prices are appreciating. As homes go up in value, people are more inclined to rent longer, which increases demand and rents in the properties you buy

Friendly landlord laws

  • Avoid investing in states that are anti-landlord and anti-business. Rent control laws & restrictions could hurt you, and evictions may take 6 to 12 months, which makes it harder to operate a property when you still have to pay the mortgage

Some of my favorite states to invest in that meet all my criteria:

  • Texas
  • Florida
  • Arizona
  • Tennessee
  • North & South Carolina.

Now that you have the right states, the next step is to choose the right region & MSA within those states.

2. Regions (MSA)

To be clear, an MSA consists of one or more counties that contain a city of 50,000+ population.

When you are choosing an MSA or region to invest in, the criteria is actually very similar to choosing a state. You want to choose an MSA that has high population growth, high rent growth, with proven historical appreciation, and landlord friendly laws.

You want to make sure that you invest in MSAs that meet this criteria. Just because a state like Texas is doing very well overall, doesn’t mean every region in Texas is doing well. There are bad regions and good regions to invest in within a state as big as Texas, Arizona, or any other state you choose.

Here are some of my favorite MSAs to invest in:

1. Dallas Fort-Worth, Texas (17% Rent Growth in 2021)
2. Nashville, TN (25% Rent Growth in 2021)
3. Phoenix & Tucson, AZ (30% Rent Growth in 2021)
4. Orlando, Tampa, Jacksonville, FL (22% Rent Growth in 2021)

The next step is often overlooked but is one of the most important parts of the process of choosing the right markets, and that is knowing how to choose the right neighborhoods to invest in.

3. Neighborhood Selection:

You want to make sure that you go the extra mile to search and find the right neighborhoods to be in. Choosing the right neighborhoods tends to get you better returns on your investment financially, but also it makes your life easier as you don’t face as many challenges as you would if you choose the wrong neighborhood.

Neighborhoods I invest in:

$35k+ Median Household Income

  • You can use City-Data.com to find free data on the Median

    Household income

  • The higher the median household income is, the more your

    tenants can afford to pay higher rents, and the less difficulty

    you’ll tend to have with collecting rent

Close proximity to jobs

  • If job locations are too far, people relocate and move out more often, which increases your rehabbing costs

Convenient shopping centers/plazas

  • Ideally within 10-15 minutes at most

Close proximity to Schools

  • Schools will encourage tenants to stay longer and renew their leases to not have to move their kids around as much

Avoid “up and coming” areas

  • Avoid low income areas with high crime as it will make it harder for you to push rents up and harder for you to collect rents
  • “Up and coming” areas will also make it more difficult for you to find employees to work at your property as they might be uncomfortable or feel afraid of being on-site

Premium locations with high income and solid tenants

  • It’s better to buy in premium locations. They tend to appreciate faster due to increased demand, and you get a steadier flow of tenants that are willing to pay higher prices to live at your property

 

When you start your search for the right market, region, and neighborhood, you can go through a lot of data online. You can use many different websites that I have mentioned previously that are completely free, and you can even get a virtual tour of the areas you’re interested in by going on Google Streets and touring the areas online.

Another method is to also hire a photographer or a dog walker to drive around and record videos for you of the area, shopping plazas nearby, streets, etc.

Ultimately, you always want to put your foot down and drive through and walk the neighborhoods you’re interested in. I follow a lot of data, but nothing beats data + in person tours. You will understand the market at a deep level with that combination and make informed decisions.

When we look for Multifamily apartment deals for us and our investors, we follow this exact same process to find the deals that we put out to our investors.

If you’re interested in seeing opportunities we vet to invest alongside us and other investors passively, click the link to schedule a 15 minute call so that we can answer any questions and add you to our future deal flow AT NO COST! We will have nothing to sell or pitch you on the call.

15 Minute FREE Call: https://modelequity.com/invest-now

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