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What Makes a Good Market?

10/22/2020

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​As an out of state investor, one of the questions that I am often asked is; "how do you decide where to invest?".  That is a great questions with some very important answers since the difference between choosing a good market and a bad one can make or break your investments.  As with all other investing decisions, it starts with defining your situation, goals, and risk tolerances. 
  • How much money do you have to invest? It takes a lot more cash to invest in LA than Cleveland.
  • Are you primarily seeking cash flow or equity growth? Different markets provide different opportunities.
  • Do you have a competitive advantage in a certain market? (i.e. local knowledge, family, investing team)
Once you have a good idea of your goals and strategies, it is time to start analyzing individual markets.  The more you can stack the odds of success with you, the better.  To do this, look for stable or growing markets that have a diverse economy and positive outlook.  Here are some of the key criteria that I look for when comparing markets:
  • Population growth - Look for cities that are seeing significant population growth.  Real estate follows the basic supply and demand rules.  If demand is increasing, rent rates and sales prices will also be increasing.  I like to see a steady trend of 1% - 1.5% annual population growth.
  • Job growth - Usually job growth goes hand-in-hand with population growth, but do some research to see how the unemployment rate is trending.  What companies are there and are they growing?  Are new businesses opening or relocating there?
  • Job diversity - Markets where a high percentage of jobs are provided by one employer or even one industry can be very risky.  If that company or industry sees a downturn, layoffs could be devastating for the real estate demand.  I look for a good mix of manufacturing, tech jobs, health care, tourism, service, and government jobs. 
  • Income growth - You really want to see that the local economy is strong and wages are growing.  It is hard to raise rents and/or sale prices if wages are stagnant.  
  • Housing price growth - Strong long term growth in housing prices generally indicates that demand has been solid and the local economy is trending upward.  Personally, I would rather see slower but steady growth over the long term.  Markets that make quick, huge jumps tend to make quick huge falls too.
  • Rent increases - Same concept as home price growth here.  You want to see a steady trend of rent increases that can continue into the future.  Rent increases are usually required to maintain your margins as inflation and expenses increase.
  • Poverty decline - This metric will tell you a lot about the direction the local economy is heading.  A decline in the poverty rate means more people are finding quality jobs and can afford to rent or purchase your investment.
  • Vacancy stabilization or decline - Vacancy is one of the biggest killers of profitable investing.  Look for markets where the overall vacancy rates are stabilized or declining.  If the rates are increasing, it means demand is waning and could be a warning of worse things to come.
  • Tax rates - Tax rates can have a massive affect on your profits.  It is worth some research to learn how properties are assessed, what the local rates are, and if they are trending up or down.  
  • Price-to-Rent ratios - This is a very important metric to compare how cash flows will compare in different rental markets.  It compares the ratio of home prices to annualized rents.  Obviously, markets with high prices and low rents will be hard to cash flow and vice versa.  
These are just a few of the key metrics to research before choosing a market to invest in.  The more market knowledge that you are armed with, the greater your chances of success.  I have seen people have success in declining markets but why handicap yourself right from the start.  Find some areas that you are interested in, have a good economic outlook and dig in to the details.  There is a ton of information available online but visiting in person is really helpful.  Here are a few good sites to get you started:
  • ​www. city-data.com
  • www. bestplaces.net
  • www.census.gov
  • www.deptofnumbers.com
If you are interested in further details or investing in other markets, reach out to me so that I can provide way more in-depth details and help you find something suitable for your goals.

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