selecting a market to invest in

[Jason Malabute]

Hey guys,

So my study shows that the South and midwest are the best places to invest in.

1. How do you determine what state is the most promising?

2. How do you select a city and submarket within the state to invest in?

3. How and where do you begin your market research?

Thank you,

jm

[Jonathan Twombly]

@Jason Malabute  You are asking a great question.

First, avoid lists of "top markets for investing".  These lists are always based on arbitrary factors and are backward-looking.  They will tell you what markets went up most last year - meaning that a huge chunk of the appreciation has happened, and you are buying at the top now.  Plus, these lists change from year to year.  If a market was really such a great place to invest, why would it be on the list one year and not on the list the next year?  Even the market lists compiled by the top brokerage firms show wild, crazy fluctuations from year to year of the top markets for investing, because they are always looking at the previous year's data.  These are marketing pieces, and complete worthless for making investment decisions.

Okay, with that out of the way, what do you actually do?

Well, you look for fundamental factors and trends that do not fluctuate quickly and are not dependent on the economy.

1.  Find markets with long-term population growth.  Start with the list of Metropolitan Statistical Areas (MSAs) on Wikipedia:  https://en.wikipedia.org/wiki/List_of_metropolitan....  Sort the data by population growth.  Eliminate anything growing more slowly than the country as a whole.  Eliminate anything where the population has not been consistently growing since 2000 (that way you eliminate places that have been shrinking for decades, had a little growth from 2000-2010, and have started shrinking again).

Next, find the markets that are easiest for you to get to.  Maybe you are lucky and live in one of them.  If not, try to find a market close enough to get there and back the same day (by plane is okay).  This is just a way to pare down the list and make your investing more manageable.

2.  Get granular with your MSA.  Within every MSA, there are areas that are growing and areas that are shrinking.  For example, yesterday I was on a call with one of my coaching students and we were looking together at the Lancaster, PA market.  Turns out that the Lancaster MSA is growing, but Lancaster city is shrinking.  That tells me that suburbanization is occurring in this market.  You would need to find out which of the surrounding towns have strong growth and which do not, and focus on the ones with good growth.

Hometown Locator (www.hometownlocator.com) compiles all the census data and goes down to the zip code level.  It is a great resource for identifying which submarkets in an MSA are growing and which are not.

You should literally get a map of the area and plot this out.

You can also piggyback on major chains.  They do a massive amount of research before opening new outlets. If you can find out where they are moving and where they are shutting down stores, it tells you a lot about the research they are conducting.  (Ignore retailers that are downsizing in general, as them shutting down is more about Amazon than anything else.)

3.  Look for good schools.  All things being equal, good schools are always a great draw for rentals.  People who cannot afford to buy in a good school district will want to rent there. And the added bonus is that the tenants who think this way are the best tenants - they are the most ambitious and disciplined and want the same for their children.  They will come up with the rent money come hell or high water to keep their kids in the good schools.

The closer an asset is located to a good school the better.

So, within the growing areas of the growing MSA, find the best school districts.  Don't just rely on websites of school rankings, though you can start there.  Ask people in those areas what are the best schools, and then get on the school district maps and find out exactly where they are.

4.  Look for economic "anchors".  Economic anchors are things that are not going anywhere anytime soon, like state government, major universities, major health care centers, or manufacturers that are independent of the economy like military suppliers.  Avoid military bases, because these are often subject to consolidation and can disappear overnight.

In the aftermath of the Great Recession, I was tracking markets like Charlottesville, VA; Ithaca, NY; and Madison, WI. These markets barely scratched 6% unemployment. Why? All three have major universities that anchored them, and Madison is also a state capitol.

5.  Jobs.  Of course, jobs are an important factor, but this fluctuates with the economy.  Nevertheless, all things being equal, you want to be closer to jobs than not.  You want properties that are in close proximity to major employers, especially the ones that are the most recession-resistant, such as anchors.

When looking at jobs, ignore the unemployment rate.  What you care about is the absolute number of jobs and whether it is growing or not.  You want to go to the Bureau of Labor Statistics and get the Metropolitan Area Employment and Unemployment Monthly Report: https://www.bls.gov/news.release/pdf/metro.pdf.  Look at Table 3, which tells you the absolute number of jobs.  You want to track this data over 12 months and see the trend.  Past reports are archived on the BLS site, so this is easy to do.

Putting it all together:  if you can identify a growing submarket within a growing MSA where the schools are great and it's near a major anchor, you are golden.  You're not immune to economic fluctuations, but you will be cushioned much more than other places.