Quote from @Eric Fernwood:
Hello @Vidal Gonzales,
If your goal is a dependable passive income, the most important decision you will make is the location. The location determines all the long-term characteristics of an investment property necessary for a dependable passive income. The following is how I define a dependable passive income.
- Reliable - You continuously receive the income with minimal interruptions, in good and bad economic times.
- Inflation Adapting - Your rental income increases faster than inflation, so you have the additional dollars you need to maintain the same lifestyle.
- Persistent – The income continues for a long time; you and your spouse will not outlive the income.
Once your goals are defined, the next step is to select a location that will provide a dependable passive income. The most important criteria is that pre-COVID rent growth was greater than the current inflation rate. As long as you buy in a location where rents and prices increase faster than the inflation rate, appreciation and rent increases will correct all but the worst mistakes. However, if you buy in a location where prices and rents increase below the inflation rate, you can do nothing to reverse the situation.
Below are some of the most important criteria by which I would evaluate potential locations based on dependable passive income characteristics.
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Inflation Protection - Unless your rental income increases as fast as or faster than inflation, your buying power will decline. The best indicator for inflation protection is the pre-COVID appreciation rate. Why pre-Covid? Covid distorted many markets. Locations that have not seen rent or price growth in years started performing. Such increases were transitory since the economic fundamentals of these markets have not fundamentally changed. And prices in many locations are reverting to the pre-COVID conditions.
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Jobs - Rental properties are no better than the jobs around them. And, it is not just the number of jobs, the quality (how much these jobs pay) matters too. Also, it is not just about the jobs your tenants have today. Companies have an average life span of about ten years. Even S&P 500 corporations only have an average life of 18 years. So every job your tenant pool currently has will disappear in the next 10 to 20 years. Unless the location has new employers setting up operations and creating new replacement jobs that pay similar wages and require similar skills, the area will decline, and your rents will fall or, at best, fail to keep pace with inflation. One metric for determining the economic health of a metro area is inflation-adjusted median household income. Check the St. Louis federal reserve site for this sort of information.
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Population - Prices and rents are driven by demand. Where there is little demand, prices and rents are low. And there is insufficient demand to increase prices and rents at or above the current inflation rate. A good indicator of rising demand is population growth. Only invest in locations where both the state and location population are increasing.
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Operating Costs - It does not matter how much rental income you gross. What matters is how much you net after deducting all operating expenses. There are two types of operating costs; direct costs and indirect costs. Direct costs include insurance and property taxes and such. Do not buy in any location with high insurance and property taxes. Your cash flow must be much higher in these locations to offset the high insurance and property taxes. Indirect costs can be even more expensive than direct costs. These include regulations, code compliances, rental restrictions and the cost and time to remove non-performing tenants.
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Crime - Crime is far more prevalent in some locations than others. Employers considering locations for expansion will not create new operations in locations perceived as a high crime. The best source of high crime cities is Neighborhood Scouts' top 100 most dangerous US cities list.
If you’d like to dive deeper, I have a free training video that goes into more detail about the above process. You can access it from the link below or my profile page.
A couple of additional thoughts:
- ROI and similar metrics are only a snapshot in time. They predict how the property will likely perform under ideal conditions on day one. Such metrics do not indicate how property and location are likely to perform over the long term. What is likely to happen over the next ten years is far more important than what happens on day one.
- Low-cost locations are very tempting. However, prices are driven by demand, and prices and rents only increase in high-demand locations, with higher prices than in low-demand locations. You cannot afford to buy in a location where pre-COVID price and rent growth were less than the inflation rate.
Vidal, I hope the above helps.
@vidal - As you can see from everyone's post you should invest everywhere :)
I think what @Eric Fernwood said sticks out most to me personally. What are your goals? Do you want cash flow to retire from your W2? Do you want to be a long-term hold investor and land in a hot market for appreciation over time?
My .02 is to identify your goal, write it down on a notecard, and then dig in and do some market research. Stack rank your results yourself. When you do this, you will give yourself knowledge to be dangerous in convos with agents, PMs, etc. Remember, it's your money and a big investment. Happy to take this off-line but this is the formula I used to land in my markets right now.
1. Counties to target - leverage https://worldpopulationreview.com/ and see if they are trending in the right direction
2. Supply and demand
- What are the vacancy rates? (Census.gov)
- Are building permits increasing or decreasing?
3. Job diversity
- Leverage city-data.com
4. Top employers and businesses (Google city name + top employers)
5. Unemployment (Calculate for 5 years) (Use Fred Economic Data)
6. Population age (Leverage Data Commons Website)
7. Misc:
- Landlord friendly (How quickly can we evict?)
- What are the property taxes?
- Are there Walmarts and Chipotles? (These organizations do great market research)
