How I Chose My Out Of State Market In 10 Steps

[Alex Schukin]

Hi BP!

After diligently reading, listening, following and doing some posting, I finally feel like I have something to contribute to the general knowledge pool for beginners. Hope you find it useful.

Based in NYC, it felt very challenging and intimidating for me to get started in real estate investing given the price levels in my area. Most generic real estate advice for beginners encourages you to start investing locally as it’s the area you know best, you understand the nuances of the population, hyper-local zoning & neighborhood dynamics, and so forth; but that wasn’t going to work for me.

After about a year of puttering on the forums/podcast and saving up capital, I started getting serious about purchasing my first property and began researching areas where I could afford an investment property.

Being quantitatively driven, I needed to determine my desired location for investing by something more stringent than just pointing a finger at a map. Below are the steps I took to narrow down my investment market. Any feedback, comments, or questions greatly appreciated.

Disclaimer: Please note that all results and judgement calls are my own and your results may differ based on the factors you prioritize. My resolution to avoid analysis paralysis led me to focus on making directionally correct decisions versus perfect decisions.

• Step 1: Pull census population data for the aggregate US and each state for 1990, 2000, 2005, 2010, 2015 and forecasts for 2030. Calculate the historical and projected compound annual growth rates (CAGR) and the change in growth rates over the last 5 year periods (2010 – 2015 vs. 2005 – 2010)
  • Over the last 15 years, the US average population growth rate was 0.9% and for the next 15 years the growth rate is expected to be 0.8%. I was generally looking for states that exceeded those growth rates OR were located on the East Coast (for proximity purposes)
  • My Results: 34 states
    • Florida, New Hampshire, North Carolina, Georgia, Virginia, Maryland, New Jersey, Rhode Island, Delaware, Maine, South Carolina, Massachusetts, Connecticut, Pennsylvania, New York, Arizona, Nevada, Texas, Washington, Oregon, Idaho, California, Alaska, Utah, Minnesota, Vermont, Tennessee, Colorado, Hawaii, Montana, New Mexico, Wyoming, North Dakota, District of Columbia
• Step 2: Taking the 34 states that I narrowed down to, I pulled the location of each Fortune 500 company and mapped their states to my list. Here I was looking for states that had at least 4 Fortune 500 companies with an HQ in the state
  • This narrowed my list down to 18 states:
    • New York, Texas, California, New Jersey, Georgia, Virginia, Pennsylvania, Connecticut, Minnesota, Florida, North Carolina, Massachusetts, Tennessee, Washington, Colorado, Arizona, Maryland, Nevada
• Step 3: Cross referenced the population growth (historical and projected) with proximity and number of Fortune 500 companies in the state to make a judgement call on states to proceed with more in depth. Increased distance away from NYC had to be coupled with attractive population growth opportunities and affordable house prices
  • My criteria:
    • Too far away / close by
    • Projected population growth in line with historical population growth AND positive
    • 4+ Fortune 500 companies AND concentration (i.e. # of companies per city)
    • General knowledge or stereotypes of location (not the best criteria but given that I had more states to choose from than I had time to explore each individual state in depth, my goal was to find reasons not to invest in a state)
  • My results: 12 states
    • Texas, New Jersey, Georgia, Virginia, Pennsylvania, Florida, North Carolina, Massachusetts, Washington, Arizona, Maryland, Nevada
• Step 4: For each of the 12 states, I listed out all the cities that had at least 1 Fortune 500 company and cross referenced those cities with a list of colleges from http://www.collegesimply.com/colleges/. I also overlaid data from Trulia & Realtor.com for median house prices and population growth by city from the census bureau. And finally, I began to filter down
• Step 5: I chose cities that had at least two Fortune 500 companies and at least two universities / colleges, a median home list price less than $300,000
  • My results: 14 cities
    • Winston-Salem, North Carolina
    • Springfield, Massachusetts
    • Allentown, Pennsylvania
    • Pittsburgh, Pennsylvania
    • Philadelphia, Pennsylvania
    • Newark, New Jersey
    • Jacksonville, Florida
    • Richmond, Virginia
    • San Antonio, Texas
    • Fort Worth, Texas
    • Las Vegas, Nevada
    • Charlotte, North Carolina
    • Phoenix, Arizona
    • Houston, Texas
• Step 6: Look for population centers that have over 500,000 inhabitants to ensure stable rental demand. Now the technical point here is that I was looking at city proper vs. MSA and therefore crossed of a few locations from my list that have significant sprawl, but would still meet the 500,000 person requirement if the full statistical area was included
  • My result: 8 cities
    • San Antonio, Texas
    • Fort Worth, Texas
    • Las Vegas, Nevada
    • Charlotte, North Carolina
    • Phoenix, Arizona
    • Houston, Texas
    • Jacksonville, Florida
    • Philadelphia, Pennsylvania
• Step 7: Going back to the generic beginner advice of investing close to home, I prioritized the East Coast cities that remained on my list
  • My results: 3 cities
    • Philadelphia, Pennsylvania
    • Jacksonville, Florida
    • Charlotte, North Carolina
• Step 8: Leveraging the following two resources from a friend, I was able to cross Jacksonville off my list due to greatest distance from NYC of the three and highest risk of natural disaster, a combination that I did not want to deal with
  • http://money.cnn.com/interactive/pf/real-estate/natural-disaster-risk-map/
  • http://www.nytimes.com/interactive/2011/05/01/weekinreview/01safe.html?_r=1&

Deciding between Charlotte and Philadelphia was challenging, but this is how I did it:

• Step 9: I pulled high level statistics from Trulia, the census bureau, and the Bureau of Labor Statistics (college educated percentage, commuter percentages, house hold income, median age, home owners percentage, marital status, crime, 1900 to present population growth, 10 year jobs growth rates).
  • Charlotte won out on household income, less crime, population growth, jobs growth and more college educated people
  • Philadelphia had more renters, less driving to commute, more single people
  • I also pulled approximate rents and median home prices by neighborhood and Philadelphia won on better cap rates
• Step 10: My final decision: Philadelphia
  • Philadelphia is also closer to NYC (2 hour train ride), has improving demographic trends (gentrification), more affordable for my budget, stronger rents, and larger urban center with more investment options (SFR and MFR)
  • There are obviously downsides such as older buildings, higher crime rates, historical population growth issues

We can debate the merits of one city over another, but eventually one has to get off the proverbial pot and make a decision. Other things that I’m thinking about now include landlord-tenant rules, opportunities to connect with other investors, turnkey company availability, etc.

Nonetheless, a mentor of mine told me that a good investment in a bad city or state is more important than a bad investment in a good city or state. There are good investments to be found possibly anywhere if you look hard enough, but the point of this exercise was to narrow down where to look in a fairly reliable way.

Best of luck all!