Step 7: Discover Your Market
Baby Goes Shopping
Money: 0
Commitment: ◙○○
Time: 1-2 hours
Realtors and investors use the term "Market" to refer to the geographic area where a property is located. A "market" might be a whole city, or a certain neighborhood within a city.
Today, we'll look at your city and compare it with some other markets to see where you might like to invest.
Pump the brakes, baby!
The idea of buying a property away from your home city might make your spine tingle. Don't worry. Investing in your home town is still an option. But let's consider your fear:
(If you have no fear of buying property in another state, you can skip ahead to part 2 of today's tutorial).
It's understandable to be scared of buying property in another state, where you can't go to visit the house in person. Consider again our lesson from last time: A rental property is different from the home you live in. You want to see, feel, and experience a house that you'd live in. On the other hand, a rental property is a business venture and nothing more. It doesn't matter how you personally feel about it, because other people have different tastes and opinions.
Analyzing out-of-state rental properties strictly as a business/investment project should feel different than shopping for your own home.
You may still panic about investing your money in a far-away project. Consider this: Every day, millions of Americans have their paychecks decucted by 401ks and mutual funds. If you're one of these people, your money is taken from your pay before you even see it, the money is sent far away to some broker somewhere (you probably do NOT know this person's name, right?), and that broker puts the money into funds and bonds made up of many different companies. Do you know what companies' stocks you own? Do you know where they are located, and have you ever visited them? Do you have a person to call if you have questions about how they are running the company?
We have all been trained to invest our money this way without blinking; in fact, we are told that this is the best way to prepare for our financial future.
Now, there's nothing wrong with a 401k or mutual fund; my point is that putting our money out-of-state into unknown ventures is shockingly common and many people do it without even realizing.
When you invest in a property out of state, you actually have more knowledge and control compared to stocks and bond funds. With real estate, you have actually seen photos of the property, you've had it evaluated by a professional home inspector and appraiser. You can't say the same of your typical mutual fund.
Now let's compare the difference in viewing a house in person versus having it professionally inspected by someone else in another state.
I'm no expert in home inspection. Even when I do see a house in person, I am not skilled enough to look at the foundation, wiring, and crawlspace to predict any future problems. I am not a carpenter or electrician even though I'm pretty handy. Just because you've been inside a house in person, does not mean that it's a better house than something you have not visited.
My point is that visiting a property in person may feel comforting, but it actually produces no real benefit to the investor. No matter where the house is located, you still need to have it professionally inspected and appraised; and as you'll see in a future tutorial, you'll have a trained realtor on your team who can visit the house for you and will provide photos and even video-walkthroughs and aerial drone images.
Are you convinced that out-of-state investing is a viable option? it might take a while to warm up to the concept, don't dismiss it for now. We can still think about whether investing in your home city might work to make money for you.
Part 2:
Use Google to look up your City's "Median Home Price".
If you live in a rural area or small town, look up the closest big town and search "Median Home Price".
Jot down the result. This is just an practice exercise, so exact numbers are not important.
Next, search "Average Rent" for your city. Look for average rent for a 3 bedroom home. Jot this number down too.
Let's see if the average numbers in your city meet the 1 Percent Rule from last time.
I did this for 3 cities:
Remember we are just considering averages here, but clearly Boston falls below the 1 Percent rule, Chicago does meet the Rule, and Indianapolis is close but not quite at 1%.
Where does your hometown fall? If your hometown appears greatly below the 1 Percent Rule, it may not be the best place to find a cash-flowing rental property.
There may be neighborhoods or regions within your town that do meet the 1 Percent Rule but you have to work extra hard to find them.
If you're lucky and your city does meet the 1 Percent rule, you may be in a really good spot to find cash-flowing properties close to home. Many of us are not in that position so we look to other cities to invest in.
So where are all the good cash-flowing cities?
Luckily for you and me, a collection of super-smart economists, realtors, and other investors are already crunching data to look for these trends. There is no need for us to re-invent the wheel (or re-invent new cliches). Any given year, a number of magazines and investment companies publish their list of cities with the best cash-flow potential. They look not only at the 1 percent rule, but also economic stability, low unemployment, low crime and many other indicators.
Here are a few such lists:
www.realweathnetwork.com
You can Google search other resources to see what the big real estate research firms are predicting. In general, at the time of this writing, cities in the midwest and southeast are showing up on a lot of "hot" lists. These cities have lower prices than dense coastal cities, but also have growing populations that lend to higher rental rates. That combination of low purchase price and high rental rate makes rental properties particularly profitable in these regions.
Here's my trick: I look for cities that show up on more that one "Hot" list. If multiple research groups have included the same city on their lists, I find that very convincing. So look through these results for yourself and see what cities are getting good recommendations for buy and hold rental investment.
Today's final lesson, pick out 2 or 3 cities (no more!) to consider for further research. The first city can be your hometown, if you like, but the others need to be far away. You can pick your cities because maybe you have family there or you've been there before, or it's a direct flight from your local airport, or just because you like the sports team. Anyway you chose, just pick 2-3 cities and we will look more closely at them next time.
Homework
Once you pick the cities, read the short segment on www.realweathnetwork.com and watch the corresponding video clip under the "INVEST" tab in the upper right*.
*Real Estate Baby Steps is not affiliated with Real Wealth Network or any of the other sites linked in this article; we simply think their video clips are a great introduction. You are not committing to anything by watching the clips. .
Print a map of the city and keep it next to you as you read and watch. You'll hear the experts start to talk about certain regions within the city, such as areas near certain highways or landmarks. Look at the map and starting to get familiar with these different zones. This will help you you warm up to the city and make you feel more comfortable with the idea of investing your money there.
Do not investigate any more than 3 cities. There are many cities out there that show up on these lists and you could spend years reading about them. But that's not the point of Baby Steps. The point is to start doing something. To make it work, we have to fight Analysis-Paralysis. We'll jump into that next time!
