Hello @Liam Alvarez,
You don't need any apps to select an investment city. The data is readily available, and I will provide the data source and its relevance.
To ensure we're on the same page, the goal of real estate investing is financial freedom. This isn't merely about replacing your current income—it's about creating an income stream that sustains your lifestyle indefinitely. To achieve this, the rental income must meet three requirements.
Rents Must Outpace Inflation
Inflation steadily erodes the purchasing power of a fixed amount of money. For example, if the inflation rate is 5%, what costs $100 today will cost $155 in 10 years. If rents don't keep pace with inflation, you won't have enough funds to cover these inflated prices.
Rents and prices are driven by supply and demand. Demand is a function of population change. In cities with significant and sustained population growth, rents and prices will rise faster than inflation, enabling financial freedom.
Conversely, rents and prices rise slowly in cities with static or declining populations because the current housing inventory is sufficient. Low property prices evidence this. No matter how many properties you own in such a city, you can't achieve financial freedom because inflation continuously erodes your purchasing power. Eventually, you'll have no choice but to get a job to maintain your standard of living.
Best source for population growth: Wikipedia
Last Throughout Your Lifetime
You cannot sustain financial freedom if your income doesn't persist throughout your life. However, your rental income depends on your tenants remaining employed at similar wages. The problem is that non-government jobs aren't permanent. On average, U.S. companies last only ten years. Large companies, like those on the S&P 500, last on average for 18 years. So, every non-government job your tenants have will end in the foreseeable future unless new companies move into the city and create replacement jobs that pay similar wages and require similar skills; Otherwise, soon all that will be left are lower-paying service sector jobs. Below are the key factors companies consider when choosing a city for investment:
- Low operating costs: Companies are unlikely to choose a location where state income taxes, property taxes, and insurance consume a significant portion of their potential profit. Sources for insurance and property taxes: Insurance—ValuePenguin, State Property Tax Rates—Rocket Mortgage. State income taxes: Here's a map showing state income tax rates.
- Low crime: Companies are unlikely to choose high-crime cities. Avoid investing in any city listed here: The Most Dangerous Cities in America, Ranked.
- Cities with a metro population >1M: Companies need significant infrastructure, which is only available in metropolitan areas with a population > 1 M. Wikipedia
- Pro-business environment: Companies are reluctant to set up operations in cities with burdensome regulations that hinder profitable operations. Google search.
Ability to buy multiple properties with minimal capital
You'll need multiple properties to replace your income. Let's consider an example. Say your monthly income requirement is $5,000/Mo, and each property generates $300/Mo. If each property costs $250,000 and the only acquisition cost is a 25% down payment, how much savings would you need?
- ($5,000/$300) x $250,000 x 25% = $1,062,500
For most people, this is an unattainable amount of after-tax savings.
If you buy in a city with a high appreciation rate, you can grow your portfolio through appreciation and cash-out refinancing. For example, if the first property costs $400,000 and your acquisition cost is a 25% down payment, you need:
- $400,000 x 25%. = $100,000
If the appreciation rate is 8%/Yr, how long will you need to hold the property before a 75% cash-out refinance to yield enough to have $100,000?
- After one year: $400,000 × (1 + 8%)^1 × 75% - $300,000 ≈ $24,000. For simplicity, I've assumed no principal paydown on the original $300,000 mortgage.
- After two years: $400,000 × (1 + 8%)^2 × 75% - $300,000 ≈ $49,920
- After three years: $400,000 × (1 + 8%)^3 × 75% - $300,000 ≈ $77,914
- After four years: $400,000 × (1 + 8%)^4 × 75% - $300,000 ≈ $108,147
While the above example is oversimplified, the concept is valid. Many of my clients and I have grown our portfolios through appreciation and cash-out refinancing with minimal additional capital.
Zillow Data is one of the most reliable sources for analyzing appreciation rates at the zip code level.
Summary
No special apps are necessary. A process is far more important. The information required to select an investment location that enables financial freedom is readily available and straightforward. To choose an optimal investment location, follow these steps:
- Select a city with a metro population >1M and sustained and significant population growth. Wikipedia
- Choose a state with low operating costs. Every dollar spent on operating expenses reduces your potential income. Insurance—ValuePenguin, State Property Tax Rates—Rocket Mortgage. State income taxes: Here's a map showing state income tax rates.
- Low crime: Avoid investing in any city listed here: The Most Dangerous Cities in America, Ranked.
I will add one more location consideration
- Never buy in a city with any form of rent control. Google search.
Liam, I hope this helps.
