Last week I provided an 8-step formula for how to approach out of state investing. This week, I want to look in more depth at the first step – that of researching markets in which to invest.
Let me start by identifying what I think are three critical components that determine where an investor should be looking.
They are:
- Employment trends
- Housing factors
- Population shifts (particularly by baby boomers) -and-
- Overall affordability.
Employment Trends
Employment trends deal with whether an area is experiencing job growth, stagnation, or decline. Many areas I discuss are experiencing growth in employment, which brings people into an area for jobs, placing pressure on the existing stock of housing and pushes up rents and property values. Declines in employment have the opposite effect as is being seen in places like Detroit. Unless you are hedging for a turnaround in an area, your best bet is to find an area with good employment prospects, even if you are not seeking a job yourself.
Housing Factors
There are many factors related to housing. Among them are appreciation rates, valuations, the ratio between rent and mortgage payments, and the number of vacant units waiting to be filled.
Appreciation rate is probably the easiest to understand, probably because it was one of those things that was reported on so markedly during the housing boom. Appreciation represents how much a property is going up or down in value. On average, across the country, and over time, real estate seems to appreciate at about a 4% per year rates. But, when a market gets hot, that can go up into double digits, and that’s when things get promising.
Keep in mind that housing values can stagnate, and even go down – particularly if they ballooned too fast and defied any logic.
Valuation is another key component. In certain markets properties are so expensive that only the upper strata of the population can afford to buy. And, don’t make the mistake of thinking that an expensive area naturally means better appreciation. That is often not the case.
One of the factors related to valuation is the differential between a typical mortgage payment and the rent a property can command. For example, in pricey areas, it’s not uncommon to find average single family homes selling for well over $400,000. That means a mortgage in the ballpark range of probably $3,000 a month. But, rental rates on that same property might be in the range of $1900 a month, meaning a $1100 a month negative cash flow! In a less costly area, a house might run, $140,000, with a ballpark mortgage of $1,100. Rent in that area might be $1,000 a month, nearly covering the monthly payment.
Vacancy rates and the amount of housing inventory an area needs to absorb is another critical factor. Closely related to this is the time it takes a property to get sold or rented. Right now in Phoenix there is at least a six month glut in vacant property for sale. Combine that with the mass of properties that were overvalued on speculation and you find a bad combination – people renting properties for far less than their monthly carrying costs just to cover some of their expenses…because they know the property could take half a year or more to sell.
Let’s turn our attention to a variety of resources where you can find critical housing market data. My emphasis today is on resources that you can access for free.
Federal Government Resources
First and foremost is the US Census. You can access that at www.census.gov
Census data is not compiled yearly, and can be a couple of years out of date. But, it does paint an overall picture that’s reasonably current. Here are just a sample of the reports you can access with the Census:
- Housing Affordability
- Absorption Rate
- Income
- Demographics of an area
HUD’s Resource site at www.HUDuser.org
Here are just some of the reports you can access from HUD
- State of Cities Data System
- US Housing Market Conditions
- American Housing Survey
- Property Owners and Managers Survey
State and Local Government Resources
State Economic Development offices hold a wealth of information for states, cities, towns, and counties. You can access a complete list of state economic development offices at the Economic Development Administration’s Website www.eda.gov
Associations
The National Association of Realtors at www.realtor.org and the National Association of Home Builders www.nahb.org are two fantastic resources with a lot of research at your disposal.
Chambers of Commerce are the gateways to local areas, their merits, business climate and so forth. You can access chambers across the country at the World Chamber of Commerce website (www.commerce.com) or the US Chamber of Commerce (www.2chambers.com)
Local and State Real Estate Investment Associations (or REIAs)
Larry Goins, who is going to be our guest speaker next week www.larrygoins.com has a comprehensive list of REIA’s across the country on his website as does the National REIA at www.nationalreia.com.
Private Research Sites
Mostly, these tend to be fee-based, but Altos Research, which deals in Western states has a fantastic property valuation map that overlays value charts on Google maps.
Retirement Sites
Retirehomesmart.com and greatretirementspots.com are two tremendous resources if your strategy is to buy where boomers are retiring.
Relocation Sites
Sperlings bestplaces.net and findyourspot are both similar tools, being able to filter locations based on criteria you deem important. The Wall Street Journal’s www.Realestatejournal.com has a similar tool.
Other Websites of Value
Job sites like Monster.com and, in particular, the Riley Guide www.rileyguide.com often profile markets, with a bent towards job prospects, growth, cost, and quality of life.
Magazines
Where to Retire magazine is a must have if you place importance on population migration. Each issue is a storehouse of market profiles and ideas for places to invest. Live South, which focuses primarily on the South East, has a magazine and website by the same name has similar information to Where to Retire.
CNN, Forbes, Money Magazine, the Wall Street Journal and similar financial publications all put out real estate articles on a regular basis. Just recently, for example, Kiplinger profiled the ten top cities for empty nesters.
Books
Places Rated Almanac is a must if you want to select areas by your own criteria. It covers, among other factors, tax rates, job growth, and quality of life.
Where to Retire magazine puts out a series of books on buying strategies. You’ll find them advertised in the pages of the magazine.
That’s a lot on your plate – and remember, if you want to ask any questions or need more information, email me at whflood@yahoo.com and I will be happy to chat with you.
So, until next time, I’m Bill Flood; this is the Coast to Coast Real Estate Investor…live your real estate dreams!
