Most real estate education focuses on general criteria for selecting a real estate market. These include tracking data trends such as population growth, job growth, and new construction. This is a good idea, and we will cover that information here too, but I believe that there are more important steps that should be taken first.
Let’s look at choosing a market from three new approaches:
- The business perspective
- The education perspective
- The real estate perspective
The Business Perspective
Imagine setting up a new business. Imagine that you will need an office and that you will need to visit this office a few times a month. You won’t need to be there all the time, but you will need to go there periodically to meet clients and to conduct business. You will need to be in that office regularly to create the relationships in the market that will bring you the best business deals. You will need to be there to take care of any problems that may arise on short notice. You will need to be there because someone may walk in the front door and hand you a great opportunity. If you are not there, that opportunity will go to your competition.
Now imagine that office is one thousand miles away from your home. How hard would it be to travel there? Could you go there often (two to three times a month)? Do you have the money and time availability to be there when that great deal shows up, or will they all go to your competition because you were not there? How will your family react to all this traveling?
This is the business perspective to choosing a real estate market. Job growth and demographics are important but not if you can’t maintain a competitive presence in the market. You won’t actually need an office in the market you are looking in, but you will need to be physically there enough to be competitive. If you are looking for deals in your own city or within a half-day’s drive from your house, this section will be less applicable to you, but if you live in a city in which it may be challenging to buy real estate, you better pay close attention.
Whatever size deal is right for you, you must be analyzing at least three deals a week. You should be physically looking at (touring) three to five deals a month. By looking at, I mean going to the asset and meeting the seller or real estate agent to take a tour of the property. Property tours are the best way to establish new relationships with real estate agents, but you have to be in the market to do them. If you have chosen a market that is far from you, then consider the cost of operating your business at that distance.
What if the realtor has a hot deal and they call you about it? Can you move quickly? Good deals don’t stay on the market for long, and great deals usually don’t come to the market at all. They are traded privately through private relationships. Your goal is to establish the relationships in the market with the realtors and sellers so that when that great deal comes along, you get the first shot at it. If you get that magic call where the seller or realtor has a hot deal, you better move quickly. If you can’t show up to at least tour the asset, those sellers or realtors are not likely to call you in the future.
Keep in mind that there is always one group that can act quickly, and tour deals easily. This group is the one that builds the best relationships and gets called first on good deals. They are also your greatest competition. They are the locals. If you are an out-of-town buyer, you will always be at a disadvantage to the local buyer. Keep this in mind when you choose a market. If you are on a budget or travel constrained, it would be better to stay close to home in a mediocre real estate market than to choose a strong market in which you cannot maintain a competitive advantage.
If you do need to buy in a distant market but are having trouble spending time there, one solution is to find boots on the ground in the new market. If you must be in a market that will provide challenges in getting there, find a partner who lives there. When sitting down to analyze markets for the first time, start with a list of close friends and family who might be interested in working with you on your new real estate venture. Where do they live? Is it a good market for real estate? Use this list to help create a shorter list of possible markets for your future investing. This person could help take some of the travel burden off you and would be able to meet a realtor or seller on short notice. Remember that real estate is a business just like anything else, and there is a cost to starting and running it. Keep that cost as low as possible in the beginning to cut down on burnout and unhappy families.
The Education Perspective
You can’t learn to ride a bike without a bike. You can’t learn commercial real estate without some commercial real estate to learn from. When choosing a market, consider the education perspective. Does this market have enough of the deals that you are looking for? Does it have enough real estate assets that fit your buying criteria to keep you analyzing several deals a week? Some markets and cities are small and may not have much of the product you are looking for. If you are looking for two-hundred-plus-unit apartment complexes and you live in a small, rural town, you may not have many or any assets like that around. Certain areas of the country have more or less of certain types of real estate as well. For example, I have found that the New England area does not have many large garden-style apartment complexes. Outside the major metro areas, New England tends to have smaller assets like two- to four-unit properties, not large one-hundred-plus-unit complexes.
Examine your market to see if it has a fair amount of the asset types you are looking for. If there are not many deals in the market, then there is not much product for you to practice on and learn from. Go where the deals are to make learning the real estate business easier.
The Real Estate Perspective
This is the usual information people track when discussing what makes a good market in which to buy real estate. The basic concept here is supply and demand. If people are moving to an area, they will need somewhere to live. This drives up demand, and rents go up too. If rents go up, the revenue produced by the asset also goes up. If revenue goes up, cash flow usually goes up too, followed by an increase in the value of the deal. Our equity becomes more valuable, and we are on the way to that $1.5 million.
Why do people move or migrate to a city? Jobs. Employment opportunities are the largest driver of population growth in an area. When people can make more money somewhere, they go there. We are only somewhat concerned about population growth; it’s really job growth and economic opportunity that drive the population of a city and the subsequent increase in the values of the real estate in that market. Follow the jobs when choosing a market. It pays.
Here are some basic statistics for job, population, and economic growth to look for when choosing a market:
- Population growth (for the previous twenty years)
- Thirty percent growth for cities with a population of 250,000 or less.
- Twenty percent growth for cities with a population of 250,000 to 1,000,000.
- Fifteen percent growth for cities with a population of 1,000,000 to 2,000,000.
- Ten percent growth for cities with a population of 2,000,000 or more.
- Median household income growth
- Thirty percent or more growth of the median household income over the last fifteen years.
- Crime
- Crime should be declining or at least holding steady in the area.
- Job growth
- Two percent or more annualized job growth in the city if the population is less than 1,000,000.
- One and a half percent or more annualized job growth in the city if the population is more than 1,000,000.
- Median household income
- Median household income should be over $40,000 a year for the area.
- Median rent
- Median rent for the city should be no less than $700 a month.
For current data, visit the Department of Numbers (www.deptofnumbers.com) and the City-Data (www.city-data.com) websites.
I have found that of the three ideas presented here, the business perspective is the most overlooked aspect of choosing a market. Most people who are new to real estate look only at markets based on population growth, prices for assets, and whether they think that city will produce cash flow. Although these are important concepts, they are relatively worthless if you can’t build relationships and maintain a competitive presence in that area.
Some people live in regions where real estate is logically priced and will produce cash flow. Some people live in cities where the general pricing for real estate is cash flow prohibitive. No matter where you are starting out, it would be better to look and learn in your backyard than to waste time trying to get started in a market you can’t reach on a regular basis.
If you are in a challenged real estate market, you should move. I understand the magnitude of that suggestion. It may not be the right time for you now, but I suggest that you consider it as part of your long-term real estate strategy. If you are local to a good market, it will be much easier for you to find good deals. You will also bring more value to other potential partners as you will be the boots on the ground in that city.
If you cannot make the move to a new city, then I suggest looking for a market in a high population growth area. When first looking for new investment markets, start by making a list of friends and family who may be interested and able to help you with the local real estate tasks. This would include checking out neighborhoods and touring properties when you can’t show up yourself. Look at the list and see where these friends and family live. Do any of them reside in areas that would be good to invest in? If yes, then start your market research with that city as a viable possibility.
How Many Markets Should You Cover?
The answer to this question starts with the amount of deal flow you can handle each week. As I have already suggested, you must be analyzing about three deals a week at a minimum. If you have more free time or you are doing this business full time, you may be able to take on more than three a week. Whatever your number is, you can use that to help select your markets.
Start with the first market you have chosen. How many deals a week does it produce? If you are not at your capacity for analysis, then start adding more territory until you reach the maximum amount of deals you can analyze in one week. When adding more market territory, I suggest that you draw a circle on a map around the city in which you are starting. Now draw the circle larger and larger until you include the next closest city that is a viable real estate market. Keep adding cities until you reach your maximum tolerable deal flow.
Tip: When adding new cities to your market territory, try to keep them as close to each other as possible. For example, if your market is Dallas, Texas, you would add in the Fort Worth area first. Next you might include Austin or Houston or even Shreveport, but I would not immediately add Atlanta or Miami to the list as they are likely to be too far away.
I started my business in Macon, Georgia. It did not take long for me to realize that I had to add market territory to be able to grow my portfolio. Macon didn’t have enough apartment deals for sale on a regular basis to provide me with three deals a week. I had to expand my outreach to include the entire state of Georgia. When I did, I started to find some great deals that were no more than an hour’s drive away from my home market.
In 2015 my wife, Yvonne, and I left Macon to move to Atlanta. She grew up in California and Florida. Middle Georgia was just not her speed of life. She said she was moving out of there, with or without me. I didn’t want to find out if she was serious, so off to Atlanta we went.
This was one of the best decisions of my life. Living in a market that was a world hub of growth and industry was great for my business. I could do more networking in an afternoon in Atlanta than I could do in a month back home. If you live in a great market for buying real estate, consider yourself lucky. If you are not in a great market, you should think about moving. I don’t make that suggestion lightly, but do keep one thing in mind when it comes to real estate: There is closing deals, and there is not closing deals. Your choices will determine your options.
