@Chris Trull Some key factors in evaluating markets include:
1. Population Growth: Look for areas into which people are moving. Seek markets with a growth rate that is consistent with or above the national average.
2. Job Growth: Look for areas that are attractive for business formation and proliferation. New jobs should be keeping pace with or exceeding population growth. Watch for announcements of major employers moving into the area. Markets that have a combination of universities with strong hard science & engineering departments, critical mass of entrepreneurs, and capital sources (i.e., venture capital) are also fertile ground for job growth through formation of new, rapidly growing companies.
3. Diversity of Employment Opportunities (i.e., industry concentration): Look for areas that aren't overly dependent upon a single industry and/or employer. Research the major employers in your prospective markets and confirm that there is adequate diversification of employment across various industries and employers.
4. Landlord Friendly: Focus on states that aren't overly protective of tenants.
5. Local Investment in Infrastructure: This is a derivative of #1 & #2. You want to invest in areas where there are indicators that the city infrastructure is being fortified to support more residents and economic activity (e.g., new schools, roads, highways, public transit, etc.).
6. Scarcity: Look for areas where local constraints have caused a shortage of land and/or housing. Zoning (e.g., Portland, OR) or geographic constraints (e.g., San Francisco, Seattle, NYC) can constrain availability of land and/or housing. This creates scarcity and enables owners of the scarce resource to realize value.
To dig deeper, I recommend that you review research reports published by the major national brokerage firms. By reading these reports, you'll gain an understanding of the key factors that they feel are important when evaluating markets. I've included an example below which outlines low vacancy markets, total return markets, affordable markets (% of rents relative to income), and other key measures affecting prices and rent growth, including unemployment, job growth, unit absorption, and population growth. You won't find small towns in the list but you will see the key primary and secondary markets. It's a good starting point from which you can conduct further research.
The materials below are free after you create an account. M&M produces quality research and offers much more than the report below. I recommend subscribing to their research publications.
http://www.marcusmillichap.com/research/researchre...