How to Analyze a Real Estate Market Out of State
The question that I get asked a lot by new investors and experienced investors who want to learn how to invest out-of-state is how do you find a good real estate market out-of-state and what qualifies a good real estate market out-of-state. I’ll walk through different ways that I analyze a real estate market out of state.
A couple of major things I look at are unemployment, population growth, major employers, diversity of workforce, the mayor’s mindset, colleges, and then I dive into the neighborhood.
You want to make sure that there are good, solid jobs in this city. You want to make sure that there is not a lot of unemployment. You can go and find these unemployment number by going to the Bureau of Labor Statistics. You’ll see there’s a ton of information there about different cities. The website is BLS.gov.
The BLS will show things like unemployment, population growth, and information aboud the diversity of a workforce. You can download reports from the website and they have certain data tools that you can use to look up exact information about each city.
I don’t necessarily want to find a city that has had extremely massive population growth over the last couple of years. Typically that means that the city is really hot, and you’ll see that for cities like Austin, Texas, Nashville, San Francisco, LA, etc.. Since the crash of 2008 these cities have really increased in population. I don’t necessarily want a city that has had some exuberant amount of population growth and influx of people. I’d rather have a city that’s been fairly stable but is just starting to go on the incline. That’s a city that I would focus on, and there are plenty of cities out there like that.
If you buy right before those markets begin to spike, that is when you’re going to get all that extra equity for all the properties that you’re going to be purchasing in that city. I want to buy in cities like Nashville a couple years ago, before they get all this momentum. Or imagine buying in Austin, Texas, before the city completely exploded and blew up and all these investors and people started to move there.
I also look at major employers when analyzing a market out of state. This can be found just with a simple google search online. Typically the website that I go to is Forbes.com and just type in the city. It shows all the major employers. You can actually just type it into Google and look up major employers for a city.
The things that I’m looking for when doing this search is major employers that are going to be here for the long term. I don’t want companies like Blackberry or Mattel to be the major employers for a city. I want companies that are going to be here for the long term, and even better if they’re S&P 500 companies or S&P 10 companies. I want companies that I personally believe will be here in 30+ years.
Diverstiy of Workforce
Something that I dive into after looking at the major employers is the diversity of the workforce. This can also be found on the Bureau of Labor Statistics. They actually have these two-page reports that you can find for certain cities, which show the diversity of the workforce.
The reason why I look for diversity of the workforce is because I want to hedge against what happened in Detroit when all the jobs were in the automobile industry. You want all the jobs to be diversified into five or six different industries. You want to make sure that no industry owns more than half the jobs or 1/3rd of the jobs. Because then if that industry does leave, it won’t tear down the entire economy and leave a city bankrupt and without jobs.
Another thing I look into is the political climate and the mayor’s mindset about the city. And interesting and probably the most fun part of doing all this research is finding the mayor’s mindset about the city and talking to the economic development committee. Each city is going to have what’s called an Economic Development Committee, or something similar. If they don’t, I would recommend not investing in that city.
What these committees do is they’re people who are going to bring jobs and businesses to the city by giving them incentives. They’ll give them tax incentives, they’ll give them other reasons to move to the city, they’ll provide them with ease of finding places to work and places to build their new warehouses, and all these kinds of incentives for moving to their city. They are committees within cities that help make this possible and make it easy for companies to move into the city and grow and develop their businesses there.
Typically for the cities that I’m investing in, these cities actually have their own websites. For the Economic Development Committee of St. Louis, you can see all the companies that they’ve helped bring there, what incentives they’ve given, etc. If you’re a business looking to move into St. Louis then they show you what incentives can they give you. Looking at those incentives and matching them up against other cities is very interesting because you can see which city is providing the best incentives for businesses.
In Memphis, the Economic Development Committee is giving all these tax incentives for companies to move and build there. For example, Memphis gave Amazon 15-years tax-free for building and developing and hiring over 1,000 employees.
Looking at what companies are taking up these incentives from the cities is also very important. A young company like Amazon taking up a 15-year tax incentive from the city of Memphis, that’s good news.
In addition these projects are very long. For Amazon it’s a two-year project of developing the warehouse before the jobs are actually going to come to the market. That’s something to take into consideration, tracking all the companies that are moving in, when are they moving in, when are the projects going to be completed, and when are the jobs actually going to be there is important. Then you can figure out where those developments are going to be, where the jobs are going to be, and then acquiring real estate around those places. You have a two-year time gap to jump on before those jobs actually hit the market. So buying as much as you possibly can in those markets before those jobs actually get there could be a good strategy.
Colleges and Universities
Another thing I look for is learning a little bit more about the colleges there. Are there any major universities there, how many universities are there, how many students are going to college in the area, how much are they paying, where are those students living, etc.
Student housing is something that a lot of investors are looking at. These tenants turnover every year but sometimes they live there for four years and then they move out, but typically they turn over annually. You can slowly increase rents over time because these tenants are leaving. You might have a little bit more maintenance expense, but a lot of investors have seen that there’s also a lot of good students out there who are not going to trash your place.
I like to look at where the colleges are, what types of degrees these students are getting from these colleges and what kind of jobs are they getting after graduation. Also knowing where the students are moving after graduation is important. Are they going to this side of town for college and then moving over here after graduation to go work in the medical district (or some other district), that’s important to know.
Neighborhoods are super fun because there isn’t a lot of information about neighborhoods online and they’re changing all the time. One large project can change an neighborhood. I like to find up-and-coming neighborhoods in every city that I invest in.
Typically in the Midwest, the cities that I am investing in are cash flow markets. But what I try to do is find the appreciation in the cash flowing markets.
How do you do that?
Well…. it’s a ton of driving, walking, and talking. I personally drive or walk the up and coming neighborhoods. I go into the coffee shops or pizza shops. I eat the food, I leave Yelp reviews. I want to know what it feels like to live/work/play in my neighborhood. I talk to people who I interact with and ask them where the spot to go is. There is so much that you can pick up from actually just walking around and talking to people.
Once you’ve found a neighborhood that you like you have to make sure that the numbers make sense there. Rent-to-value ratio is you want to calculate. You want to find anything over a 1.0 rent to value ratio. A 1.0 rent-to-value ratio would be a purchase price or a property values of $100,000 and rents of $1,000. Typically for my neighborhoods I’ll find properties worth $70,000 and they rent for $800. So it’s like a 1.1, 1.2 rent-to-value ratio. 1.0 rent-to-value ratio or higher means that that neighborhood is going to cash flow and it’s going to cash flow nicely. You really want to stay above that 1.0 line.
I also look for neighborhoods that have low crime. You can find crime on Trulia. There’s a bunch of other crime map websites, but Trulia is probably the best. You can type in any property and it’s going to show up the crime map. It’s going to say, “Crime is extremely low in this neighborhood.” So you want to look at that and look at the surrounding crime too. If there’s a property that’s surrounded by crime but right in the couple blocks where it is there’s no crime, I would still stay away. You want to be on the better side of crime. You want to move away from it as much as possible. Crime is something that you can’t really control with your properties, so it’s something that I try to stay away from. I’m fine with a little bit of crime, especially near the downtown areas, but I try to stay away from it as much as possible.
Schools are something that a lot of investors talk about, but it’s not really a big factor for me. I am in blue-collar neighborhoods that I make sure are close to jobs. In neighborhoods that are appreciating in these c-class markets or c-class neighborhoods, there are not going to be very good schools anyway. Typically if you find a neighborhood that does have good schools, the property values are going to be well over $100,000 or $150,000, and cash flow tends to not make sense anymore. I just threw good school’s out the window when doing my analysis. Students still go to these schools even though they’re not top rated, or whatever it may be, but sometimes neighborhoods have private schools when there are not very good schools around a neighborhood and a lot of students do go to those private schools.
I try to find neighborhoods that have 60% or higher owner occupancy rates. That means 60% of the people in the neighborhood own their home. The reason is, people take care of their home if they own it, so it becomes a neighborhood thing if everybody takes care of their home, and if somebody doesn’t take care of their property they’re going to be looked down upon in the neighborhood. Everybody wants to have a good social interaction with their neighbors. So they tend to take care of their properties if everybody around them is taking care of their property as well. This information can be found with city-data.com. You can find owner occupancy rates for any zip code.
If you have any other questions about analyzing a market out of state reach out to me.