Where Should I Buy Real Estate?

The old adage that the three most important things in real estate are location, location, location is still true when it comes to investment real estate. And, since a typical minimum hold time for real estate investments is 7+ years, what happens in the future is actually more important than the current market situation. In this article we will cover some of the key factors that must be considered when choosing an investment location.

Foreseeable Future

Fortunately, real estate markets change slowly so it is relatively easy to project trends. The most important trends to consider include:

• Population migration
• Job quality and quantity
• Climate
• Property age
• Property taxes
• State income taxes
• Insurance
• Legislation

Population Migration

If people are moving out of the area, housing prices and rental rates will fall. If people are moving into an area, housing prices and rental rates will rise. While population migration patterns are available , an easier metric is historical home sales $/SqFt prices. If property prices are falling there is less demand so rental rates will also decline.

Employment

In many parts of the US, manufacturing and similar high paying jobs are vanishing and what remains are service sector type jobs. These jobs tend to pay less so the families of these workers have less disposable income. Less disposable income means they cannot afford to pay the same level of rent as they did in the past. If this is wide spread then property prices and rental rates will decline. A metric you can use is inflation adjusted per capita income. If you see a falling inflation adjusted per capita income, you need to carefully consider the long-term risk associated with buying a property in that location.

Climate

Moisture and temperature are both major factors. Properties in areas with hard freezes and significant rain fall will tend to have more maintenance than properties in milder climates and dryer areas. Construction also plays a big part in maintenance costs. For example, if the home has a brick or stucco exterior, it will have less maintenance than conventional siding. A built-up roof (ex. shingle) will require more maintenance than a tile roof.

Property Age

The older the property, the more maintenance it will require. For example, a rental property a client owned was about 40 years old. The sewer pipe connecting the house to the main started leaking. The investor ended up paying about $5,000 to replace the sewer pipe between the house and the sewer main in the street.

Property Taxes

Property taxes are a direct hit on cash flow and need to be considered. Property taxes range from .13% (Tangipahoa Parish, Louisiana) to 2.89% (Monroe County, New York).

State Income Taxes

State income taxes are another direct hit on cash flow. However, some states with no income tax may have high property tax rates.

Insurance

Insurance rates vary greatly. For example, in Florida the average property insurance policy is $1,900/Yr. and in Idaho it is $520/Yr. We could not find a national comparison of landlord insurance by state but we did find a comparison for homeowners insurance. Landlord insurance is typically 10% to 20% more than homeowner’s insurance.

Legislation

Legislation concerning tenants varies by state, county or city and can have a huge impact on risk and return. One example is evictions. Clients have told us that in California, if the tenant knows what they are doing, it can take up to 1 year to evict and cost thousands. In Las Vegas, the time to evict is typically less than 30 days and usually costs less than $500.

Summary

Choosing the right location is critical. And, it is not just about what the market is like today but about what it will be like in the foreseeable future since typical real estate hold time is 7+ years.