Where Should I Invest In Real Estate

Post-pandemic, we’ve seen the trend in families moving away from large, densely populated cities to the suburbs, partly because many employees are now able to work remotely, allowing them to have more freedom to choose where they live. This change has also allowed some businesses, such as Telsa, Samsung, and Apple, to do the same and move from higher-priced states, like California, to states with fewer taxes and more affordable living, like Texas.

This movement by corporations and their employees has influenced real estate market transformations by shifting demand into specific real estate markets, creating prime real estate investment opportunities.

Your Two Main Options To Invest In Real Estate

When deciding the location in which to begin your real estate investing journey, first, you must decide whether you prefer to invest in local rental properties or outside your local housing markets.

If you limit your search for investment properties only to your local area, you are restricting your investment opportunities. This strategy makes sense if you prefer to keep your investment properties close by, assuming they’ll be easier to manage if they’re in your backyard.

However, once you make the decision to invest outside your local area, the world is your oyster. This can be both exhilarating and, at the same time, completely overwhelming.

This brings up a BIG question, though:

Where should you invest if you’re not tied to your local real estate market?

How about a major city like Chicago or Atlanta, or Los Angeles? Or maybe a smaller metro like Charlotte, Portland, or Nashville? Maybe you’ve visited some of these cities and enjoyed some decent sightseeing and a fancy steak dinner. So, does that mean you should invest in real estate there?

Believe me, I’ve contemplated all of these things and more. When I first decided to invest outside my local area, I did a TON of research into various markets and “best cities” across the country. I had no idea what I was looking for, so I looked at a bunch of random things.

Unfortunately, it takes an immense amount of time to truly get to know an individual real estate investment market, especially if you’ve never set foot there. It also takes a lot of research, time, sometimes money, courage, and conviction to commit to a single market.

To overcome this, I started by assessing my personal investing goals. I determined I wanted to invest in a growing market that would provide decent cash flow. Using that basic framework, I created a list of ten key factors I consider when determining what makes a great real estate market.

10 Key Factors To Consider When Determining What Real Estate Market To Invest In

Before I look at making any investment in a new real estate market, I go through these key factors to find the best real estate markets for a potential real estate investment.

Job growth
Population growth
Job diversity
Landlord/tenant laws
Taxes
Geographical features
Cost of living
Local news
Local government
Whether you have an unfair advantage

#1 – Job Growth

This is the first and most important metric I look at in any real estate market. Steady job growth is indicative of a healthy and robust local economy, one that will bring additional businesses, real estate developers, and residents to the area.

When I see a strong job market in an area, I know that’s a leading indicator of population growth. The more jobs created in a given market, the more people that will move to that area, and the more people that move to the area, the greater the demand for housing, which will eventually drive up housing prices and rental properties.

As the market value for an investment property increases, so does the possibility of monthly rental income. This growth in your real estate investments allows you the possibility to increase the price of your rental property to stay in line with the current housing market. This extra income to most real estate investors allows them to reinvest this income into another investment property, increasing their net operating income.

#2 – Population Growth

Tied in with job growth is population growth. It’s important to note I always look at population trends AFTER looking at job growth. That’s because population growth could be due to any number of reasons, including temporary factors like natural disasters, migration patterns, etc.

I don’t want to invest in an area that’s seeing a temporary bump in population. I only want to invest in real estate markets that have long-term upward population growth, and the only thing that can sustain a growing population over the long haul is an increasing job market. Therefore, always look at these first two factors together to get the big picture of the health and future of a given real estate market.

#3 – Job Diversity

Another important factor to consider when examining a market’s local economy is job diversity. If a given market has a strong job and population growth, but most of its jobs are in, say, the tourism industry, that could be a red flag,

If a single industry is dominating the local economic landscape, that could signal a potential risk. Without a diverse economy, if that one industry topples or runs into challenges, it could risk the whole local economy.

In the case of the tourism example, if a local market is heavily dependent on tourism, a recession could drastically slow local tourism. This could lead to job losses and population decline, making it harder to keep rental units filled.

#4 – Landlord/Tenant Laws

Job growth, population growth, and job diversity are perhaps the biggest factors I look at when determining whether to invest in a given market. Beyond those, I start to look into smaller, albeit equally important, factors like landlord/tenant laws.

Perhaps the best illustration of landlord/tenant laws’ impact on a real estate investment is my local market. I live in Oakland, California. Here in the San Francisco Bay Area, rent control is in full effect. That means that, as a landlord, I cannot increase my tenants’ rent above a certain percentage each year.

This can be great for tenants, but as a landlord, these laws make it incredibly challenging to provide quality housing for people while still making a decent return on my investment, especially as prices for everything else in the Bay Area (contractors, pest control, property management, etc.) continue to rise.

So, I look for landlord-friendly areas when looking into potential real estate markets. Often, local property managers are the best source for this information, as they are intimately familiar with local rental real estate landlord/tenant laws.

#5 – Taxes

Taxes are often not at the forefront of people’s minds when looking at potential markets, but they can make a huge difference in your bottom line.

When investing in a real estate market, you should look at both state income and property taxes, as both will impact your operating budget and hence, your overall return on investment. This is also why we have seen large corporations move their business to another state, they are also wanting tax breaks to increase their overall profit.

Some states, like Texas, have no state income tax, so they rely more heavily on property taxes. Other states will be the complete opposite, and many are in between. Certain states or cities will even offer business-related taxes to entice businesses to move to their area to increase job market growth, which we know from earlier will also increase the population, increasing the real estate market. This can be seen in the Austin real estate market with the likes of Apple moving into the area.

Understanding the tax landscape before investing in a particular market is important, so you’re not surprised later.

#6 – Geographic Features

Google Maps will become your best friend when investing outside your local area. One thing in particular that I look for in a market is a barrier to physical growth. This can be a body of water, a mountain range, or any number of other natural or manmade features that will limit the physical development of a market.

For example, the ocean keeps coastal cities from expanding beyond a certain point. This forces those cities to consider other options, like building up or expanding further out to the suburbs. This tends to drive up the value of the real estate that’s more centralized, especially as more people and businesses move to the area, but at the same time expanding their real estate market into the suburbs.

#7 – Cost of Living

When you’re investing in residential real estate, particularly in more recession-proof workforce housing, it’s important to consider the local cost of living. In areas where the cost of living is already pretty high, there might not be as much room for growth.

That’s why I always look for markets with a lower cost of living, especially in comparison to the area’s median household income. This tells me that people can afford to live in that market comfortably, at least for now, and as more jobs come in, there’s room for the cost of living to rise.

#8 – Local News

Okay, now we’re getting down to the more nitty gritty. Once I’m pretty confident in a particular market, I start to track things like local news.

What am I looking for? Things like local developments, new companies moving to (or away from) the area, new store and restaurant openings, major local announcements, and more. Anything that will give me a pulse on the local economy, culture, and the potential future of that real estate market.

#9 – Local Government

Going hand in hand with local news is local government. I want to ensure I’m investing in areas with strong local leaders who have a vision for the local economy, bringing jobs to the area and making it a vibrant and welcoming place to live.

I want to see that local leaders are supportive of new initiatives, that they’re thinking about the future of the area, and that their plans and efforts are clear and innovative. Strong local leadership can also ensure that the environment will remain attractive for businesses, which means that job growth will continue increasing the potential for a real estate investment.

#10 – Whether You Have an Unfair Advantage

Last but certainly not least is whether you have an unfair advantage in that real estate market. Perhaps you went to college there, or your brother moved there a few years ago, or you grew up there.

Any time you have knowledge of the local housing market, economic growth, and understanding of the local government and affairs in a given area, you should give extra weight to that real estate market. Those local connections and roots can put you miles ahead of other real estate investors who only know as much about a market as Google Maps or a quick weekend trip can tell them.

Why The Time Is Right To Begin Your Real Estate Investing Journey

When you invest in commercial multifamily real estate, you’re helping to provide accessible, affordable housing for families in that particular real estate sector. Inevitably, there are people who won’t buy single-family homes for one reason or another, and those families still need a place to live. Affordable real estate has been on the decline for the past decade, but only recently has it begun to make headlines.

This is because housing prices in the US have hit record highs during the past few years while inventory has struggled to keep pace. This has led to more of a seller’s market, creating bidding wars between prospective buyers, and increasing the final sale price, sometimes thousands more dollars than the seller initially asked.

Historically low mortgage rates also had an impact, reducing the overall borrowing cost to purchase a house, which drove demand in the housing market upward. Now, single-family homes are even less affordable for the average family, and more people are setting their sights on renting apartments instead.

Why This Is A Great Recipe for Real Estate Investors

As many real estate markets across the US have become ultra-competitive, would-be buyers are considering the hike in mortgage rates and inflation concerns as additional reasons to take a step back from the housing market and rent for the next few years instead.

This poses an opportunity for multifamily real estate investors to easily maintain occupancy rates which typically generates best-case-scenario cash flow from their investment properties.

Now is the time for real estate investments as affordable rentals are in high demand, be they single-family homes, condominiums, or multi-family units. When you invest in real estate investment property located in high-demand markets, you provide very affordable real estate to those who need it most while simultaneously producing rental income and reliable returns for your own family.

How To Determine Where To Make Your First Real Estate Investment

To invest in real estate markets outside your local area feels like a daunting task. There’s a lot of research to be done, and sometimes it can feel like you’re just treading water and getting nowhere.

A plethora of websites list the best cities for real estate investing, stating the median home price, average monthly rent, what they consider the top housing markets, and so much more. There are reports by Urban Land Institute and a global consulting and tax firm PwC that list the top US multi-family markets with the highest buy rating based on current performance, emerging trends in real estate, and long-term economic factors that are associated with real estate and development.

Remember your overall investment goals and the ten key factors we discussed when scouring through all these sites and numbers. This will allow you to easily pinpoint the most important metrics in a potential real estate market and make the best decision on a potential investment property.

What About Investing Passively In A Real Estate Syndication?

All these factors still apply if you’re investing passively in a real estate syndication. Often, as a passive investor, you’re looking for a strong sponsor first, and then that sponsor will let you know about potential deals in the markets they’re investing in.

Even if the sponsor gives you a few bullet points about why they’re choosing a particular market, you should still do your research. Just because a sponsor says that a given market is a good one doesn’t mean that the market meets your personal criteria or investing goals, so be sure to do your own independent research.

That said, investing passively in a real estate syndication is a great way to help you narrow potential markets. If you find a sponsor you want to invest with, and they only invest in one area, then you can focus your research efforts on just that one location, rather than trying to research a bunch of random cities.