Emerging Markets Discussion

[Chaz Mathias]

Looking for emerging real estate markets outside of the expensive CA market. Does anyone have any objective advice for myself and others for markets that are still reasonably priced, with strong cash flow and will remain stable through a market downturn. Looking for areas that are driven by future job growth and strong leadership. 

Some markets I have heard about are cities within Ohio, Indianapolis, Memphis and West Lafayette. Are there any emerging markets in Idaho?

Thank you in advance for your thoughtful feedback. 

[Ross Denman]

@Chaz Mathias as the economy and housing markets rebound, even the best cash flow cities are getting tighter on inventory. This is not actually the case, it's just returning to the norm of 10 years ago... we've been spoiled for years as investors. Cheap money, cheap houses, and lots of inventory.

With that being said, target:

1. Rent to price ratios. Most of the midwest is relatively inexpensive to live in (Except Chicago and a few other markets.) This creates good ratios in many midwest markets. Most common ones are Indianapolis, Memphis, and Kansas City. I have heard mixed things on Ohio, but I don't have any specific reasons why. Ask other investors where they are and what their experiences are.
2. Job and population growth. I believe that Indy still has the lowest unemployment rate in the midwest as well as great population growth. Also, much of the younger generation prefers to rent as opposed to buying. I have many investors who live in a rental and own several rental properties. They like the flexibility and predictability of renting, but purchase for investments.
3. Understand property taxes in different markets. In Indy, taxes are 2% of assessed value, but homeowners can get an exemption to reduce it to 1%. When looking at a property, insure that you are figuring 2% of assessed values regardless of what the current owner is paying.
4. Understand tenant-landlord laws in your markets. In Indy, it takes about 4-5 weeks to get a tenant out after eviction. We are very much a "no pay, no stay" state. Regulations are relatively investor friendly.
5. Ensure that you can build a good team in your selected market. Not having a good team will break your investments.

Once you narrow it down, visit the city that interests you. Drive various neighborhoods. Network and interview several people in that market.

We have a ton of West coast investors in the Indianapolis market. It has investor friendly legislation, stable rent rates, and affordability, but like everywhere else, the good opportunities are slowing down. Investors always find new ways to obtain properties and create income, so watch the trends. For instance,

• When the market crashed, the banks had too much debt and the FDIC mandated selling the notes and/or foreclosing on the homes before they would have more cash available to lend. This created opportunities for investors.
• Institutional money prefers lower risk investments which were traditionally A Rated Bonds. After the bond market crashed, the fund managers started investing in the note and foreclosure markets driving up the prices beyond what other investors were willing to pay.
• Investors then moved to the HUD market. HUD homes are only available to owner occupants for the first couple of weeks, but because of the unavailability of money, investors were finding opportunities through the HUD market.
• As the banks started to lend again, the retail market rebounded and the HUD opportunities were getting scooped up by the retail market.
• Because of the availability of cheap money, investors began to leverage banks to achieve better ROI's on homes with lower cap rates. This rekindled the BRRRR strategy or investing in non-distressed properties with 20% down conventional loans.

As money becomes more expensive and the retail market shifts, investors will have to find new opportunities. Currently, there is a new look in the Note market as the hedge funds don't care to do a lot of heavy lifting and unload the discounted notes that eventually are available in different OTC markets (FCI exchange, Noted Direct, PPR, etc.) While there will always be distressed houses, motivated sellers, foreclosures, HUD homes, and even discounted retail homes, you have to watch the trends and learn how to utilize the opportunities at hand. Many people are shifting to the financial side of real estate investing like private money lending, owner financing, tax lien investing, or note investing (non-performing and performing alike.) My recommendation is to find a market, but start networking at meetups and REIA's to understand the current trends.

I just received an email from one of the most successful wholesale educators in the midwest who is now getting in to note investing. I believe that the financial side of investing is the direction that the market is moving, but who knows... it's much easier to see in hindsight. Eventually, subdividing land, and land development will probably come back strong again as well.