As a new or even seasoned investor, finding the best markets to invest in is crucial to long-term success. But what are the characteristics that define a market as among the best? Here are seven tips for all investors wanting to find the best real estate markets to invest in when it comes to rental properties or a buy-and-hold strategy.
1. Look for a rent-to-value ratio of 1%.
One of the quickest, easiest ways to determine if a rental property is a smart investment is the rent-to-value (RTV) ratio. For example, if a $100,000 property will rent for $1,000 per month, the RTV is 1%. Generally, if a property meets the 1% RTV, it is a viable investment to consider. A and B Class neighborhoods and properties may fall below the 1%. That doesn’t necessarily mean they are bad choices. However, if the RTV falls below 0.9%, you may not be getting the best return for your investment. If your aim is to maximize cash flow, the 1% RTV is important.
2. Rental demand is important.
Many major cities will have large percentages of renters, but many smaller markets may also be good places to find high percentages of renters. For example, the Midwest markets of Dayton, Ohio, and Middletown, Ohio — where I work and invest — have renter percentages between 40% and 50%. This is a strong correlation for a successful buy-and-hold strategy. If the population of renters falls below 30%, you’re likely looking at a market that may have trouble attracting renters because of location, price point or some other reason. Ideally, strive for markets with a 35%-60% renter population. A number higher than 60% can also indicate a market that doesn’t attract owner-occupied buyers, which isn’t positive either.
3. Diverse economy is key.
Beyond assessing whether the property is a good investment, you must evaluate the market you’re investing in. What are the large industry players? Is the city attracting new business? If so, what kind? You want to ensure that there is long-term support in the market for employment and future growth. If a market is heavily manufacturing, will those jobs be replaced with robotic technology? If a market is heavily based on tourism, could a natural disaster or a recession deplete the attraction for tenants? A diverse economy is key. This supports long-term stability, attraction for young professionals and a way to recession-proof the market (if a market relies on one industry, it could easily be wiped out during a recession, depending on what businesses fail during that time).
4. Don’t limit your location.
The mistake that many investors make is limiting their investments to a radius around their home. The old adage was to invest within an hour drive from home. However, the great expanse of the internet and technology has made this just that — an old adage. The emergence of firms like ours, known as turnkey investment companies, has made investing in markets away from your personal home possible. Turnkey companies specialize in finding promising rental properties, rehabbing them to certain standards, finding tenants and setting up property management for investors who live anywhere. I always say, “Live where you want. Invest where it’s smart.” If you confine your search to your local market, you will likely be missing out on some of the best investment markets.
5. Find a great team.
If you choose to invest in the best markets, they’re likely not within a close range to home (see No. 4). Therefore, it is important to find a great team with boots on the ground in the market you want to invest in. Find a turnkey company or team that lives and works in the area they’re investing in. There are many companies that invest and operate remotely. This means their home office is located in one city, while they’re selling properties in a market many states away. This is not ideal. You want a team that can easily access your investment on any given day if an issue occurs. Be sure to thoroughly vet any company before signing on to work together.
6. Think like an investor, not a homeowner.
Too often, investors base their purchase decision on where they would live. Cities in the Midwest may not be an East Coaster’s cup of tea, but that doesn’t many that millions of other people aren’t choosing to live, work and raise families there. If there is evidence to support a large renter population and the numbers for the investment make sense after your due diligence, don’t cancel the deal based on personal feelings on the market. Even more granular, don’t discount a property with a paint color or layout that you don’t personally enjoy. If the numbers make sense, and a renter is paying the rent amount, don’t let the purple shutters bother you that much. After all, you could always spend $100 to get the shutters painted.
7. Finally, look for boring markets.
Boring markets are best for buy-and-hold investors. Here’s why: Markets that have large ups and downs in terms of their real estate market can be turbulent. Markets like Las Vegas were hit hard in the recession. Many residents moved out, not only hurting the local economy, but also the renter population. Demand went down. Rent prices dropped, and cash flow for investors in that market took a tumble. Markets that are stable over the long term, that don’t have large ups and downs, will generally survive a recession without a huge hit. If you’re building a portfolio for cash flow purposes, or even banking on selling off assets in the future with a bit of appreciation earned, this is a very important point to consider.