In this post, I want to share 8 signs for identifying an out-of-state real estate market to invest in. Truthfully, these are positive signs to identify a good market anywhere, whether local or not.
By market, I’m talking about a large metropolitan area like Atlanta, Denver, or Memphis. So the tips in this post will focus on higher level macro factors to help you evaluate a large city. Factors such as school ratings, crime statistics, and other demographics won’t be covered here since they are more relevant to identifying sub-markets (i.e. neighborhoods) within the larger market.
Here are 8 signs to look for when identifying an out-of-state real estate market to invest in.
1. Increasing Population
Invest in a city or metro area where the population is increasing over time. An increasing population simply means more demand for housing. If a population is trending downward, that’s not a good sign for any real estate investor. Whether you’re looking into residential or commercial real estate, an increasing population is desired.
2. Increasing Jobs
Invest in a city with increasing jobs. One of the biggest drivers of population growth is economic opportunity. That economic opportunity most often comes in the form of increased hiring. Both an employer that’s adding new jobs and new employers that move into a market will fuel net migration into that market.
And what’s the one thing this influx of new workers will all need? You guessed it. Housing.
3. Low & Decreasing Unemployment Rates
Invest in an area with low unemployment rates below the national average. Also, study the unemployment rate over recent years and months to identify the trends. In what direction is it heading? A downward trending unemployment rate is indicative of a growing local economy. On the other hand, a rising unemployment rate where more employees are finding themselves out of work is typical of a sluggish or contracting economy. Finding qualified renters to fill a vacancy in a rising unemployment market may be more challenging.
4. Business Friendly Environment
Look to invest in a business friendly market. States with business friendly policies, regulations, and tax incentives will continue to attract major employers and new startups. This business friendly environment translates into new jobs, which stimulates the local economy, and ultimately promotes further population growth. All big positives for anyone investing in that real estate market.
5. Employment Diversity
Invest in a market where several industries and employers are represented. The local economy should be well balanced and supported by many different industries and employers. A market that is heavily employed by a single industry or employer increases the risk to your real estate investment should something happen. Take for example, the collapse of the automotive industry in Detroit drove (pun intended) the city into a downward spiral because there was very little economic diversity.
6. Jobs That Won’t Be Outsourced
Invest in a market where the jobs are unlikely to be outsourced. Some industries remain fairly stable regardless of how the economy is doing. Jobs in education, government, and healthcare tend to be resilient to hard times like a recession. Every major city will need teachers, health care professionals, and a local government to function. While other jobs, are indifferent to location and are highly influenced by labor costs. For instance, if a significant portion of a town’s jobs are in manufacturing, then there’s a chance that the employer may someday find a lower cost labor force either in another state or abroad.
So investing in a real estate market where the majority of jobs there won’t be outsourced offers stability and lower risk to the real estate investor.
7. Affordable Housing
As a real estate investor, look for markets that are not overpriced where you can acquire properties that are still affordable and will provide the biggest bang for your buck.
So you’ve found a market where the population is growing, the local economy is booming with new jobs, and the job market spans across diverse industries. So do you invest there? It depends. What you’ve probably come across is a desirable market to work in. You could very well be at the peak of the market cycle. Buying homes at a premium price can really hurt your cash flow and returns. While buying at the peak of the market does not mean you can’t cash flow, it’s certainly not the best time to buy.
8. High Rent-to-Price Ratios
For the cash flow investor, look to invest in a market where the rents are high relative to the home price. In other words, look for high rent-to-price ratios. The rent-to-price ratio is the monthly rent divided by the price (purchase + rehab) of the property. Markets with higher rent-to-price ratios will tend to offer more opportunities for investors to find a positive cash flowing rental property. For instance, where I live in Los Angeles, it is not a strong cash flow market with a median rent-to-price of 0.47%. However, Cleveland has many opportunities to find cash flowing properties with a median rent-to-price of 1%.
Your Personal Advantage
Now this last point is not a requirement. It’s the frosting on a cake— a nice addition.
If you’re planning to invest in a distant market, then it certainly helps to have some personal benefits to investing there. I’m talking about investing in a market where one or more of the following applies:
- Family or friends live there
- Favorite vacation spot
- Frequent business trips there
- Regularly attend conferences there
However, I do not recommend investing anywhere based solely on these personal reasons. Like I said, it’s a nice perk to be able to mix personal travel with business.
Do you have friends or family that you visit often in a potential real estate market? Maybe a vacation spot or business trip you take each year? Perhaps you attend a conference every year like the International Brotherhood of Real Bearded Santas, which took place in Branson, MO. Yeah, that’s a real thing.
Whatever the reason, you may have personal advantages to investing in a distant market that should be taken into consideration when selecting a real estate market.
Selecting a real estate market to invest in is no easy task. Though focusing on strong fundamentals can help identify which markets are the most attractive to meet your goals. In this post, I listed 8 signs to help identify a strong real estate market, whether out-of-state or not.
Look for a real estate market with the following positive traits:
- Increasing population
- Increasing jobs
- Low and decreasing unemployment rate
- Business friendly environment
- Employment diversity
- Jobs That Won’t be Outsourced
- Affordable housing
- High rent-to-price ratios
Lastly, while not a requirement, it certainly helps if you have some personal connection to that market. Whether it be family, friends, work-related, or something else.
I hope this post helps you the next time you’re evaluating a new real estate market.
What markets are you currently interested in today and is it for any of these reasons listed here?
I’d love to hear from you. Leave a comment below.