The content in this blog post comes from Karen Conrad on episode 64 of The WealthBuilders Podcast, ‘How to Find the Best Real Estate Markets for Investors: 9 Questions.’
When it comes to real estate, did you know that you don’t have to invest in the same city where you live? When investors have this realization, it can be exciting and overwhelming. There are so many different options, and how can you know which one is the wisest choice? So, we came up with the following nine questions to help you locate the best real estate markets for investors. Go through these questions as you consider where to invest. They should give you a well-rounded picture, from the finances to the ‘feel’ of a potential market.
1. What’s Your Price Point?
Evaluate your cash reserves and current DTI ratio. How much are you willing to spend on a property? Do you want to buy multiple properties, or just one? Remember that cash flow is your goal. So, it is generally better to buy several cheaper properties rather than putting all your eggs into one basket. In other words, just because you have the money doesn’t mean that you should aim for a higher price point!
2. Would Investments in This Area Set You Up Toward a Real Estate Professional Designation?
The IRS allocates a specific real estate professional designation to investors who spend at least 750 hours per year (averaging 15 hours a week) managing their real estate portfolio. This must be their primary occupation. This tax advantage lets qualifying real estate investors deduct business expenses, losses, and property depreciation from their overall taxable income.
So, what does this have to do with finding the best real estate markets for investors? Even if you’re looking to find your first investment property, this is good to have in mind should you ever desire to scale. The best markets have options for buy and holds, fix and flips, and vacation rentals. That way, you always have a string of exit strategies and backup plans available should you need them.
3. Where is the Growth Pattern?
Instead of looking at the parts of a city that are already crowded, evaluate where the growth is projected. Are there growing suburbs or up-and-coming towns next door? The key here is to get ahead of the curve and purchase properties before others recognize the demand. If you do that, your properties will appreciate as demand heightens in that area.
4. Can You Make an Impact in That Community?
Meaning, do you think you can connect to the people and the place? As Christians, we want to make a positive difference with our investments. Think creatively about something you can bring to benefit the markets where you choose to invest.
5. Can You Bring Something New to The Market?
What’s your edge? What are your specific talents and gifts, and is there a market where they’re underutilized? Find the gap! For example, I have a knack for home staging. We were able to find a market where home staging and design weren’t prevalent. So, our properties sold for more and inspired other people doing similar work!
6. Can I Find Connections in This Area?
If you’re going to be a real estate investor, you need a real estate team. This includes, but is not limited to, a property manager, builders, a general contractor, and an attorney. For more information on finding this team (from scratch), check out the following blog: How to Start Real Estate Investing: 9 People You Need on Your Team.
7. Do You Like the Area?
You want to get excited about the areas where you invest. You’ll spend more time there than you think! Do more than look online. Make the trip, walk around, talk to locals, and have a great time. It should be a fun process!
8. What Businesses Are in the Area to Support Growth and Increase?
The best real estate markets for investors are home to businesses and industries that attract jobs (and therefore people) to the community. You want to be confident that you’re going into a community with a demand for housing. In the town we invested in near Waco, Texas, we found that there was an HVAC supplier, SpaceX, and an Amazon Distribution Center that were all growing and attracting more people to the community (2,500+!)
9. Is There Vacation Property Appeal?
Real estate markets change. When the economy is down, the rental market for buy and hold properties tends to be pretty good. This is because fewer people qualify to buy a home, but they still need a place to live. When the economy improves, and more people qualify to purchase their own homes, you might have a more challenging time finding quality renters. That’s when it helps to be positioned in a market that attracts tourists who need a rental property! You can go through rental agencies or list it yourself on Airbnb and VRBO. Research how vacation properties have performed within the last 15-20 years in that area. Understand how much properties rent for there and determine if you can make your mortgage payment (principal, interest, taxes, insurance, and management) with around 16 weeks of rental income. (Realistically, you will not have vacation property income year-round due to seasonality and vacancies.)