How to Choose a Good City to Invest In
I have a checklist I use to determine whether a city is good to invest in or not. Different investors have different items on their checklists and I'm not saying mine is the best but it works for me and I've had really good success with it.
If you don't have your own checklist developed you may want to use mine until you do. You may miss a couple of 'hot' areas but it will keep you from investing in a bad one.
1. Cheap Properties
I'm really risk adverse and like to be super safe with my investments. There is risk in all real estate but it's a lot easier to stomach a small loss than a big one. Plus, if your rental property is vacant for longer than you expect and you have to eat the mortgage payment, insurance and so forth, it's a lot easier to come up with a couple of hundred dollars for a cheap property than the couple of thousand you may owe on a higher priced property.
Don't get suckered into just looking for cheap properties though. Just because a place has a bunch of cheap properties doesn't make it a good location or make the properties good deals. Imprint that on your brain particularly if you live in a high priced state because it's really easy to see a house that only costs $5,000 or $10,000 and think it's a no brainer that it's a good deal. Uh, no. That's how you lose your shirt.
Cheap is good ONLY if the other items on the checklist are met.
2. Positive Job Growth
This is kind of a no-brainer but it's really easy to get caught up in the lure of cheap prices and ignore this one.
People live near their jobs. If jobs leave a city so do the people who work those jobs. This means the pool of people available to rent your property is going to shrink. This results in either you having no one in your rental or you have to charge such a low rent price that you lose money on it. Either way, not good for you as a real estate investor.
For example, right now Detroit, MI is a really cheap place to get property. You can get single family houses for $5000 or so but is that a good deal? Personally I wouldn't touch that city with a ten foot pole. The city is experiencing MAJOR negative growth.
Without jobs, people can't afford to stay. People have left that city in droves. Even if you get a place dirt cheap in one of those places it's hard to make money if you can't find a renter. Plus, don't forget you aren't the only landlord looking for renters. I prefer to be really safe when I invest and investing in a place with negative job growth or less than a 10% job growth potential isn't what I consider a good bet so I would pass.
You want to invest in cities where jobs are expected to grow. So, how do you find out this information?
The first place I look at is Best Places. It's a fantastic site with a lot of useful information. You enter the city you are interested in and at a glance you can see data which shows the current unemployment rate in the city as well as future job growth and a lot of other interesting facts about the city.
3. Positive Population Growth
This follows job growth a lot of the time but not always. If it is negative I move on. The reason is that numbers show the recent past. Although it could turn around it isn't a given and I don't want to bet that it will. There are other locations that are stable that look good now. I look at Best Places and Uhaul's Top Destination Cities Report for this information.
4. Low Vacancy Rate
If the vacancy rate for rentals is above 10% I discard a location. A number above 10 tells me that it could be tough to find a renter. Anything under 10 and I feel a lot more confident in the rental market. Again, I look at Best Places for this information.
5. Large Population
I don't look at smaller cities and towns no matter how cheap or good they look. The reason is that the number of management companies goes way down which means your chances of landing a good one go way down too.
Also, if you do happen to find a good property manager and he goes out of business can you find another good one? It isn't easy so I stick with cities where the pool is bigger which increases my chances of getting a good management company to work with.
6. Easy Access by Airplane
Although some people buy and manage their out of state investment property entirely from the comfort of home. Chances are you are going to have to visit them at least once. I recommend going to visit them and meet with your management company at least once a year. It keeps you known to them and lets you check on your properties.
I've found that it's cheaper and easier for me to invest in properties that I can easily reach by direct flight. If you fly into a regional airport it's a lot cheaper than if you invest in a city or town hours away from the regional airport. You will either have to pay an extra couple of hundred dollars to fly to the smaller town via the regional airport or you will have to rent a car and drive another couple of hours. It may be okay to do once or twice but if you are having issues with your property that you feel your presence is required for, the extra travel time and expense can get old fast.
7. Multi-Industries/Employers
Some cities are heavily dependent on one particular type of industry or one big employer. For example, Detroit is very much a 'car' town. When the main employers like Ford closed their plants down a lot of people were thrown out of work. Because they couldn't find work they had to leave the area to go to an area where they could find work. Detroit lost over 8% of its population very quickly.
If you were a landlord in Detroit you would have seen the value of your investment property plummet and have had a hard time getting and keeping it rented.
The same thing played out in the 80's in Pennsylvania when the steel mills shut down.
Moral of the story: Don't invest in cities that are industry or employer dependent. It may work out great for a while but if the employer pulls out or the industry suffers a decline you can be in a world of hurt.
7. Low Cost of Living Area
With gas prices and other costs so high now more people are focusing on stretching their income even more. That makes cities with lower costs of living more appealing to people and to employers. Although not a deal breaker I will go with a city that has a lower cost of living including taxes, etc. than a city with a high cost.
If a city passes all of the items on my checklist then I will consider buying property there; however before I buy an investment property there the city needs to have one more thing - good management companies. If I can't find what I consider to be a good management company I move on to another location.
Without a good management company you are going to be frustrated, lose money and probably have an all-around miserable experience. Life is just too short.
Got questions? Let me know. If I can help answer any questions you have I will be glad to. kip@realestateoutofstate.com