How can I judge market areas using more objectivity

Question

One of the problems I've noticed while analyzing a specific location in my local market is that I analyze it based on whether or not I would personally live there. I don't think this is the proper way to analyze an area. I know my areas pretty well and I would like to know what specific objective metrics I should be looking at when deciding whether an area is "good" or not. I want to develop a system of analyzing a location that can be duplicated all over the country. I don't want to just rely on my subjective feelings about an area. For example, there are a few 2-4 units in Joliet that I like, but because I personally would never live in Joliet, I immediately cross those properties off my list for potential investment.

James Wise · Answer

I despise terms like good and bad neighborhoods. Good and bad for what? To live in? To invest in? To make money in? As such I created a grading scale from A-F to provide a set of expectations on characteristics one could expect when investing in certain classes of properties. Not sure where you are investing but below are some of these guides for individual markets that are popular with investors.

The Ultimate Guide to Grading Cleveland Neighborhoods

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The Ultimate Guide to Grading Kansas City Missouri Neighborhoods

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The Ultimate Guide to Grading Birmingham Alabama Neighborhoods

David Dachtera · Answer

Instead of focusing on your own feelings, focus on the numbers. Lots of places you wouldn't personally live can be quite good for rental income.

In the end it's not about you - it's about people seeking shelter. Where would THEY live (any place they can afford, really).

Take what you like about a property and ignore your own preferences about it as a residence.

My $0.02 ...

Bob Stevens · Answer

its all about the numbers.  Of course do not judge based on if you would live there.  I have  been doing all my business in the Cleveland markets, about 500 deals, and I would never live there. As long as I get 15- 20% net caps, used to be higher, I buy them and or flip them to investors . Of course we do not work in war zones

Good Luck

Andre Crabb · Answer

I love this question...I really like running the numbers and analyzing markets...I made a handful of spreadsheets before I moved!

@Albert Velasquez shoot me a DM and let's see if I can help you narrow down your search :)

Forrest Williams · Answer

Several things you can look at:

School scores. Better schools usually indicate a better area. Use a website that grades schools, and try to stay in those districts.

Crime: Low crime is better than high crime, and not all crime is equal. If there are shootings and violence in the area, I would avoid them.

Rent: Using rentometer or another site, find out which areas will give you the best bang for your buck. Make sure to cross reference with crime and school scores, some areas have a great ROI on paper, but will not appreciate because the neighborhood is dangerous.

Appreciation: Are property values in the neighborhood going up? By what percentage? A neighborhood appreciating rapidly now may be too expensive, but one that is consistently climbing could still be a great investment in 5, 10, 20 years.

Talk to a realtor that knows the areas. We're pretty friendly and can help you out too!

Mike D'Arrigo · Answer

@Albert Velasquez you already know what you're doing wrong so take the personal feelings out of your analysis. When I evaluate a market, I look at it through the eyes of potential tenants and what kind of renter that the area will attract. Personally, I place the most emphasis on crime and safety. Good tenants don't want to live in the hood. I look at the average rent in the area. Higher rents attract better tenants. I don't put a lot of emphasis on schools. Highly rated schools are generally located in more affluent and expensive neighborhoods which aren't always the best rental neighborhoods. The main reason I don't pay much attention to schools is that 66% of renters don't have children so schools are pretty irrelevant for  most and those that do have children, the majority are not of school age. GoogleMaps will tell you a lot about a neighborhood. If you see strip malls with payday loan places, liquor stores or bail bondsmen, you can be sure that it's a fairly rough area.

Dan Maciejewski · Answer

I like to reverse engineer business.

Start with who your ideal tenant is.  Or start with your ideal return which should back you into the rents you're looking for (based on cap rates in the area you're looking at).

If you think of who your ideal tenant is, which will give you a target rent, you should come up quickly with the areas they want to live.  You'll be able to tell what's important to them.  Is it schools?  proximity of nightlife?  Organic stores nearby?  Closeness to work?  Etc. . . .

The you will vet the areas that your tenants want to live and look for deals there.  This way narrows down your search significantly while allowing you to search wider.  You know where in any given location the area you want to buy.

I also use metrics like cap rate, but you really don't determine that -- the market does.  If you do it the way I said above, you CAN find areas that fit your criteria with better or worse cap rates.  I like to know what I'm looking for before I start looking -- I go into car dealerships knowing what I want.  I don't let the car salesman tell me what I want.  Others are different, though.

To answer your specific question, here are some metrics that are important to me.  Cap rate (current at purchase and after stabilization).  ARV vs cost to improve.  Current rents vs ARV rents.  Job markets in a given area (I don't like places with one or two sources of jobs).  Types of prevalent crimes (personal vs property).  Will an economic swing affect my ideal tenant in this area (will they move in/out/up/down)?

Depending on how much you're buying / developing: What's in development for the city -- do they have any plans for improvement?  What businesses are moving in or out?  Who is the big developer in the area and what are they buying or selling?  What are the biggest property owners and businesses doing?

Patrick Shep · Answer

Great advice. I think it comes down to making sure your numbers are correct and also knowing where your acceptable risk level is. Higher ROI will likely be a less desirable area for some, but remember the median household income is $67k. That means plenty of people near or below need housing. There will always be risk and if you’re not willing to accept any, you won’t make a return on your investment.

John Hu · Answer

everything other people have said; I got slight 1 step further and segment the market by potential customers.  I see being a landlord as a business and your tenants are your customers.  when you break it up like that then you can start looking at demographics... e.g.

I'll give you an example - I have a 3 unit in Jefferson Park.  its a little far from the blue line so I basically broken down the potential personas to the following

1) Single Parents looking for good neighborhood school (Beaubien / Taft are considered better in the CPS neighborhood school rankings)

2) lower income young room mates looking to split rent

3) late 20 early 30s work from home and wanting to get away from the hustle and bustle of the hipper neighborhoods and save some money

4) people who have lived in the area for a while and like the area

for each one I look up the demographic for the area / city and then target income level and assume for any given year there's probably 5% of the overall demographic that would be looking to move. Assuming that number is high enough, I would then look reverse the perspective and ask if I was one of these personas, would I want to live in this property?

How can I judge market areas using more objectivity

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