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How to research real estate markets
I am new to real estate investing, and am looking for advice on how to research the best markets. What information do you look for? And what resources do you use to gather the information?
I have decided to target multi unit apartment complexes in the midwest, but there are still a lot of good markets out there, and I don't know how to narrow down my search further.
Thanks,
Matt
Originally posted by @Matt Mahony:
I am new to real estate investing, and am looking for advice on how to research the best markets. What information do you look for? And what resources do you use to gather the information?
I have decided to target multi unit apartment complexes in the midwest, but there are still a lot of good markets out there, and I don't know how to narrow down my search further.
Thanks,
Matt
Hi Matt,
Welcome to BP,
You are in the perfect place to get those answers. Start with the blue bar above, click on the 'Learn' then 'free how-to Guide'. Listen to the podcasts and blogs as well. There are endless tools here to help. Happy investing.
Kudos,
Mary
@Matt Mahony City-data is a good site. I look up in their forums and type in exactly what i'm looking for. I even type street names and what not and 9 times out of 10 something comes up. It's a site where people come to talk about neighborhoods, relocating, etc. Locals give others opinions about where they live. It also has a neighborhood map for most cities where you can literally look at a block or section of a neighborhood and find out it's average income, type of employment residents are in, and hundreds of other factors.
I also utilize crime maps, call local brokers, and also private message people on here who are locals in the area i'm looking at and ask them about their opinion about the property address I am interested in. In this day and age, the internet will give you a wealth of information. It truly is a great time to be an out of state investor with all the tools we have.
Hello @Matt Mahony ,
If your goal is achieving financial freedom as quickly as possible, there may be a better solution than multi-unit apartment complexes in the midwest. I see nothing wrong with multi-unit apartment complexes or any property type or location as long as every property meets the following criteria:
• It is located in an area likely to appreciate over time
• It is highly likely to have sustained profitability
• Located in an area with real estate investor friendly taxes and legislation
The process I recommend is to start with the location and then progressively narrow your focus down to specific properties.
Location
The old adage that the three most important things in real estate are location, location, location is still true but areas change. Areas that are good today can decline and sometimes areas that were once bad get better. Is it possible to accurately predict what an area will be like in 15 or 20 years? No, but you can make a reasonable guess what an area will be like in 5 years and extrapolate from there. Three indicators I think you should watch are population, crime and job stability.
Population Migration
If people are moving out of the area, the housing prices and rental rates are likely to fall. If people are moving into an area, then there is likely to be appreciation and rising rents. Here is a website that shows population shift by area. Also, many areas have populations that are getting older. As people age they tend to want smaller properties and lower rents. If you are considering a home targeted towards families and the area is aging, you will likely find demand decreasing. So, also check the population demographics.
Crime
Stable or increasing property values and rents rarely occur in areas with high crime. People with sufficient income move from areas with high crime to areas with lower crime. The people who cannot afford to move tend to have lower incomes thus resulting in falling rents and property values. What you need to consider is the types and frequency of crimes in the area and how it is changing. Where can you find such data? Here are some sites: crimemapping.com, homefacts.com, crimereports.com and spotcrime. Depending on your city/area you may have such data available from the local police department or the sheriff's department. Remember that it is not just crime in the specific neighborhood that matters, you also have to consider areas near the property where people will shop and such. For example, I was evaluating a property in an area that I did not personally know so I was using Google Street View to check the drive path to the property. I noticed a strip mall near the property where I anticipated tenants would shop. When I checked that location on one of the crime sites I discovered that robberies and assaults occur frequently at the strip mall and that the situation appears to have been the same for the past few years. I rejected the property based on these findings. So, check the shopping areas that tenants would use. You should also check the sex offender database. See familywatchdog.us but there are likely many others. Some states/counties/cities have their own sex offender/crime websites.
Job Quantity and Quality
In many parts of the US, manufacturing and similar jobs are going away and what remains are service sector jobs. Service sector jobs tend to pay less than manufacturing and similar jobs so the families of these workers have less disposable income. Less disposable income means that they cannot afford to pay the rents that they did in the past. Look at the major employers, what industries they are in and their future prospects. Another key indicator is inflation adjusted per capita income over the past few years. If you see a declining job market or dropping per capita income adjusted for inflation, you need to carefully consider the long term value of the property. On inflation adjusted numbers, "official" inflation during 2014 is at 1.7%. However, “official” inflation numbers do not include energy or food. Personally, I use energy and eat so the inflation I experience at the gas station and the grocery store is much higher than the “official” number. Depending on whose numbers you use, actual inflation is between 6% and 10% per year. Keep in mind that unless the per capita adjusted income is rising at or greater than the rate of actual inflation, your potential tenants disposable income is eroding. What this means is that if you buy a property that rents at the upper end of the rent range, you will likely have increasing time-to-rent and declining rents over time.
Real Estate Investor Friendly Taxes and Legislation
Legislation concerning tenants vary by state, county or city and can have a huge impact on your return. An example is evictions. Clients have told me that in California, if the tenant knows what they are doing, it can take up to 1 year to evict and cost thousands. In Las Vegas, the time to evict is typically less than 30 days and usually costs less than $500. The best source of this sort of information would be local property managers.
State taxes and property taxes are another big factor to consider. For example, suppose you are considering three identical properties that rent for the same amount (yes, this is an over simplified and contrived example!). And, one is located in Austin, one is located in Indianapolis, and one is located in Las Vegas. Which one is better? Below is a table showing approximate state personal income tax (I will assume a person filing separately with a $50,000 income) and property tax rates for all the cities. (Note, please forgive me if I am off on the values. My goal is to communicate a concept, not accurate math.) Note: Property taxes source and state income tax source.
Below is a (oversimplified) formula for estimating cash flow assuming 100% occupancy, no maintenance, etc. in order to keep the numbers simple:
Cash Flow = Rent x 12 - DebtService x 12 - PropertyTaxRate x PurchasePrice
And, to take into account state taxes:
Annual Cash Flow = (Rent x 12 - DebtService x 12 - PropertyTaxRate x PurchasePrice) x (1 - StateTaxRate)
For Austin: ($1,000 x 12 - $600 x 12 - 1.9% x $150,000)x (1 - 0%) = $1,950/Yr
For Indianapolis: ($1,000 x 12 - $600 x 12 - 1.07% x $150,000)x (1 - 3.4%) = $3,086/Yr
For Las Vegas: ($1,000 x 12 - $600 x 12 - 0.86% x $150,000)x (1 - 0%) = $3,510/Yr
In summary:
Real return is about how much money actually flows to you, not gross rent or ROI. Property taxes and state taxes have a big effect on the real return.
What to Buy
Now that you have a (few) location(s) that appear(s) to be good, you need to know the best types of investment properties in that local. Where can you get highly detailed information on type, location, configuration and rent range in any location? Local property managers. Most new investors think of property managers as someone to collect the rent after they buy a property. I strongly disagree with this view. I consistently find properties for my clients that meet the dual goals of profitability and appreciation through processes and an investment team. The key member of any real estate investment team is the property manager. (I am a Realtor; I do not manage properties.) Below is a diagram showing four categories where a good property manager can help you be successful. Your initial interviews with three or four property managers will concern their local knowledge of: type, location, configuration and rent range.
Below is more detail on this four characteristics.
• Type: Condo, high rise, single family, duplex, single story, two story, etc.
• Configuration: Two bedroom, three car garage, mud room, etc.
• Location: Usually a very specific area. For example, west of 23rd St and south of the river, etc.
• Rent Range: If the majority of the population to which you want to rent are willing and able to pay $1,000/Mo to $1,300/Mo. you should only be looking at properties that you can purchase, rehab and profitably rent in the same rent range.
Start by telling each property manager that you are just starting out and are looking for a property manager to work with. You need to have a well defined list of questions before you start interviewing and ask the same questions of three or four property managers. (I have a set of property manager interview questions that I'd be happy to share.) After these interviews you will have a pretty good idea of the local market and you may even have an opinion whether any of the property managers you talked to are people you would like to deal with in the future. Once you have a reasonable idea of type, location, configuration and rent range (which I call a property profile), you are in a position to determine whether you can achieve the other goal: profitability.
Once you know the property profile you can use Zillow (or many other sites) to determine the typical sale price of properties in that local. With a reasonable knowledge of the rent and price of typical properties, you need to determine whether you can make a profit. In my practice I am almost constantly making what I call an investigate/forget decision. I do this so often that I created an online tool which enables me to instantly estimate a break-even price (where rent equals recurring expenses). Below is a screen shot of the tool. (I'm also happy to share it. There is no charge or obligation for using the tool.)
In the example above I entered the estimated rent and other factors and tapped Estimate. The result is that if the property were purchased for $185,000, the rent ($1,200/Mo.) would equal the recurring costs (debt service + taxes + insurance + property management fees + monthly fees). This means that if I thought I could get the property for $165,000 I would investigate further. If I thought I would have to pay $185,000 or more for the property I would forget this one and look for another. Remember that this tool is only for making a quick investigate/forget decision, not a purchase decision.
If you cannot make a profit, look somewhere else. Once you find a place that looks to have good potential, get the name of a local Realtor from the property manager(s). Tell the Realtor what you are looking for (type, location, configuration) and have her/him send matching properties. Be sure to send the properties that you are interested in to the property managers and get their opinion as to the property in general (will it make a good rental) and what is their estimate on the rent and time to rent. The answers from the property managers should be close. If everything looks good, I would travel to that location and meet with the property managers and the Realtor. These are the people who will be responsible for one of the more expensive assets you will own and you need to evaluate them and see some properties.
Matt, let the numbers be your guide; do not start with a pre-conceived technique, property type or location.
I wish you the best.
@Eric Fernwood I would be interested in a link to the calculator and the property manager interview questions.
There are a lot of factors that go in to researching a market but the 3 major things you should start with at a metropolitan statistical area are:
1. Population trends
Is the population growing or shrinking
What is the net migration in and out of the city
What are the age demographics of the population growth
2. Economy & Employment
Who are the major employers and are they from diverse industries
Are the major employers expanding or contracting?
Are new businesses moving in?
What is the job growth---look at number of employed, not unemployment rates
How much is the Gross Metropolitan Product and is it growing or shrinking?
What percent of population is living below the poverty level
3. Income trends
Are incomes increasing or shrinking?
214,000 new jobs were created last month nationwide with no income growth. 32% of the new jobs were low paying retail and food service jobs and many were part time.
I know that a lot of people say to look at crime rates but I think a metropolitan statistical area is too broad to look at crime. Every MSA and city has high crime areas and low crime areas. If you look at it from an MSA level you won't be able to see the forest for the trees. I think it's best to choose a market on economic fundamentals and then drill down and identify the best areas within that market.
These are just the macro level things to start with and begin narrowing markets down. There's all kinds of micro level things you also need to look at like rent ratio's, property taxes, insurance rates, landlord/tenant statutes, vacancy rates and the list goes on.
I've written a paper on the topic that I'll be happy to share with you if you or anyone else would like a copy. Feel free to reach out if I can help.
Best wishes,
Mike
Matt (and others),
I am an investment specialist in Austin, TX and would be happy to help you break down your target areas.
My first advice is research. From there it's turning the data into quantifiable information.
Feel free to send me a message. We could even get on the phone briefly if you'd like.
Yoni
@Mike D'Arrigo Mike could you please send over the paper you mentioned you wrote on this topic. Thanks! Look forward to the read
Eric, what a fantastically written and well organized response. I think I speak for a lot of newbies like myself, that this is such a wealth of information. Thank you very much; this helps tremendously.
Best,
Vickie
@Mike D'Arrigo I realize this was a long time ago, but if you have that paper I'd love to check it out.
Thanks for all the good information guys!
@Mike
@Mike D'Arrigo I was wondering if you were still willing to share your paper?
Thanks!
Garnett
@Eric Fernwood, great thread! would you mind sending me the calculator and interview questions, please?
Thanks!
@Mike D'Arrigo, interesting input. I'm interested in reading the paper that you wrote. Would you mind sending me a copy please?
Thanks,
This is an Amazing Thread. I currently have an accepted Short Sale offer on a 4plex in Phoenix AZ. This is my first investment property. I was trying to build a step by step process to purchasing out of state investment properties and @Eric Fernwood was super helpful! I'm hoping you are still willing to share your Interview Questions for Property Managers? I am in the process of generating a set of questions but this would save valuable time.
@Mike D'Arrigo I would be very interested in reading your paper as well if it is still available.
Thanks again to you vets for helping out us newbies. We value your experience and knowledge.
Best,
Trevor Stonehouse
Originally posted by @Eric Fernwood:
Hello @Matt Mahony ,
If your goal is achieving financial freedom as quickly as possible, there may be a better solution than multi-unit apartment complexes in the midwest. I see nothing wrong with multi-unit apartment complexes or any property type or location as long as every property meets the following criteria:
• It is located in an area likely to appreciate over time
• It is highly likely to have sustained profitability
• Located in an area with real estate investor friendly taxes and legislationThe process I recommend is to start with the location and then progressively narrow your focus down to specific properties.
Location
The old adage that the three most important things in real estate are location, location, location is still true but areas change. Areas that are good today can decline and sometimes areas that were once bad get better. Is it possible to accurately predict what an area will be like in 15 or 20 years? No, but you can make a reasonable guess what an area will be like in 5 years and extrapolate from there. Three indicators I think you should watch are population, crime and job stability.
Population Migration
If people are moving out of the area, the housing prices and rental rates are likely to fall. If people are moving into an area, then there is likely to be appreciation and rising rents. Here is a website that shows population shift by area. Also, many areas have populations that are getting older. As people age they tend to want smaller properties and lower rents. If you are considering a home targeted towards families and the area is aging, you will likely find demand decreasing. So, also check the population demographics.
Crime
Stable or increasing property values and rents rarely occur in areas with high crime. People with sufficient income move from areas with high crime to areas with lower crime. The people who cannot afford to move tend to have lower incomes thus resulting in falling rents and property values. What you need to consider is the types and frequency of crimes in the area and how it is changing. Where can you find such data? Here are some sites: crimemapping.com, homefacts.com, crimereports.com and spotcrime. Depending on your city/area you may have such data available from the local police department or the sheriff's department. Remember that it is not just crime in the specific neighborhood that matters, you also have to consider areas near the property where people will shop and such. For example, I was evaluating a property in an area that I did not personally know so I was using Google Street View to check the drive path to the property. I noticed a strip mall near the property where I anticipated tenants would shop. When I checked that location on one of the crime sites I discovered that robberies and assaults occur frequently at the strip mall and that the situation appears to have been the same for the past few years. I rejected the property based on these findings. So, check the shopping areas that tenants would use. You should also check the sex offender database. See familywatchdog.us but there are likely many others. Some states/counties/cities have their own sex offender/crime websites.
Job Quantity and Quality
In many parts of the US, manufacturing and similar jobs are going away and what remains are service sector jobs. Service sector jobs tend to pay less than manufacturing and similar jobs so the families of these workers have less disposable income. Less disposable income means that they cannot afford to pay the rents that they did in the past. Look at the major employers, what industries they are in and their future prospects. Another key indicator is inflation adjusted per capita income over the past few years. If you see a declining job market or dropping per capita income adjusted for inflation, you need to carefully consider the long term value of the property. On inflation adjusted numbers, "official" inflation during 2014 is at 1.7%. However, “official” inflation numbers do not include energy or food. Personally, I use energy and eat so the inflation I experience at the gas station and the grocery store is much higher than the “official” number. Depending on whose numbers you use, actual inflation is between 6% and 10% per year. Keep in mind that unless the per capita adjusted income is rising at or greater than the rate of actual inflation, your potential tenants disposable income is eroding. What this means is that if you buy a property that rents at the upper end of the rent range, you will likely have increasing time-to-rent and declining rents over time.
Real Estate Investor Friendly Taxes and Legislation
Legislation concerning tenants vary by state, county or city and can have a huge impact on your return. An example is evictions. Clients have told me that in California, if the tenant knows what they are doing, it can take up to 1 year to evict and cost thousands. In Las Vegas, the time to evict is typically less than 30 days and usually costs less than $500. The best source of this sort of information would be local property managers.
State taxes and property taxes are another big factor to consider. For example, suppose you are considering three identical properties that rent for the same amount (yes, this is an over simplified and contrived example!). And, one is located in Austin, one is located in Indianapolis, and one is located in Las Vegas. Which one is better? Below is a table showing approximate state personal income tax (I will assume a person filing separately with a $50,000 income) and property tax rates for all the cities. (Note, please forgive me if I am off on the values. My goal is to communicate a concept, not accurate math.) Note: Property taxes source and state income tax source.
Below is a (oversimplified) formula for estimating cash flow assuming 100% occupancy, no maintenance, etc. in order to keep the numbers simple:
Cash Flow = Rent x 12 - DebtService x 12 - PropertyTaxRate x PurchasePrice
And, to take into account state taxes:
Annual Cash Flow = (Rent x 12 - DebtService x 12 - PropertyTaxRate x PurchasePrice) x (1 - StateTaxRate)
For Austin: ($1,000 x 12 - $600 x 12 - 1.9% x $150,000)x (1 - 0%) = $1,950/Yr
For Indianapolis: ($1,000 x 12 - $600 x 12 - 1.07% x $150,000)x (1 - 3.4%) = $3,086/Yr
For Las Vegas: ($1,000 x 12 - $600 x 12 - 0.86% x $150,000)x (1 - 0%) = $3,510/Yr
In summary:
Real return is about how much money actually flows to you, not gross rent or ROI. Property taxes and state taxes have a big effect on the real return.
What to Buy
Now that you have a (few) location(s) that appear(s) to be good, you need to know the best types of investment properties in that local. Where can you get highly detailed information on type, location, configuration and rent range in any location? Local property managers. Most new investors think of property managers as someone to collect the rent after they buy a property. I strongly disagree with this view. I consistently find properties for my clients that meet the dual goals of profitability and appreciation through processes and an investment team. The key member of any real estate investment team is the property manager. (I am a Realtor; I do not manage properties.) Below is a diagram showing four categories where a good property manager can help you be successful. Your initial interviews with three or four property managers will concern their local knowledge of: type, location, configuration and rent range.
Below is more detail on this four characteristics.• Type: Condo, high rise, single family, duplex, single story, two story, etc.
• Configuration: Two bedroom, three car garage, mud room, etc.
• Location: Usually a very specific area. For example, west of 23rd St and south of the river, etc.
• Rent Range: If the majority of the population to which you want to rent are willing and able to pay $1,000/Mo to $1,300/Mo. you should only be looking at properties that you can purchase, rehab and profitably rent in the same rent range.Start by telling each property manager that you are just starting out and are looking for a property manager to work with. You need to have a well defined list of questions before you start interviewing and ask the same questions of three or four property managers. (I have a set of property manager interview questions that I'd be happy to share.) After these interviews you will have a pretty good idea of the local market and you may even have an opinion whether any of the property managers you talked to are people you would like to deal with in the future. Once you have a reasonable idea of type, location, configuration and rent range (which I call a property profile), you are in a position to determine whether you can achieve the other goal: profitability.
Once you know the property profile you can use Zillow (or many other sites) to determine the typical sale price of properties in that local. With a reasonable knowledge of the rent and price of typical properties, you need to determine whether you can make a profit. In my practice I am almost constantly making what I call an investigate/forget decision. I do this so often that I created an online tool which enables me to instantly estimate a break-even price (where rent equals recurring expenses). Below is a screen shot of the tool. (I'm also happy to share it. There is no charge or obligation for using the tool.)
In the example above I entered the estimated rent and other factors and tapped Estimate. The result is that if the property were purchased for $185,000, the rent ($1,200/Mo.) would equal the recurring costs (debt service + taxes + insurance + property management fees + monthly fees). This means that if I thought I could get the property for $165,000 I would investigate further. If I thought I would have to pay $185,000 or more for the property I would forget this one and look for another. Remember that this tool is only for making a quick investigate/forget decision, not a purchase decision.
If you cannot make a profit, look somewhere else. Once you find a place that looks to have good potential, get the name of a local Realtor from the property manager(s). Tell the Realtor what you are looking for (type, location, configuration) and have her/him send matching properties. Be sure to send the properties that you are interested in to the property managers and get their opinion as to the property in general (will it make a good rental) and what is their estimate on the rent and time to rent. The answers from the property managers should be close. If everything looks good, I would travel to that location and meet with the property managers and the Realtor. These are the people who will be responsible for one of the more expensive assets you will own and you need to evaluate them and see some properties.
Matt, let the numbers be your guide; do not start with a pre-conceived technique, property type or location.
I wish you the best.
Hi Eric,
You have provided a wealth of information that is still relevant even today - thank you!
Do you still have the tool you referenced? If so, are you willing to share?
Thanks in advance!
Hey Matt!
I can give insight into Oklahoma's Market. To overview, we're incredibly stable with low cost of living and low unemployment. In the last recession with other markets saw 20% drops in their property values, we saw maybe 5.
Because of the stability, we don't have a lot of distressed sellers. You can't get severely undervalued properties and do great with BRRR method super consistently, however price points for cash flowing rentals are great. You can buy properties that don't need to be rehabbed for 60k and still do great.
We're very landlord friendly. You can do an eviction within a month for under $100.
I'm happy to answer any questions. I just want to make sure OKC is on your radar!
Hi @Eric Fernwood ,
I know this is well over 4 years ago, but just thought I let you know that this information is helping others such as myself! Thank you for taking the time to put this together. I'm beginning my adventure in long-distance investing from Los Angeles, CA and I am happy I stumbled across this discussion post. If you don't mind sharing it, I would love to check out the Break-Even Estimator tool. Wishing you nothing but success.
Thanks!
Paul
@Matt Mahony Loaded question!! First start with your OWN strategy. What is most important to YOU?
Cashflow
Growth/appreciation
Maybe both? Hybrid?
Once you know your goals-- it will knock out the markets for you. Then you have price---- how much do you want to spend one each property? Budget? What area will you be in based on that price? That will then- knock out some markets.
Then you are left with the markets that fit YOUR needs and go from there. I really think people make it way to hard and you get stuck in analyzing too much and spending way too much time on markets that actually don't fit your strategy.
@Eric Fernwood I can't begin to explain how helpful and appreciated your response is! Are you still willing to share the break even tool and interview questions?
Hello Erica,
Thank you for your kind words. People were very kind to me when I first started investing in real estate. My way to repay their kindness is to help others.
We've decided to patent the algorithm for the break even tool so until that is complete we are not allowing access. On the the while paper on selecting a good property manager, happy to provide it. Just send me an email and I will respond with the paper. This is true for anyone who wants the paper.
My partner and I are engineers and have had to replace property managers a few times. We decided to create a process to make finding the next property manager faster and easier. Later we decided to turn it into a white paper since it worked well for us. Especially the interview questions. I hope you find it useful.
Best regards,
...Eric