\n<\/p>\n
Before you buy your first rental property<\/strong><\/a>, you\u2019ll need to choose a real estate market<\/strong>. If you\u2019re like many Americans, your own backyard may not offer what you want out of an investing area. So, where do you go to find cash flow or appreciation?<\/strong> Today, we\u2019re walking you through choosing a real estate investing market, the metrics to look for, signs of growth and decline, and which markets offer investors the biggest benefits.<\/p>\n How hard is it to do market research? If you have access to the internet, you can research a market in a matter of minutes. But knowing WHAT to research is the most crucial part. Dave Meyer<\/strong>, VP of Market Intelligence at BiggerPockets and host of the On the Market<\/em><\/a> podcast, shares his steps to market analysis<\/strong> and how he analyzes each market to ensure it\u2019ll make him the most money in the long run.<\/p>\n We\u2019ll touch on population and migration<\/strong>, supply and demand<\/strong>, vacancy <\/strong>rates<\/a>, rent-to-price ratios, landlord vs. tenant-friendly states<\/strong><\/a>, and the telltale signs that a market will have high or low cash flow<\/strong>. So before you buy your first or next rental property, make sure you do THIS research!<\/p>\n David: Henry: Dave: Henry: Dave: David: Dave: David: Dave: David: Dave: Henry: Dave: Henry: Dave: Henry: Dave: David: Henry: David: Dave: David: Dave: Henry: Dave: David: Dave: David: Dave: David: Henry: David: Henry: David: Henry: Dave: David: Dave: David: Henry: David: Henry: David: Henry: David: Dave: David: Dave: Henry: David: \u00a0<\/p>\n<\/div>\n Help us reach new listeners on iTunes by leaving us a rating and review! It takes just 30 seconds and instructions can be found here<\/a>. Thanks! We really appreciate it!<\/p>\n Interested in learning more about today\u2019s sponsors or becoming a BiggerPockets partner yourself? Email <\/em>[email\u00a0protected]<\/span><\/em><\/a>.<\/em><\/p>\n Note By BiggerPockets:<\/b> These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.<\/p>\n
This is the BiggerPockets Podcast Show 886. What\u2019s going on everyone? Welcome to the BiggerPockets Podcast. I am your host, David Greene, joined today by Henry Washington and Dave Meyer. Gentlemen, what\u2019s going on?<\/p>\n
Hey, hey, what\u2019s going on, David? So when I record with both of you, is it like, \u201cWho\u2019s David and who\u2019s Dave?\u201d<\/p>\n
I\u2019m Mr. Meyer. Please, call me Mr. Meyer for the rest of the episode.<\/p>\n
Well, I won\u2019t be doing that, but we do have a great episode for you today. And you know when Dave Meyer is here that we\u2019re going to be talking something about data or numbers or economics or foreign policy or something else nerdy.<\/p>\n
I feel like I\u2019m getting typecast a little bit, like there\u2019s this always that actor who\u2019s always the really boring, weird uncle or something like that. I\u2019m just only always, even in my private life, just talking about economics all the time.<\/p>\n
That is you, Dave. But see, that\u2019s not fair because you\u2019re actually a very cool guy, and we\u2019re going to be picking your brain as we do a show about how to pick a market.<\/p>\n
Yeah, well, I guess some of the typecasting is fair. I do do this for a living, so I think that\u2019s fair. But I am also a real estate investor, so I will take some credit there. But we are going to be talking about one of my favorite topics, something I spend a lot of time doing, which is figuring out what markets work for what strategies, and we\u2019re going to jump into that today. And actually for this episode, I created something cool. It\u2019s the first time we\u2019ve ever done this, but I created a little worksheet that you can use to follow along. You can just go to biggerpockets.com\/resources and get it for free. And it has all sorts of different market research tips, like what data you should be looking at and little areas where you can write it down and keep track of it. So, if you want to do that either while you\u2019re listening or later, go get that for free at biggerpockets.com\/resources.<\/p>\n
All right, make sure you check that out and let\u2019s get into the show. All right, Dave, the first book that I wrote for BiggerPockets was called Long-Distance Real Estate Investing. So I frequently get the question of, \u201cDavid, how do I choose a market?\u201d Now, the book focused on the systems that you need to buy real estate in any market, but I do briefly cover things that I look for in a market. What are some metrics that you think investors should be looking for when determining what market to invest in?<\/p>\n
So I think when you talk about picking a market, there\u2019s actually three different steps. The first one, we probably won\u2019t get into too much today, but that\u2019s really just figuring out what your priorities are. Because as we\u2019re going to talk about today, there are different kinds of markets that are good for appreciation, some are good for cashflow, some balance them. And so before you actually dig into data and start looking at numbers and stuff, you have to figure out what your objective is, and that\u2019s going to help you figure out what markets are best for you. So that\u2019s like the first step. The second step is what I call building a short list, which is going from all of the possible markets in the country to a list of maybe five, maybe 10 if you want to be really ambitious, because you obviously can\u2019t research every market in depth.
And so I recommend you either use a list that we provide on BiggerPockets or talk to other investors about where they\u2019re investing and come up with just a short list of 5 to 10 markets that you\u2019re going to do a deep dive into. And then you can move on to step three, which is the market research and what we\u2019re going to get into today. But once you get to that market research phase, I think that there\u2019s two different areas you want to explore. First is what I would call market fundamentals, which is like the background information about the economy, about what\u2019s generally happening in this area beyond just real estate. And then the second part is looking into real estate specific stuff, like how much prices are, what rent is, the rent-to-price ratio and all of that. So does that make sense as a framework for picking a market?<\/p>\n
Yeah. So we\u2019re going to be getting into population growth and migration patterns. Median home prices, that\u2019s a pretty big thing that you want to think about because price rent ratio was so important when looking for cash flow. Inventory available \u2019cause you don\u2019t want to be in a market that\u2019s too hot where you can\u2019t even get anything, or at least you want to know that\u2019s what you\u2019re stepping into. The price rent ratio itself and unemployment rates, et cetera. All right, so first question, everyone wants to know where do we find this data?<\/p>\n
So let\u2019s first talk about market fundamentals. This is like the macro economic type of stuff and I recommend people first and foremost start on an aggregator website. There are a lot of different websites out there, most of them are free. That will pull together just various government data and various public sources. The one I like the most is called FRED. It\u2019s the Federal Reserve Bank of St. Louis. They aggregate tons of data. It\u2019s completely for free, but there\u2019s also various different census. There\u2019s something called Census Reporter you can check out, and those will have all the information on a market specific level about population growth, job growth and all that.<\/p>\n
And I think people want to do this research and then get overwhelmed by what it takes to aggregate it. And hearing you say it is one thing, but what\u2019s the learning curve or the necessary skillset one would need? Can anybody hop on this website and put together data in a way that makes sense and it\u2019s fairly easy?<\/p>\n
Yeah, it is really actually quite easy, especially in some of these aggregator websites. If you go to Census Reporter, for example, you could just type in the name of a city and it\u2019ll pull up stuff like the population growth, medium household growth, unemployment rate. And also the other way to do this is plug these questions either into Google or into ChatGPT. ChatGPT can easily grab a lot of this data for you. So, if you wanted to say like, \u201cWhat is the home ownership rate in Philadelphia?\u201d ChatGPT will be able to do that relatively easy for you. I think actually the harder part is just knowing what numbers to get and to organize it, which is why we put together that worksheet, by the way, which you can download, is because people hear me name seven different things and then they forget. So it\u2019s helpful to just have a checklist and a place to write down the individual metrics that you find on the internet.<\/p>\n
And what do you think about resources that a lot of investors use to just research areas in their backyard, like bestplaces.net? Do you find that that has accurate data? \u2018Cause some of that already comes a little bit aggregated and you could just put in a couple of cities, and it\u2019ll give you some of that information.<\/p>\n
Totally. Yeah. A lot of those websites are good. I don\u2019t know, I\u2019ve been on Best Places. I don\u2019t know anything particular about their specific data, so I can\u2019t comment on that. But those websites generally are pretty good. They\u2019re all using basically the same data. And so, if you find a UI, like an interface, that you find easy to use and easily to interpret, use that. And there are a lot of good places where you can do that kind of thing. Just like Henry\u2019s saying, personally, I like finding the source of the data, one, because then it\u2019s more accurate if you can find the primary source. And the second thing is, I like to make my own comparisons. So I think it\u2019s easier for me if I go on the FRED website, I can say, \u201cWhat\u2019s the unemployment rate in Dallas compared to San Antonio?\u201d And I can see them on one chart when I\u2019m trying to compare two markets.<\/p>\n
And the last thing I\u2019ll add to this conversation in terms of research tools is, most large language model AIs have access to the internet. And you can very simply ask a question to AI about these metrics, \u201cGive me a comparison of population growth in XYZ City versus ABC City.\u201d And usually you can get pretty good results just from a quick AI search.<\/p>\n
That\u2019s a hundred percent right. And I think that\u2019s true for the stats and also some of the more subjective things. So within market fundamentals, we talked about population growth, household income, those are important, but sometimes one of the ones that\u2019s harder sometimes is what are the biggest industries or what are the biggest employers in a city? So asking ChatGPT or something like that, that question can be really helpful. Or what are the best public schools in the Dallas metro area? Is a good question to ask a large language model. And one of the ones I like the most is, this is ambiguous, but is a metric I personally care a lot about when I look at markets, is what is the regulatory environment like? Are there any landlord tenant relationships or laws that I should know about? Are there any bans or restrictions on short-term rentals that I should know about? ChatGPT does a pretty good job identifying those things.<\/p>\n
Or what is their history of exercising eminent domain, which was never a thing I had to think about, but our buddy Henry here is dealing with a hostile takeover for the city of one of his own rentals. Apparently, that\u2019s something that you got to think about. It\u2019s coming from every angle.<\/p>\n
All right. Now, that we know what to look at and where to find the data, how do you use that information to make smart real estate decisions? And what is the most commonly overlooked risk factor you should avoid in a market? We\u2019ll get into that after the break.<\/p>\n
And welcome back everybody. Henry Washington and I are here with Dave Meyer, the data nerd himself, and we\u2019re talking about how to choose a market in 2024. All right, Dave, I think one of the issues that new investors get wrong is they ask the wrong question. Typically people will say, \u201cWhere will I get the most cash flow or where are the cheapest properties?\u201d Because that can sometimes go hand in hand, at least it can on a spreadsheet, but it doesn\u2019t always work out that way in practice. I prefer to ask questions of, how population and migration are playing a role in that individual market? What do you think about that strategy? How much should investors be looking at where people and jobs are moving?<\/p>\n
Ultimately, market analysis comes down to the same thing everything in economics do, which is supply and demand. And so that\u2019s ultimately what you\u2019re trying to get to. When you look at population growth, when you look at job growth, when you look at median age, these are questions that impact supply and demand. And that\u2019s why, I think Henry mentioned earlier, people get overwhelmed, but if you can remember that all of these metrics are really just trying to figure out how many people want houses and how many homes are going to be for sale, that\u2019s really what you\u2019re trying to understand because that\u2019s going to determine the direction of home prices and it will also determine rent and vacancy rates and all of the things that we care about as real estate investors. And so one of the most fundamental elements of demand, which is half the equation, is how many people live in a particular city and which direction that\u2019s going in?
I hope you all can understand that if you\u2019re living in a city that is growing, demand is going to go up. For very likely, they\u2019re obviously caveats. But if you are living in a market that is declining in terms of population or household formation, then you might see a softer real estate market. And so in softer real estate markets, you often see higher cashflow. And this is why there has historically been a trade-off between markets that offer great cashflow and markets that offer great appreciation because the supply and demand dynamics are different. Actually, one of the first projects I did when I started making content for BiggerPockets about this stuff was looking at the historical relationship between appreciation and cash on cash for the entire country.
And what I found is that the markets that have the best cashflow have the worst appreciation. And vice versa, the markets that have the best appreciation have the worst cashflow. Now there\u2019s a lot in the middle that offer some appreciation and some cashflow, but the extremes are the outliers for appreciation are negative outliers for a cashflow. And so that\u2019s why I think it\u2019s really important what you said, David, is that if you want cashflow, that\u2019s fine, but you have to understand that you\u2019re making a trade-off. And that\u2019s why market analysis is so important is because it is very rare to find an exceptional cashflow market that also has exceptional appreciation potential.<\/p>\n
Now, another thing to consider when we\u2019re looking at what type of people and how many people are moving into an area and what the industry is, is that\u2019s going to be the tenant pool that you\u2019re choosing from. If you\u2019ve got an area where you don\u2019t really have anybody moving into it, the same people have lived there for generations and generations, there\u2019s not a lot of economic opportunity, you\u2019re definitely going to get a tenant with a different set of ambitions than maybe when you\u2019ve got fresh blood moving in, people graduating college and moving into a city to take a job there versus the type of area where maybe someone moves to because they want to raise a family. How much of a factor do you think that should play in choosing the market? Because as an investor, the type of tenant we get is going to have a very big impact on the type of experience we have investing?<\/p>\n
Yeah, I think it\u2019s within a market that\u2019s really important. It\u2019s hard to, I think, categorize entire markets that way because sometimes it\u2019s like, if you go into a market that is really struggling economically, then yeah, I think that\u2019s very important. I think for most markets there\u2019s a trade-off. And you have to decide within that market, do you want to be in a class A neighborhood? Do you want to be in a class B neighborhood, a class C neighborhood? Because that will really impact how much rent you can command, what vacancy rates there are, and any potential for rent not being paid or anything like that. So I do think that\u2019s super important. And generally speaking, my opinion is that, and this is opinion, this is not fact, but my opinion is that places where the economy is growing and is likely to continue to grow offer the least risk for real estate investors, that might not mean that they have the best possible upside, but if you are one of those people who wants to mitigate risk, looking for strong economic growth is a very good way to do that.<\/p>\n
Yeah, I agree with you from that perspective. Economic growth is huge because if you\u2019ve got economic growth and population growth, I think you\u2019re on the right track in terms of putting your money in a market where you think it would be safe. But there are a couple metrics that I look at, as well, that I\u2019m interested to see what your thoughts on them are. We touched on them a little bit early on in the show, and that being inventory and vacancy. So vacancy can be looked at a couple of ways, right? So you can look at vacancy, if a market has a very low vacancy, what that suggests is that you\u2019re probably going to get higher rents because there\u2019s less properties to rent and you\u2019re probably going to have maybe not less turnover, but the time to find a tenant should be shorter than in a market that has a higher vacancy. And if the vacancy\u2019s higher, it\u2019s the opposite, right? You\u2019ll probably get lower rents, but I think the secret sauce is somewhere in the middle, right? Where\u2019s your head on this?<\/p>\n
Yeah, that\u2019s a really good point. I think it boils back down to what your objectives are as an investor. For me, I think that one of the key components when I look for a market personally is how quickly you\u2019re going to be able to fill your units. Because I think people really obsess over how much rent they can get and raising those rents. But if you miss one month of rent, that\u2019s probably going to eat up your annual rent increases and more. And so I\u2019ve talked to a lot of people about this, it\u2019s like you\u2019re going to kick someone out and raise rent 50 bucks and get a month. If your rent is 1200 bucks raising it 50 bucks a month, it\u2019s going to get you 600 bucks a year. But if you miss one month of rent because of that, you\u2019re losing $1,200 a year.<\/p>\n
Two years behind.<\/p>\n
Yeah, exactly. So I think vacancy is one of the most overlooked things. And I just think it\u2019s really important to get a good feel for the market for these things, \u2019cause you can be in a market where there\u2019s high vacancy rates, but if you\u2019re buying quality assets, then you\u2019re still going to be able to lease it. I think where that really comes into play is when you\u2019re buying low quality buildings, low quality apartments where if things start to soften up and there\u2019s more vacancy, that generally pushes rents down everywhere. And that means tenants, they\u2019re still going to live somewhere, but they\u2019re going to take that opportunity usually to move up in terms of quality, and they\u2019re going to go up to maybe from a C neighborhood to a B neighborhood. And that is one of the reasons why I personally don\u2019t like buying rentals that are really ran down is because you are at the whim of the macro economy and if things turn poor, you\u2019re probably going to be on the short end of the stick.<\/p>\n
Little throwback, quick tip for everybody here. Much better to put somebody in your unit at a cheaper rent, like Dave said, to cut down on the vacancy and then raise rents once they\u2019re in there because it\u2019s a massive inconvenience to have to pack up all your stuff and move somewhere else to save a hundred bucks a month when the rent goes up than it is to try to get the top rent in the very beginning when they could be picky, not move into your unit and move into somebody else\u2019s that is cheaper. Learn where you have leverage and where you don\u2019t. And no one to hold them and no one to fold them.
Now, this whole idea of price-to-rent ratio, or as you called rent to price, is a big thing that investors need to be aware of because typically as investors, we\u2019re going to be buying for cash flow, or at least we want there to be some hope of cash flow when we\u2019re buying a property. The BRRRR method isn\u2019t a great method if you end up pulling all your money out of a house that\u2019s bleeding money every single month. So the end goal is always to have something that cash flows. And if the price of the property gets to be too high, rents typically don\u2019t keep up and you\u2019re not going to get cash flow. So what are some percentages that an investor should be targeting in today\u2019s market?<\/p>\n
So just so everyone knows, the rent-to-price ratio is basically just a way of comparing the price of a property to the amount of rent that you can generate from that property. And generally speaking, the higher the rent-to-price ratio, the better. Now, 10, 12 years ago right after the great recession, there was something called the 1% rule that came out that said that to get a good cash selling property, you need to have a rent-to-price ratio over 1%. Now, there are still deals and there are still markets that offer 1% rule, but I think it is better and healthier for investors to recognize that that was actually a very unique time, not that it\u2019s the normal one.
But 1% rule and being able to find markets who are 1% rule is very rare historically. And so we\u2019re in an era where the average rent-to-price ratio across the country is closer to 0.6%. And so if you think about it that way, and you look at a market where it\u2019s 0.7% or 0.8%, that is above average cash flow potential for a market. And I think what\u2019s really important here is when I\u2019m talking about a market at an average, if I\u2019m saying that the average in Detroit is 0.8%, then that means by rule that there are deals that are better than 0.8% and there are deals that are worse than 0.8%. That\u2019s how averages work.
And so that means your job as the investor is to go find the deal that is better than 0.8% so you can find the ones that are cash flowing better than the others. So that\u2019s generally how I advise people is go look for markets where it has above average cash flow potential. So you\u2019re not going to be looking at Los Angeles or New York City or something like that, but if you can find a place where the average for the whole metro area is like 0.6% or 0.7%, there are going to be pockets in that market that offer cash flow and you as the investor, your job is to go find them.<\/p>\n
Now, here\u2019s some ways that you can make the price-to-rent ratio metric work in your favor. It\u2019s not always about picking the cheapest market. Let\u2019s say you find a market where homes are priced higher than the median home price across the country, maybe they\u2019re 500, $600,000 houses where you\u2019re not very likely to get close to the 1% rule. You\u2019re not going to be buying a $500,000 house that rents for $5,000 a month, at least not as a single family home. But what if that property has a basement and an ADU, and you have three income streams that you can bring in that all add up to being close to $5,000 a month? You\u2019ve now found a property that gets close to the price-to-rent ratio that you\u2019re looking for that is also in the better neighborhood where you\u2019re also going to get more appreciation and better tenants.
The same thing applies to small multifamily. Maybe it\u2019s a triplex or a fourplex. You\u2019ve got more to rent, or the people that take advantage of the rent by the room strategy. So if you just rented the house out on its own, maybe it gets $2,200 a month, but if you can find a property with six bedrooms and you can rent all of them out for $700, now you\u2019re at $4,200 a month, which is significantly more. This is how investors that are savvy figure out how to use metrics like the price-to-rent ratio and make them work as opposed to just doing what worked in 2012, which was look at all the houses that were out there, 80% of them had a price and rent ratio that was favorable and making it work.<\/p>\n
Yep, I 100% agree, David. I 100% agree, David. I often tell people, if you can\u2019t find the deal in your market, there is likely an opportunity where you can make a deal in your market. And so looking at rent by the room, looking at midterm rental strategies, looking at ADU strategies is a great way. Another thing you could potentially do is take your existing home and make it a multifamily. There are easy ways to make a single family a multifamily. Now, obviously you need to make sure that your zoning laws in your area are going to allow for it.
But there are ways you can take a three bed, two bath, single family home in an expensive market and make it a duplex that has a one bedroom studio on one side and a two bed, one bath house on the other, especially if it\u2019s a split wing house where the primary bedroom is on one side of the house and then the other two bedrooms and living room and bathroom are on the other side of the house because then you can just close off the primary bedroom, add a one wall kitchen in there, you\u2019ve already got plumbing, you\u2019ve got water access, and so you can take a single and make a duplex.
Now, I know it sounds easier right now than it probably is, but it\u2019s just as easy as calling down to the local city or municipality that that property is in and making sure a, that it\u2019s zoned properly and getting some quotes from a contractor on being able to do the work. And you can essentially take something that might cost you $500,000 and then another $20,000 to $50,000 in renovations and now you can get the rent that would put this above or at the 1% rule.<\/p>\n
Awesome. Dave, Henry, we\u2019ve covered some valuable info so far, like population trends to look at and how to think about the rent-to-price ratio. But we are about to get into one of the most crucial questions on investors\u2019 minds today, how do you assess a market for cashflow versus appreciation? Stick with us. We\u2019ll be right back after this quick break.<\/p>\n
Welcome back everybody. Dave Meyer is here schooling us all on how to choose a market in 2024.<\/p>\n
All right. Now, speaking about cashflow, let\u2019s walk into the age old debate, the hornet\u2019s nest of the BiggerPockets forums where everybody gets so worked up. Should investors be looking for cashflow or appreciation because the market you choose are is typically going to be suited to one more than the other. Henry, I\u2019m going to throw this one to you first. What is your philosophy on which is better or which type of investors should be starting with which strategy?<\/p>\n
Man, I\u2019m going to give the political answer, right? It goes back to what Dave was saying in the beginning of the show. You have to understand what your goals are. What are you trying to accomplish? What I may be trying to accomplish is different than what a brand new investor may be trying to accomplish. And if that brand new investor is, if their goal is, \u201cI need to generate enough monthly income, so that I can leave my job, so that I can go do this other thing that I have a passion for doing,\u201d well, then that sounds like you\u2019re going to need some cashflow. And so you might want to focus on a more cashflow intensive market.
If your goal is maybe somebody like Dave who\u2019s like, \u201cLook, I love my job. I make a great salary. I enjoy real estate, I don\u2019t necessarily need to make thousands of dollars a month off of my cashflow. What I need is to build long-term wealth through equity and appreciation, and get the tax benefits that come with owning rental properties to offset not just my rental property income, but my W-2 income because W-2 earners are one of the highest taxed people on the planet.\u201d So that\u2019s a completely different strategy, which would say investing in a more appreciation-friendly market would make sense. So that\u2019s my general thoughts.<\/p>\n
I agree with Henry because, I mean, I basically wrote an entire book and took two years of my life trying to answer this question once and for all, which is that you need to think about your own personal strategy before anyone can answer this for you. So I\u2019ll just say that, like Henry said, there are different approaches for different people. I\u2019ll give you a couple of examples. I think most people who are earlier in their investing career should wait appreciation higher than cashflow. If you don\u2019t intend to retire for 10 or 20 years, then you probably don\u2019t need as much cashflow and appreciation gives you an opportunity to take some bigger swings and try and make some more wealth. And as you approach retirement, whether that\u2019s early retirement or traditional retirement age, it probably makes sense to shift your focus more towards cashflow. So I think that\u2019s just a general rule of thumb.
My personal approach is to look for properties that at least break even. I don\u2019t want to come out of pocket, if it does a month or two, I don\u2019t really care, but I look for a minimal cash on cash return. It doesn\u2019t have to be great. That\u2019s not what I\u2019m doing for, but I want to get a property that will sustain itself in an area that is likely to appreciate and that has some value add opportunity like Henry was talking about. If I can buy something that off the shelf, breaks even, and then if I make improvements to the property, then it gets me a seven, eight, 9% cash on cash return, that to me is a winning strategy.<\/p>\n
All right. Now, certain markets are going to be more favorable for cashflow, others are going to be better for appreciation. What are some of the fundamentals that each of you think an investor should be noticing in choosing a market that would lead them to believe, \u201cHey, this is more likely to have properties that are going to be worth more in the future and this is a property that\u2019s more likely to have a higher volume of cash flowing properties\u201d?<\/p>\n
So in the beginning I said that my market research, basically I break it down into two different areas. One is market fundamentals, one is housing market data. I think for cash flow, it really comes down to housing market data. If you want to know cash flow, it\u2019s like how much rent can you charge? What is the price of the house? What are your property taxes? What are your insurance? It\u2019s really just straight math. The reason that appreciation is hard to predict is \u2019cause it\u2019s not objective like cash flow. It\u2019s just a little bit more subjective. And I think that\u2019s why you need to also be looking at these market fundamentals. You want to look at long-term trends like, one, how many people are moving to the area? How well paid are those people? How many houses are being built in those areas? Because again, property appreciation sounds crazy. It just comes down to supply and demand. So if you can figure out shortcuts to measuring supply, measuring demand, that\u2019s going to give you a good indication of which markets are going to appreciate the most.<\/p>\n
Henry, what about you?<\/p>\n
Yeah, for me, if I\u2019m looking for cash flow, then what I\u2019m going to look for is a market where the average rents are higher maybe than the national average or are going up at a higher rate. And then I\u2019m going to look for if I can find a market that also has a median home price that\u2019s at the average or lower than the average. So if I can see a market, it\u2019s got high rents, but I can buy a house for lower than the national average, I\u2019m going to just go out on a limb and say, \u201cI\u2019m probably going to get the cash flow that I\u2019m looking for there.\u201d And if I was looking for appreciation, I\u2019m going to look, just like Dave said, I\u2019m going to look more at the economics of that market and the population growth. So I\u2019m going to look for a market that\u2019s had population growth, positive population growth for at least the last five years.
And then if it\u2019s got the population growth that I\u2019m looking for, I\u2019m then going to look at the economics. What is driving the jobs in that market? What industries? And I\u2019m going to be looking for industries that are up and coming based on what\u2019s happening in the world right now. So things that I would be looking for are fintech jobs, technology jobs in general, government jobs, and healthcare jobs because these industries aren\u2019t going anywhere. They\u2019re improving. Technology is improving them. And they\u2019re high paying jobs typically. So, if I\u2019ve got people moving into an area where there are new companies or companies that are hiring in technology positions and they\u2019re paying a hefty wage, then you may be looking at a market that\u2019s going to get you some appreciation over time.<\/p>\n
Right on. That\u2019s a really good way to look at this. Some of the things that I look at when trying to figure out what are the strengths or weaknesses of a market, you can start with just median home price. If the homes are priced higher than the national average, that usually means that wages are going to be higher in that area, which means more people will want to buy homes, which means it\u2019s not going to be a strong market for finding renters and it\u2019s going to have a harder time getting cash flow. So the price of the home itself is one way that you can tell if it\u2019s higher price, it\u2019s probably going to be an appreciation market and if it\u2019s lower price, it\u2019s probably going to be closer to a cash flow market. Another thing to think about is the supply and demand dynamics here.
It\u2019s really simple when you boil down and you understand the fundamentals. If the demand is growing but so is the supply, like let\u2019s say that businesses all started to move into Topeka Kansas or something, they\u2019ll just build more houses. So you\u2019re never going to see a ton of appreciation in an area where they could just add supply. But if you find an area where jobs are moving into and you don\u2019t have the ability to grow supply where it\u2019s constricted, you are going to find that is a high appreciation market. Look at the highest appreciation markets the last decade or so, it\u2019s been Austin, Texas, San Francisco, California, Seattle, Washington, Miami, Florida. All of these were cities that had a restricted amount of land where they could even build, but jobs move into there with high wages, which forced appreciation and made it not cash flow strong.
I think the mistake that investors make is they hear where everybody else is buying and then they just go, \u201cOkay, I\u2019m going to go by there.\u201d And then like a bunch of locusts, they all settle on the same market and then you just hope that the fundamentals of that market were good. When you hear other people are buying somewhere, that should make you want to look into the market more and study it, not necessarily just piggyback onto what everybody else did. I\u2019ve seen a lot of mistakes get made when people bought properties because it was the flavor of the month. Dave, Henry, any other tips that you can give for investors that are trying to figure out what market would work for them?<\/p>\n
Yeah, I think you touched on something pretty important there where you don\u2019t want to rely on the research of someone else.<\/p>\n
Especially not me.<\/p>\n
I agree with you for the most part, but I think what was really essential there is that you said, \u201cHey, you can take their advice, and then that should trigger you to go do your own research.\u201d Because along the lines of that, we do have to acknowledge there are large companies who have entire real estate teams, whose sole job it is to analyze these markets from a real estate perspective to determine if their company should go there. And so you can essentially follow the whales, but you\u2019re right, it should trigger you to go and do your own research. And so I like doing things like looking at markets where there are minor league baseball teams. They do a lot of market dynamics to determine, are there people who want to live here who make enough to want to spend money on going to ball games?
And they typically put these teams in places where they feel like they\u2019re going to be successful. And so if you find a company like that, who has demographics who might be that same demographic who\u2019s going to rent your place, it is totally okay to piggyback off of where are they looking for properties, but that should trigger you to go dive in deeper and do your own research. Just because they\u2019re moving there doesn\u2019t mean you\u2019re going to have success as a real estate investor. But even large companies do this. Even large companies don\u2019t just, they say, \u201cHey, I hear so-and-so company is building a new place over here. Maybe we should dive into that market.\u201d And then they do their own research from there.<\/p>\n
Dave, give us some advice for what an investor who says, \u201cTell me how to do my own research. What should I be doing? Where should I go? What should I be reading? And does BiggerPockets have anything that can help me out in this area?\u201d<\/p>\n
Yeah, of course. So you should definitely check out this spreadsheet. We\u2019ve talked about a lot of different things. It\u2019s not a spreadsheet, it\u2019s a worksheet. But we\u2019ve talked about a lot of different metrics. And if you want them all just in a simple place where you can go and just go one by one and look at this, use ChatGPT, use Google, you can just get this completely for free. And I think the other thing is, we are going to be doing, stay tuned for this, it\u2019s going to be in late February. I\u2019m actually going to be doing a workshop on this, where I\u2019m actually going to show people step-by-step, I\u2019m going to screen share basically and show you how to do this thing one at a time.
But just with everything in real estate, the number one thing is just to start doing it. Go look up a couple of stats right now and see that it\u2019s not that hard. If you sit around and wonder the perfect way to do it, you\u2019re never going to make a lot of progress. But if you just start exploring a little bit, use your computer and Google, you\u2019re going to be getting better at it all the time.<\/p>\n
All right, one last question before I get you two gentlemen out of here. Landlord-friendly states and laws. What are things that investors should look for or what are things that they should look to avoid? Dave, let\u2019s start with you.<\/p>\n
I think, most of all, what landlord-friendly means is sort of subjective. So I think different people interpret certain laws as positive, some people interpret laws as negative. I just really think the most important thing is that you understand what you\u2019re getting yourself into. So certain places might have restrictions on rent growth or might have really difficult evictions, stuff like that. Sometimes it\u2019s really detrimental, sometimes it\u2019s not so bad. But I really think you should spend some time either going to Arria, talking to your agent, or just looking on the local government website, the rules. I invest a lot in Denver and they have really good resources both for tenants and for landlords to look this stuff up, which I think is great. Tenants should know what they\u2019re getting themselves into, in my opinion. and any property owner should know what they\u2019re getting themselves into, and I think you can interpret for yourself what is landlord friendly and what is not. The more important thing is you know what you\u2019re doing.<\/p>\n
I agree. I would look at this after you have figured out some of these other metrics and dynamics. If you\u2019ve got it dialed down to two to three markets based on everything that we\u2019ve talked about today, call a couple real estate attorneys in each of those markets and just ask them, \u201cHey, what\u2019s it like when you have to do an eviction? What does it cost? How long does it take? Tell me the worst case scenario and then tell me the best case scenario.\u201d And with that bit of information you will understand for yourself if that\u2019s something you can stomach or not and how that might impact your financials if you had to actually evict somebody in those markets.<\/p>\n
Really good point. Here\u2019s the last thing that I want to add, a little cherry on the top of this episode. When you make your decision based on states that have landlord-friendly laws, you\u2019re making an entire investment strategy based off the worst case scenario in a real estate investment. When you\u2019re dealing with a literal eviction, a tenant that won\u2019t leave, remember that is different than a tenant that stops paying their rent and just leaves the place voluntarily. That sucks when that happens, but it\u2019s not an eviction. Eviction is your worst case scenario. You\u2019re planning your whole strategy around something you hope never happens, right?
It doesn\u2019t happen a ton. So I try to invest in areas where I can be picky about my tenant and choose a tenant that has the most to lose. So if they lose their job, if they come across hard times, if something terrible happens and they send all of their money to some Nigerian prince or they get caught up in a crypto scam from one of the fake David Greene or Henry Washington profiles that are ripping people off, they just leave voluntarily because they don\u2019t want to see their credit score destroyed by an eviction. You can avoid needing the laws to be in your favor by picking an area and a location in a neighborhood where people are going to have more to lose.
All right. That\u2019s all I have to say on that topic and I had a great time with you two gentlemen today. Hopefully everybody learned more about how to choose the market to invest in so that they can start taking practical steps towards saving that down payment, finding the right property, and building that wealth today. If you\u2019d like to know more about Henry Washington or Dave Meyer or myself, you can find our information in the show notes. So please do go look those up and give us a follow. And if you\u2019d like to know more on this specific topic, my advice would be you check out the BiggerPockets forums where we have tons of questions on this very same thing with lots of information for you to check out. That being said, I\u2019m going to let you guys get out of here. This is David Greene for Henry Washington and Dave \u201cthe Oscar\u201d Meyer, signing off.<\/p>\n