How to choose the right market for you

When you start investing, WHERE you invest is just as important as choosing WHAT you invest in. But what makes a market good or bad? Why would you choose one over the other? How can I compete in a market where the big guys are buying up everything? Those questions are becoming harder and harder to answer in today’s hot market, especially when you’re first starting out.

The most important thing to keep in mind is: what are your goals! If you want to flip houses, then you should probably look at different markets than someone who wants to hold rental properties for 30 years. But I’ll go into some of the key performance indicators that I use.

Tertiary Markets

First of all, what’s a Tertiary Market? Equity Multiple says this: “Tertiary markets are smaller metro areas that are not large enough to be primary or secondary markets. Investments in these markets can be riskier, but have the potential for high returns.”

Sounds scary right? Maybe not so much. These are your smaller cities near a big city. The populations of these cities might be 100,000 people or more. There’s still people working and living there and maybe they even commute to the primary market for their jobs.

And as you might guess, properties are cheaper in these markets, so the rents can typically cover the mortgage and pull in a profit.

BUT: everyone is starting to look in these markets, and they can be higher risk, so how can you mitigate that risk?

Invest in what you know

The first way to mitigate risk is to stick with what you know! Simply because of statistics, there’s a very high chance that you live in or near one of these markets. If your market is overpriced, then there’s probably a smaller city nearby that isn’t.

This is a market you probably understand, or know people that understand it. That knowledge is invaluable! You know which streets are bad, and which are improving in a way that the big national buyers can’t, and you can use that to your advantage.

And maybe you just can’t invest anywhere near where you live. Maybe you live in the middle of San Francisco, or you live 4 hours from any large town. There’s still hope! You just have to choose a market somewhere else and become an expert in it. Visit the place. Meet people who have lived there for their whole lives. Work with those people as your property manager, agent, and lender! It’s harder to invest at a distance, but if you do it right, it can pay off huge.

Population

The first thing I look at in a market is population growth. It is the most important indicator of the health of the rental market and will tell you how your properties will perform over time.

Declining

Run away. Fast! This means that vacancy is only going to increase over time. So there will be fewer home buyers and fewer people renting. The city is dying and you don’t want any part of it.

Steady

Workable, but tricky. This means that as more housing is built, vacancy will have to increase, so you have to be sure to only buy in areas that will remain steady over time.

Massive Growth

Think 2-4% growth over time. Sounds perfect right? Well it also sounds perfect to everyone else. This market is probably very hot and very competitive. Good deals are typically off market and very hard to find. If you want to invest in a city like this, either live there or work with someone who does. If you can make it work, you’ll make a fortune.

Small Growth

Think 0.2-0.8% over time. This is a slow growing market, and probably isn’t as hot as other parts of the country. Typical returns are good, not great. But this is personally where I like to be because it’s a mix of decent deals and not as much competition.

Jobs

Right after population, it’s all about jobs! Without steady jobs, no one’s buying a house or paying rent. I like a mix of jobs, especially in a tertiary market. If there’s only one big employer in the city, what happens if they decide to close the plant?

White collar jobs are the best for a lot of reasons, but most important, white collar jobs are job multipliers. Let’s use a story as an example:

Case Study: Jay

Jay just graduated with a bachelor’s degree and got a job at XYZ Insurance Company. It pays well, so he moved to the nice part of town and rents a 1 bedroom apartment near some restaurants. The commute is alright because he lives close to the office, but he still owns a car and likes to get outside the city on the weekends to golf and hike.

Just in that small story, Jay’s job has started paying dividends into the local economy. Just to name a few things:

• He pays the mechanic when his car breaks down.
• He pays his hair dresser every 6 weeks for a haircut.
• He pays for the landscapers and workers at the golf course.
• He pays for the hosts, waiters, and chefs at the local restaurants.
• He pays the local grocery store workers for his food.
• He pays higher taxes because of his earnings, which goes to the local infrastructure.
• And on and on...

Research, Research, and more Research

We talked about a couple things here, but it is so important to know everything you can about where you invest. But I actually hate telling people to do their research. I see the uncertainty in their eyes and I know they won’t do it because they either don’t know how, or don’t want to spend countless hours on the computer looking up every aspect of the city.

But that’s not the only way to research! Go to town hall and talk to people, or just call them on the phone. I just had a lovely phone call today with the Director of Economic Development in one of my local markets. Ask them about what the city has to offer for your type of investment and they’ll love to talk about it. If they don’t have anything to say about it, then there probably is no plan, which could be a warning sign.

And talk to people! You’ll never learn as much about the city from the computer as you will just talking to the guy who lived there for 30 years. He might not have the vision you have for investment. He might even tell you not to invest. And he might be right! But he also might be wrong! Just learn as much as you possibly can. Be the expert!