10 Key Factors To Look For When Investing In A New Market
Once you make the decision to invest outside your local area, the world is your oyster. This can be both exhilarating and, at the same time, completely overwhelming. If you’re not tied to your backyard, where should you invest? How about a major city like Chicago or Atlanta or Los Angeles? Or maybe a smaller metro like Charlotte or Portland or Nashville? Maybe you’ve visited some of these cities and enjoyed some sightseeing and a fancy steak dinner. So, does that mean you should invest in real estate there? Believe me, I’ve contemplated all of these things, and more. When I first decided to invest outside my local area, I did a TON of research into various markets across the country. I had no idea what I was looking for, so I looked at a bunch of random things.
Best cities to invest in market
I cross-referenced multiple “best cities to invest in” lists, looked at population trends, scoured local real estate listings, read local headlines, and on and on I did a lot of random research. Got nowhere, and wasted a bunch of time. The problem was, it takes an immense amount of time to truly get to know an individual market, especially if you’ve never set foot there. It also takes a lot of research, time, sometimes money, courage, and conviction to commit to a single market. To overcome this, I started by assessing my personal investing goals, I determined that I wanted to invest in growing markets that would also provide solid cash flow. Using that basic framework, here's a list of specific criteria that I look for in a market before I invest there:
- Job growth
- Population growth
- Job diversity
- Landlord/tenant laws
- Geographical features
- Cost of living
- Local news
- Local government
- Whether you have an unfair advantage
#1 – Job Growth
This is the first and most important metric I look at in any market. Steady job growth is indicative of a healthy and robust local economy, one that will bring additional businesses, developers, and residents to the area. When I see strong job growth, I know that’s a leading indicator of population growth. The more jobs created in a given market, the more people that will move to that area, and the more people that move to the area, the greater the demand for housing, which will eventually drive up rents, as well as real estate prices.
#2 – Population Growth
Tied in with job growth is population growth. It’s important to note that I always look at population trends AFTER looking at job growth. That’s because population growth could be due to any number of reasons, including temporary factors like natural disasters, migration patterns, etc. I don’t want to invest in an area that’s seeing a temporary bump in population. I only want to invest in areas that have long-term upward population growth, and the only thing that can sustain population growth over the long haul is job growth. So, be sure to always look at population growth together with job growth, to get the full picture of the health and future of a given market.
#3 – Job Diversity
When examining a market’s local economy, another important factor to consider is job diversity. If a given market has strong job and population growth, but most of its jobs are in, say, the tourism industry, that could be a red flag. If a single industry is dominating the local economic landscape, that could signal potential risk. That’s because, if that industry topples or runs into challenges, it could put the whole local economy at risk. In the case of the tourism example, if a local market is heavily dependent on tourism, a recession could drastically slow local tourism. This could lead to job losses and population decline, meaning that it could be harder to keep rental units filled.
#4 – Landlord/Tenant Laws
Job growth, population growth, and job diversity are perhaps the biggest factors I look at when determining whether to invest in a given market. Beyond those, I start to look into smaller, albeit equally important, factors like landlord/tenant laws. Perhaps the best illustration of the impact that landlord/tenant laws can have on a real estate investment is my local market. I live in Oakland, California. Here in the San Francisco Bay Area, rent control is in full effect. That means that, as a landlord, I cannot increase my tenants’ rent above a certain percentage each year. This can be great for tenants, but as a landlord, these laws make it incredibly challenging to provide quality housing for people while still making a decent return on my investment, especially as prices for everything else in the Bay Area (contractors, pest control, property management, etc.) continue to rise. So, when looking into potential markets, I look for landlord-friendly areas. Often, property managers are the best source for this, as they are intimately familiar with local landlord/tenant laws.
#5 – Taxes
Taxes are often not at the forefront of people’s minds when looking at potential invest market, but they can make a huge difference in your bottom line. When investing in real estate, you should take a look at both state income taxes, as well as property taxes, as both of these will impact your operating budget, and hence, your overall return on investment. Some states, like Texas, have no state income tax, so they rely more heavily on property taxes. Other states will be the complete opposite, and many are in between. It’s important to get a good understanding of the tax landscape before investing in a particular market, so you’re not surprised later.
#6 – Geographic Features
When investing outside your local area, Google Maps will become your best friend. One thing in particular that I look for in a market is a barrier to physical growth. This can be a body of water, a mountain range, or any number of other natural or manmade features that will limit the physical development of a market. For example, the ocean keeps coastal cities from expanding beyond a certain point. This forces those cities to consider other options, like building up or expanding further out to the suburbs. This tends to drive up the value of the real estate that’s more centralized, especially as more people and businesses move to the area.
#7 – Cost of Living
When you’re investing in residential real estate, particularly in more recession-proof workforce housing, it’s important to consider the local cost of living. In areas where the cost of living is already pretty high, there might not be as much room for growth. That’s why I always look for markets that have a lower cost of living, especially in comparison to the median income of the area. This tells me that people can afford to live in that market comfortably, at least for now. And as more jobs come in, there’s room for the cost of living to rise.
#8 – Local News
Okay, now we’re getting down to the more nitty gritty. Once I’m pretty confident in a particular market, I start to track things like local news. What am I looking for? Things like local developments, new companies moving to (or away from) the area, new store and restaurant openings, major local announcements, and more. Anything that will give me a pulse on the local economy, local culture, and the potential future of that market.
#9 – Local Government
Going hand in hand with local news is local government. I want to be sure I’m investing in areas with strong local leaders who have a vision for the local economy, for bringing jobs to the area, and for making it a vibrant and welcoming place to live. I want to see that local leaders are supportive of new initiatives, that they’re thinking about the future of the area, and that their plans and efforts are clear and innovative. Strong local leadership can also ensure that the environment will remain attractive for businesses, which means that job growth will continue.
#10 – Whether You Have an Unfair Advantage
Last, but certainly not least, is whether you have an unfair advantage in that market. Perhaps you went to college there, or your brother moved there a few years ago, or you grew up there. Any time you have an unfair advantage in a given market, you should give extra weight to that market. Those local connections and roots can put you miles ahead of other investors who only know as much about a market as Google Maps or a quick weekend trip can tell them.
What about investing passively in a real estate syndication?
If you’re investing passively in a real estate syndication, all these factors still apply. Often, as a passive investor, you’re looking for a strong sponsor first, and then that sponsor will let you know about potential deals in the markets they’re investing in. Even if the sponsor gives you a few bullet points about why they’re choosing a particular market. You should still do your research. Just because a sponsor says that a given market is a good one, doesn’t mean that the market meets your personal criteria or investing goals, so be sure to do your own independent research. That being said. Investing passively in a real estate syndication is a great way to help you narrow down potential markets. If you find a sponsor you want to invest with, and they only invest in one area. Then you can focus your research efforts on just that one location. Rather than trying to research a bunch of random cities.
Where We've Invested
We’re always looking for new partners and new markets as well. These are the current markets we're invested in:
- Rock Hill, SC
- Houston, TX
- Newnan, GA
- Hampton, VA