Looking for a less volatile market for my first investment property

[Saeed J.]

Hi all,

I'm planning to buy my first long term rental, a single family resident in the next 3-6 months. I'm in the Bay Area houses here are very expensive for me to start with. I have relatives in Houston, TX and did toured a few houses there last year. I feel like that's a good option with okish cash-flow. But when I checked some houses in Cincinnati, the deals are lot better with higher cash-flow. I'm confused now as to which market to focus on. Any help is appreciated!

[Bob Stevens]

Quote from @Saeed J.:

Quote from @John Clarken:

Most markets have potential but it all depends on your strategy. Having relatives in the Houston area who potentially could help with small would be a positive asset. Also having the local market knowledge of areas that are up and coming, where to stay away from, and any other improvements is helpful. If you visit annually or even every couple years it gives you a reason to check in on the properties. Investing in a city or state you haven't visited and and do not have extensive knowledge on can add unforeseen variables that make a deal not pencil or too much of a headache. 

Which ever market you choose will depend on your strategy and how involved you are going to be. Having someone you know in the area that you can trust is a good head start.

 Thank you this is helpful. Yeah, having family in Houston is it's biggest advantage. I will still try to get more idea of different markets.

Do you know what is the best way to get "local market knowledge"? I understand this happens when you walk around a neighborhood but I've seen many people invest out-of-state and still do fine. I just want to get more comfortable taking that risk!

 Simple. connect with those that do deals OOS . I live in FL and do all my biz in Cleveland. All my rentals are not less then 15% net , some over 20% . Happy to reccomend 

[Peter W.]

I’ve given this advice before and it hasn’t always been well received, but here goes.

You can make money anywhere but the best place to buy real estate is generally around the Tier 1 Cities (Boston, NYC, Philadelphia, DC, and SF). You can maybe add LA and  San Diego to that list. Large cities are the biggest wealth generators(network effects) and therefore have the most valuable real estate.

You can expect real estate to grow more than 5% a year so at 5% down you’ll likely double your investment in the first year. 2-3 house hacks (or live in flips) will get you to retirement in these cities. It will be hard to make it work (you might need to room share, rent by the room and otherwise get creative) but it’s also more finacially rewarding than other cities.,  

 
The other thing is you should invest in your own backyard. I haven’t a clue which neighborhoods and suburbs are safe and desirable in any city except the one I grew up in. Plus the closer you are to the houses you own, the easier it is to resolve issues that arrive.

[Russell Brazil]

Quote from @Saeed J.:

Hi all,

I'm planning to buy my first long term rental, a single family resident in the next 3-6 months. I'm in the Bay Area houses here are very expensive for me to start with. I have relatives in Houston, TX and did toured a few houses there last year. I feel like that's a good option with okish cash-flow. But when I checked some houses in Cincinnati, the deals are lot better with higher cash-flow. I'm confused now as to which market to focus on. Any help is appreciated!

 Less volatile = less risk = lower cap rate = lower cash flow.

So if less volatility is what you want, you want a lower cap rate market. If higher cash flow is what you want, you need a higher cap rate city but thus need to compromise on volatility.

[Morgan Tondre]

Quote from @Jonathan Greene:

Your plan is too basic right now, but it's a start. You are kind of throwing darts and hoping something lands from far away. As others have said, Houston is a better option over Cincinnati just because you have relatives there, but Houston is huge. It's better to have boots on the ground who can go with an agent and to inspections than trying to do it all virtually with people you don't know.

 Agreed, Jonathan! What specific area did you look into in "Houston"? There are great investment zipcodes up to an hour from downtown that could still be considered Houston, or not - so hard to know exactly. 

[Regina Blake]

Hi, my client would agree that Ohio market is doing well for investing in Real Estate. Come check it out! 

[Jonathan Greene]

Quote from @Morgan Tondre:

Quote from @Jonathan Greene:

Your plan is too basic right now, but it's a start. You are kind of throwing darts and hoping something lands from far away. As others have said, Houston is a better option over Cincinnati just because you have relatives there, but Houston is huge. It's better to have boots on the ground who can go with an agent and to inspections than trying to do it all virtually with people you don't know.

 Agreed, Jonathan! What specific area did you look into in "Houston"? There are great investment zipcodes up to an hour from downtown that could still be considered Houston, or not - so hard to know exactly. 

Yes, you want to lock in with an investor-friendly agent in the Houston area so you can maximize your learning curve and couple it with proximity to your family. Most of Houston is growing, as is most of Texas, but if you have a guide who knows the real up and comer, you can increase your curve. If you need a referral, send me a DM.

[Sheryl Sitman]

@Saeed J. 
Since 2008, Philadelphia's housing market has shown steady, moderate growth, avoiding the extreme price swings seen in more volatile markets like San Francisco, Las Vegas, and Miami. Home prices in Philadelphia have appreciated at a consistent rate of 3-6% annually, providing a predictable environment for investors. The city's diverse economy and relatively affordable home prices contribute to its market stability. In contrast, volatile markets experience significant price fluctuations due to economic sensitivity and high levels of speculation, leading to potential affordability issues and market corrections. Philadelphia offers lower risk and more predictable returns, making it a stable choice for long-term real estate investment. Additionally, there is current optimism with the new mayor, who is focusing on economic development and infrastructure improvements and literally cleaning the city block by block, further enhancing the city's investment appeal.

[Alan Asriants]

Quote from @Sheryl Sitman:

@Saeed J. 
Since 2008, Philadelphia's housing market has shown steady, moderate growth, avoiding the extreme price swings seen in more volatile markets like San Francisco, Las Vegas, and Miami. Home prices in Philadelphia have appreciated at a consistent rate of 3-6% annually, providing a predictable environment for investors. The city's diverse economy and relatively affordable home prices contribute to its market stability. In contrast, volatile markets experience significant price fluctuations due to economic sensitivity and high levels of speculation, leading to potential affordability issues and market corrections. Philadelphia offers lower risk and more predictable returns, making it a stable choice for long-term real estate investment. Additionally, there is current optimism with the new mayor, who is focusing on economic development and infrastructure improvements and literally cleaning the city block by block, further enhancing the city's investment appeal.

I will second this. My father has been a broker since 2004 and experienced the 2008 GFC himself. He invested in property in Florida and in Philly. 

The philly properties did lose value but not by much - at most 10-15% at the peak of the GFC - small multi family did especially well during rough times in solid neighborhoods. 

On the contrary the FL property lost 50% of its value in days. 

FL is also very tough right now because of Insurance issues. Making it hard for buyers to purchase homes. 

I also see lots of newer construction in COVID booming areas that are sitting on the market - UT, ID, AZ. But hear things area also picking back up more or less.

I think the NE market is fairly resilient. Lots of this has to do with it being overbuilt with not much newer construction. Demand outpaces supply in these areas. 

Here is a comparison of PA vs FL

PA: https://fred.stlouisfed.org/series/PASTHPI

FL: https://fred.stlouisfed.org/series/FLSTHPI

Please keep in mind this is Statewide. Even in Philly we have struggling markets and booming markets not even miles apart...

Since you mentioned TX here is the same data for TX: https://fred.stlouisfed.org/series/TXSTHPI

All of this being said. Investing in an area you know, is the best idea. Not knowing an area and buying a home there is not recommended 

[Jeremy Holden]

Im an investor and agent over in Phoenix Metro. I help alot of folks with this topic. If you are looking for high appreciation, low cash flow - I would direct you to tech markets, coastal / mountain markets. If you are looking for slow appreciation and high cash flow, look at the midwest and part of the south. These are generalizations but good rules of thumb. It would probably be a good idea for you to identify your investor profile and risk tolerance. That should be your guiding light .. I.E. Im an airbnb investor who specializes in 20% cash on cash deals in metro phoenix sub 700. Hope this helps!

[Mya Toohey]

Hello!!!  I used to live in Cincinnati and now live in the Tampa Bay Florida area too! Have you thought about looking on this side.  Clearwater, Largo or St Pete?  I would be happy to help you try and find something over here.  I live in Largo and love it.  Rentals are great here!

[Robert Ellis]

Quote from @Sheryl Sitman:

@Saeed J. 
Since 2008, Philadelphia's housing market has shown steady, moderate growth, avoiding the extreme price swings seen in more volatile markets like San Francisco, Las Vegas, and Miami. Home prices in Philadelphia have appreciated at a consistent rate of 3-6% annually, providing a predictable environment for investors. The city's diverse economy and relatively affordable home prices contribute to its market stability. In contrast, volatile markets experience significant price fluctuations due to economic sensitivity and high levels of speculation, leading to potential affordability issues and market corrections. Philadelphia offers lower risk and more predictable returns, making it a stable choice for long-term real estate investment. Additionally, there is current optimism with the new mayor, who is focusing on economic development and infrastructure improvements and literally cleaning the city block by block, further enhancing the city's investment appeal.

 miami doesn't have huge swings it's had 12 years straight of appreciation 

[Sheryl Sitman]

Quote from @Robert Ellis:

Quote from @Sheryl Sitman:

@Saeed J. 
Since 2008, Philadelphia's housing market has shown steady, moderate growth, avoiding the extreme price swings seen in more volatile markets like San Francisco, Las Vegas, and Miami. Home prices in Philadelphia have appreciated at a consistent rate of 3-6% annually, providing a predictable environment for investors. The city's diverse economy and relatively affordable home prices contribute to its market stability. In contrast, volatile markets experience significant price fluctuations due to economic sensitivity and high levels of speculation, leading to potential affordability issues and market corrections. Philadelphia offers lower risk and more predictable returns, making it a stable choice for long-term real estate investment. Additionally, there is current optimism with the new mayor, who is focusing on economic development and infrastructure improvements and literally cleaning the city block by block, further enhancing the city's investment appeal.

 miami doesn't have huge swings it's had 12 years straight of appreciation 

True

[Eric Fernwood]

Hello @Saeed J.,

What you should buy depends on your goals. If your goal is financial freedom you need an income that meets four requirements:

• Rent increases faster than inflation: Only if rents increase faster than inflation will you have sufficient dollars to pay inflated prices in the future.
• Sufficient to replace your current income: You must have sufficient income to replace your current income.
• Lifelong income: It must continue throughout your life.
• Low operating costs: Every dollar you lose to operating costs is a dollar less for you to live on.

Rents Increase Faster Than Inflation

We live on buying power, not a fixed number of dollars. For example, if today you require $100 per week in groceries and inflation is 4% per year, how much will you need in 5 and 10 years?

• In 5 years: $100 x (1 + 4%)^5 ≈ $122 or a 22% increase.
• In 10 years: $100 x (1 + 4%)^10 ≈ $148 or a 48% increase.

Unless your rents increase faster than inflation, you will not have the dollars to pay inflated prices and sooner or later you will have to go back to work.

The key factor for rent growth is significant and sustained population growth.

Sufficient to Replace Your Current Income

You will likely need multiple properties to replace your current income. How much capital you will need depends on the appreciation rate. Two examples.

Example #1: The appreciation rate is low, characterized by low cost properties. In such a city, every investment dollar must come from your savings. For example, if you need 25 properties to replace your current income and each property costs $300,000 and your only cost is a 25% down payment, the total amount from your savings for down payments will be:

• $300,000 x 25 x 25% = $1,875,000

$1,875,000 is a lot of post tax capital to accumulate

Example #2: The appreciation rate is 7%/Yr. each property costs $400,000, and you will put 25% down. The first property will cost:

• $400,000 x 25% = $100,000

Due to rapid appreciation, you can use cash out refinance to pay for additional properties. At 7 %/Yr, how many years will you need to hold the property before a 75% cash out refinance will yield $100,000? For simplicity, I will assume the payoff of the mortgage is the original amount of $300,000.

• After one year: $400,000 x (1 + 7%)^1 x 75% - $300,000 ≈ $21,000
• After two years: $400,000 x (1 + 7%)^2 x 75% - $300,000 ≈ $43,470
• After three years: $400,000 x (1 + 7%)^3 x 75% - $300,000 ≈ $67,513
• After four years: $400,000 x (1 + 7%)^4 x 75% - $300,000 ≈ $93,239

So, after about 4 years, a 75% cash-out refinance will pay for the down payment. Also, the property and the additional property will continue to appreciate, and you can continue to repeat the cash-out refinance process. Investing in high appreciation markets enables you to acquire the number of properties you need at a fraction of the cost of buying in a low appreciation location.

Lifelong Income

Many people face the nightmare of outliving their money. To avoid this, you need your rental income to last throughout your life. This requires that your tenants remain employed at similar wages. The problem is that all private-sector jobs are relatively short-lived. The average life of a company is 10 years. The average life of large corporations, like those on the S&P 500, is only 18 years and falling. So, in the foreseeable future, every non-government job your tenants have will vanish. Unless companies set up new operations in the city creating replacement jobs, all that will remain are lower-paying service sector jobs, which pay much less.

When average incomes fall, so do rents and property prices. City services are dependent on property taxes and sales taxes. If city revenues fall, their only option is to cut back on services, which includes police and schools. This results in increased crime and people leaving the city. This starts a downward spiral from which few cities have recovered.

The most important metric is crime. Never buy properties in high crime cities, which you will find here.

Low Operating Costs

It's not about how much you gross but how much you net. Property taxes and insurance are typically the two biggest recurring costs. Below is a comparison of three states with no state income tax.

Sources for insurance and property taxes: Insurance - ValuePenguin, State Property Tax Rates - Rocket Mortgage.

In order to demonstrate the impact of taxes and insurance on net rental income, I compared the overhead costs of a $400,000 property in three different states. (These averages represent state-level; individual cities may levy additional taxes.)

To achieve the same level of cash flow as a property in Nevada, you would need to generate a higher cash flow in Texas and Florida to offset the higher operating costs.

• Texas: The property must generate $5,752 ($9,256 - $3,504) more cash flow annually to compensate for the higher operating costs in Texas.
• Florida: The property must generate $2,343 ($5847 - $3,504) more cash annually to compensate for the higher operating costs in Florida.

Overhead costs can have a large impact on cash flow.

A Process For Selecting an Investment City

There are too many potential cities to evaluate each one. However, you can start with a list of potentially good investment cities and remove those that fail to meet additional criteria. Below is the process I used.

• Sufficient population: cities with a metro population greater than 1M. Small towns may rely too much on a single business or market segment. Wikipedia
• Significant and sustained population growth: Never invest in any location with a static or declining population. Wikipedia
• Low crime rate: Never invest in any city on Mapped: The Most Dangerous Cities in the U.S. list.
• Low operating costs:
  • Property taxes: State Property Tax Rates - Rocket Mortgage.
  • State average insurance cost: Insurance - ValuePenguin

If you follow this process, you will have a short list of cities for further investigation.

An Additional Consideration

One additional consideration is an experienced investment team. Everything you learn from books, seminars, podcasts, and websites is general information. However, you will buy a specific property, in a specific location, subject to specific conditions. The only source for all the resources, expertise, and processes is a local investment team.

Saeed, I hope this helps you select an investment location that will enable financial freedom.

[Lucia Rushton]

@Saeed J. Jair keep in mind “ having family” can not counter balance any additional expenses to purchase in Houston vs DFW for instance. If your family don’t have experience in property management then you are going to hire a PM co no matter where you invest. I would do a city analysis based on your buy box and see which city pan out

Just a suggestion and as always not written by Ai.

[Morgan Tondre]

Quote from @Lucia Rushton:

@Saeed J. Jair keep in mind “ having family” can not counter balance any additional expenses to purchase in Houston vs DFW for instance. If your family don’t have experience in property management then you are going to hire a PM co no matter where you invest. I would do a city analysis based on your buy box and see which city pan out

Just a suggestion and as always not written by Ai.

 Agreed @Lucia!