My Out-of-State Search: Step 4 - What Market (pt 1)

"Where should I invest?"

This is easily the most commonly asked question from out-of-state investors, but there are a few things I want to highlight about the question:

1. No one can answer this question for you; the answer is unique to the investor, situation and gameplan. Risk, duration, beliefs etc. all play big roles in defining whether a market is a "good" investment, so the answer is always unique to the individual. I've summarized my plan and beliefs here:
2. Finding the right market is an important step, but is certainty not the most important decision that out-of-state investors make! A bad investment in a profitable, appreciating, or otherwise good market is still a bad investment.

There are 3 general ways to find an out of state market:

1. Find someone else's list or suggestion and use it. This is easy, but can be dangerous as your investment criteria are almost certainly different than theirs.
2. Work with a partner in one of his/her markets. This is an underrated avenue, and one that I would advocate for most people. However, this is not an option for me for a few reasons.
3. Do your own search. This is a good approach for a savvy, unconnected investor who is looking to buy out-of-state, and is the approach that I use below.

First - start with a big list!

Most of this post will focus on removing markets that don't meet your criteria. As you move later in the process, your decisions will shift a bit, but for now - it's all about getting a big list and trimming it down.

I know that I don't want to invest in a smaller market so my first step was to create a list of areas (Be sure to use Metropolitan Statistical Areas (MSA) rather than cities) that meet my size requirements. I originally listed 75 MSAs, but quickly trimmed that down to 59 areas (Equal to, or bigger than Albuquerque NM). A good list from Wiki .

First Cuts: Big and Easy

The first few cuts should focus on disqualifying markets rather than qualifying them; these should be quick, easy and productive. Note that not investing in a market is not going to be a big mistake, so don't lose sleep over the first few cuts.

Weather

Remember how I said that your believes will dictate what markets you should invest in? Well, I believe that appreciation will be higher in moderate climates than in extreme climates. So, I removed 21 markets due to the weather alone.

Too cold. Pittsburgh (and I hate the Steelers), Milwaukee, Chicago, Philly, Detroit, Minneapolis, KC, Indy, Buffalo, Rochester, Grand Rapids, St. Louis (and related foundation issues).

Note that Detroit, Milwaukee, St. Louis, KC and Indy all have very good cash flow potential, and St. Louis/KC/Indy are hot markets for rentals.

I hate Hurricanes and Tornadoes. Miami, Tampa, Orlando, Jacksonville, NO, Oklahoma City, Tulsa. I think Florida still has opportunities to be had, so ruling out Florida was a bit hard - but powering through...

Too damn hot. Phoenix, Vegas, Tuscon

Cost of property. I hope to spend less than $125K, but I don't want to scrape the gutter to do it, so cost was another easy cut. I used Zillow reports for this, which is not the most accurate, but gave me a starting point. This removed: Portland, NY, LA, Washington, Boston, SF, Riverside CA, Seattle, San Diego, Denver, San Jose, Sacramento, Austin, Raleigh, Salt Lake, and Honolulu.

Economy. we will look at the economy 101 different ways as we trim down our list but for now, I wanted to remove some glaring concerns: This removed Cleveland and Baltimore (both shrinking), Virginia Beach (too reliant upon military), and economies that looked too small to be stable (Bridgeport, Worcester, Albuquerque - ironic huh).

The Long List

This left 15 markets. Here they are, in order of size: Dallas, Houston, Atlanta, Charlotte, San Antonio, Cincinnati, Columbus OH, Nashville, Providence, Memphis, Louisville, Richmond, VA, Hartford, Birmingham, Fresno, CA

Second Cuts: Slower and More Precise

As we trim this list down, information becomes more important, and probably requires multiple sources.

Availability. Next, I did a search for houses in my general criteria (<= $125K, SFR, >=1990, Inc REO but No auction/foreclosures) and had planned to keep those markets that have around 50 or more listings.

This removed Providence and Fresno due to limited houses in that range (both had ~15). I Additionally, Louisville, Richmond and Birmingham all had ~50 listings, making their inclusion more arbitrary. As such, I did two things:

1. Kept them in my growth analysis below to see if the low listings would be offset by a booming economy.
2. Looked at the ratio of relevant listings to the population size (simply population divided by # of listings).

Louisville, Richmond and Birmingham all performed poorly on both of these criteria, and were removed.

Cinn, Columbus, Memphis and Hartford all passed, but did not do well in this area. Charlotte and San Antonio both did very well with ~500 openings and strong ratios; Atlanta, Houston and Dallas all had a ton of openings and good ratios.

Growth. Now is where things get fun. To determine both past growth and projected growth, I looked at several things: Population from 1990, 2000, 2010, 2012; 2020 population projections (http://knowledge.wharton.upenn.edu/papers/1319.pdf), 2020 projections (http://proximityone.com/demographics2020.htm), and short term job growth projections (http://wpcarey.asu.edu/bluechip/jobgrowth/secure_msa_over.cfm).

Here's what I found for each location:

• Dallas - Wonderful and stable growth! A++
• Houston - Wonderful and stable growth! A
• Atlanta - Very good. Huge past growth and good projections. Had bad luck the last 10 years but made it through quite well. B+
• Charlotte - Outstanding. Huge past growth, wonderful projections. A+
• San Antonio - Stable growth. Above average projections. B+
• Cincinnati - Ugh. Poor past growth. Future projections ranging form below average to bad. D Columbus - Average. C
• Nashville - Quite strong past growth and above average projections. B
• Memphis - Worse than average past growth, and worse than average projections D+
• Hartford - Ugh. Poor growth. Poor projections. D-

Hartford & Cincinnati were removed.

The Texas Factor

I'll word this carefully: my wife does not want to own real estate in Texas. I want to own real estate wherever it makes sense, but I want a happy wife more than that. So, we compromised: If we are unable to find a market outside of Texas, we will re-evaluate the Texas markets. Otherwise, we will rule out Texas... for now.

The Short List

And then there were 5. Here they are, with a high level overview of them:

• Atlanta. A very large market with huge houses and huge lots. Despite being hit hard in the .com, financial and housing crashes a decent economy which is poised for continued growth. However, this market has been the target of investors for some time, and we may be too late. Today, vacancy rates are high, PM rates are high, and hedge funds are there in force. Housing prices are also spiking. Maybe a risky option.
• Charlotte. A surprisingly great option, Charlotte was not on my radar starting this push, but looks very strong. It has grown well, is affluent, with low property values. It has a great economy, largely centered around finance. Vacancy rates are low and I expect all prices to spike in Charlotte over the next several years. Hedge funds also play a role here, but far less-so than Atlanta. A low-risk market. Rental law is somewhat landlord unfriendly.
• Columbus. A college town, Columbus seems to have a good culture. However, it seems to have hung around by not quite being disqualified.
• Nashville. Not being a country music fan, I don't know much about Nashville. It has plugged along well in my analyses so far.
• Memphis. Not being an Elvis fan, I don't know much about Memphis. A buy-and-rent haven, Memphis makes a lot of lists as a premium rental location. Higher vacancy and lower growth projections than some others, but has a reputation for great cash flow. Still, Memphis is clearly the #5 on this list.

Next Steps

I had hoped to trim the list down to 2-3, but 5 will have to work. I'll do a deep dive on these markets and see what we turn up.