Predicting the Future of All Top 50 MSAs

[Craig Micon]

As a new investor looking at markets out-of-state, I found this blog post by @Scott Trench - 2016 Best and Worst REI Markets - to be super helpful. For those who haven’t read it, it provides a ranking of the attractiveness of the top 50 MSAs over the past year.

In the comments to Scott’s blog post, Brian Burke suggested a new analysis that would help investors forecast the future potential for the top 50 markets to complement Scott’s post, which focused on the last year in review.

I've attempted this analysis below. I'm very new to REI (currently looking for my first property), and this is my first BP post, so I'm sure some of the content below is very naive. I'd love to get your feedback for improvement. The full analysis is included in this Excel doc.

TOP 10 MSAs

Below are the top 10 markets expected to improve over the next year ranked by a metric called Future Index.

Nashville takes the top spot. This means that, one year from now, Nashville is most likely to improve its position in the 2017 Bigger Pockets market ranking. Rent-to-price and appreciation should be expected to improve from their currently levels relative to other MSAs.

Interestingly, Detroit took the 8th spot. Now, before all the Detroit fans take shots at @Joshua Dorkin please read the methodology section at the bottom of this post. There are a lot of caveats. In addition, Detroit’s starting with a much higher unemployment rate than other MSAs, which can be viewed as an opportunity or a risk.

BOTTOM 10 MSAs

Virginia Beach takes the bottom spot. Population and employment change are relatively flat. Combine that with a high vacancy rate, and you get a low Future Index.

METHODOLOGY

Future Index takes four components into account:

1. Population change over the past year

2. Employed population change over the past year

3. Building permits issued for new housing units over the past year (relative to population size)

4. Vacancy rate (current)

The basic idea is to use #1 and #2 to project future demand and use #3 and #4 to project future supply.

#1 and #2 are positive signals. #3 is a negative signal in Future Index because new units will add to the supply of rental units suppressing prices. In practice, it can also be a positive signal because it’s “social proof” that a market is expected to experience appreciation. #4 is, of course, a negative signal.

The Future Index calculation is:

Average(#1, #2) - #3 - #4/10

This isn’t a super scientific formula. It’s more of a rule of thumb. I’d love suggestions for improvement. Hopefully, it gives a basic indication of where the local market is headed and is a jumping off point for deeper investigation.

One note on vacancy rate. It was divided by a factor of 10 to help normalize for the fact that there will always be a baseline level of vacancy in any MSA.

If you'd like to dig in further, all of the details are in this Excel doc, along with instructions about how to pull all of the raw data.

CONCLUSION

Being very new to REI and BP, I'd love your feedback and suggestions to improve this analysis and also to hear whether the ranking is in line with your own expectations.

I currently live in CA and am looking to invest out-of-state, which sparked my curiosity about other markets. For other new investors looking out-of-state, I’ve also found it to be helpful to think through who you can partner with locally, travel time, and how much you’d personally like to visit before picking a market.

BP has been insanely helpful getting me started in REI. Thanks to all of the folks out there who post regularly and help new investors like myself get started!

@Scott Trench

[April Crossley]

I have found that no matter what these studies and surveys say- if you want to invest in a market outside of your own then you need to go there and spend a significant amount of time in that market. Everyone invests for different reasons (cashflow, appreciation, etc). And everyone has a different risk tolerance. The top 10 MSA's tend to be ones I avoid as they are already way over priced and very competitive. I listened to a podcast the other day where a very experienced investor was slamming an are in TN based on crime rate and saying how no one should invest there and I know a guy that owns TONS of apartment buildings in the area and is absolutely killing it on cash flow and loves the area for investing. So while growth in the area is important and I do believe all these studies are great and can give you some guidance I still feel like you have to explore. I had a coach once that kept it very simple: April - where do you like to travel to? Where do you travel to often? You will have to go check on your buildings so think of markets you like to go to. So I did... my parents live in FL, my sister lives in NC... I travel there all the time. There are a ton of sub markets within these MSAs... so I fly there, spend some time with family and go to the local REIA meetings and I am just relentless about asking people for information on different areas in their submarket. None of these studies, calculations, or surveys be able to even come close to being able to give you the insight that boots on the ground can. I take everything I see in these studies with a grain of salt. For everyone I know that is saying: stay away from that market.... I know someone else that is killing it in that market. You have to find a market that matches your investment criteria and risk tolerance.