How to Choose The Right City to Invest In
There are a lot of areas of concern when it comes to being a real estate investor, not the least of which is determining the best city to invest in. Real estate is definitely all about location, but there are a few factors that go into determining which location to select.
To further complicate matters, how these factors are either detrimental or beneficial to you as an investor depends entirely on your business model and overall plan.
So what characteristics should you look for in a city when deciding where to invest? There are a good many that you need to take into consideration, but first things first:
Know what your objective is.
Is your plan to fix and flip, or does your model rely on buying and holding property while renting it out? Are you able to capitalize on short-term gains, or looking for an income stream over the long haul? Before even deciding to invest, you need to create a plan for your business, because that will inform how a given city’s characteristics will either work with or against you.
You really aren’t able to ascertain whether or not a city’s current market will work for you without a plan. For example, if your plan is to fix and flip, a city experiencing a rapid boom could be advantageous to you. If your goal is to buy and hold property, you may want to consider an area that shows more modest but steady long-term growth.
Look at foreclosure rates.
As an investor, you need inventory, and preferably the sort that comes in below market value. Foreclosures are a great place to start (especially in a city you’re new to and one in which haven’t had time to find wholesalers).
A city with a high number of foreclosures can be a positive sign because it suggests that there’s a high supply of low-priced inventory. With a market that’s decidedly geared towards sellers these days, an investor is also in a good position to sell the property once they purchase and rehab it. Still, take foreclosure rates with a grain of salt; it could be a sign of lowering incomes in the area, which brings us to our next point:
Look at the home price/income ratio.
The price-to-income ratio, with respect to housing, is the difference between the average income and average home price in the area. The higher that ratio is, the bigger the disparity between incomes and home prices.
This is important because it gives you a clue as to the strength of the local market in terms of its buying power when it comes to homes. If the ratio is high, you may not have a whole lot of qualified buyers to sell to; if the ratio is low, you could have more buyers but also face competition from other sellers and investors.
What are rents like in the area?
This is important, but like most of the others on this list, exactly how it’s important to you as investor depends on what your overall plan is. You want to know how high rents are in the area.
High rents could suggest a greater incentive for potential buyers to move from renting to owning their own home, which is good if you intend to sell the property within a year. Low rents might be good if you’re intending to buy and hold, because it suggests that there’s a higher demand for rent, less incentive to push renters towards home ownership, and possibly room to grow as the area does. Speaking of which…
What do the area’s prospects for growth look like?
No matter what your plan is, you still want to be able to assess the area’s potential for growth. How that growth is advantageous to you, whether it’s sharp or protracted, depends on the nature of your overall plan.
Look for things like recent tax assessments, which could signal an impending spike in property taxes. That could deter buyers, but it also could mean the community is about to invest in growth or infrastructure, especially schools. Schools are supremely important, because they affect property values even if a buyer doesn’t have children. High-performing school districts usually bolster home values. Be sure to check for building permits for commercial development, as that could also be a sign of future growth.
Most importantly, none of these considerations exist in a vacuum. What one does will necessarily affect the others, and you should factor that into your overall plan. Remember, determining whether or not these area characteristics are beneficial to you as an investor depends wholly on you having a clear idea of what your overall objective is.
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– Get It Right Solutions