The 4 Steps To Choosing The Right U.S. Market To Invest In!
The US is broken down into approximately 400 metropolitan statistical areas (MSA’s), so I always laugh when people use the blanket term “the U.S. housing market”. Within each MSA there is a sub-market, within each sub-market there is a suburb, within each suburb there is a street and depending if you are North/South/East or West of that street will dictate CAP rates, trends, rents, school districts, employment opportunities…. the list goes on! That’s the beauty of Investing in the U.S.; there is so much to choose from.
The US is classified in 7 regions
Here is my quick 4 step guide to choosing the right market, and becoming a wealth of knowledge for that particular area:
Step 1: Understand the Different Types of Markets
There are three types of markets in the US, linear, cyclical or hybrid.
Linear markets: appreciate by a steady amount over time along with the headline inflation. Properties in these markets are bought for the cash-flow and are normally situated in the Mid-West and Texas.
Cyclical markets: move up and down like a roller coaster and are generally found in coastal regions of the US, San Francisco is a good example.
Hybrid markets: As the name implies, is a combination of the Linear and Cyclical, Typically these markets have historically been linear but with changes in employers and jobs (ie: the tech industry) these markets are now seeing healthy population growth. A good example would be Austin, TX, Boulder, Colorado, Charlotte, North Carolina, just to name a few.
Step 2: Market Identification
When researching a market to invest in there are several things to look out for;
– Population: Invest in areas with a population of 750,000 or more in the MSA
JOBS: The local economy has to have at least 3 different industries for employment (ie: manufacturing, health care, tech, etc.). Don’t invest in a city that is heavily reliant upon one industry.
(A lot of mineral rich areas in TX and the Midwest have diversified since the crash in 2008 so as to ensure the longevity of their cities).
– Look for Job growth & migration in the area; you want to see that the population is steadily growing over time (ie: people are constantly moving there for work opportunities).
– Moderate CAP Rates: To achieve strong annual returns, the economics of the metro must be very strong yet the CAP rates of cannot be below 5.0-6.0%.
– Affordable housing market and neighborhoods. Check the market rent-to-value ratio (RV ratio) of a potential investments in an area. An RV ratio is Rent against Value – the monthly rent divided into the acquisition price (presented as a %). If it is less than 1% the property/area will be too expensive to cashflow. Conversely, if the RV ratio is over 1.5% the area could be a depressed market or a bad neighborhood. Ideally for good cashflow neighborhood 1.2-1.4% as a rule of thumb (note: this is a rule of thumb; a quick measuring tool for an area).
– Landlord Friendly Laws: Investing in states where the laws favor the landlord is better for you as the investor; it makes the property managers’ job easier if you have problem tenants when it comes to eviction.
– Thriving or emerging downtown: Since the crash in ’08 many tier 2 cities across the U.S. have had a resurgence in the ‘downtown’ area. This is due to changing renter habits; people are renting longer and they want to live closer to work and nightlife.
Step 3: Choose Two Markets: Analyze 25 Deals In Each Market
Once you have chosen two markets jump online (loopnet, showcase.com, craigslist etc) and start finding deals, and crunch the numbers in a spreadsheet analyzer. This isn’t sexy but analyzing 25 deals in a market will help you get a feel for associated costs: avg. $/door, expenses ratios, trends in surrounding suburb, average rent/suburb etc. You will be an expert in no time! This step is extremely valuable to anyone looking to vet a potential market.
Step 4: Visit the area before you invest!
Understanding the lay-of-the-land is very important particularly if you are purchasing out of state. Visiting a market will help you establish your bearings and will give you a better understanding of the types of properties you will be purchasing.
Until next time, take care, be sate and remember… Happy Investing!