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The key here is to convince yourself to think like a real estate investor, not a landlord. Once you do that, you are ready to start identifying the best real estate markets!
There are 3 key indicators to look for when identifying investor-advantaged real estate markets:
How low is the purchase price of the property and how high is the market rent? That's the first cursory metric. Many markets will be immediately eliminated due to unfavorable price-to-rent ratios. For example, some markets have very inexpensive properties, but the rental market is also depressed. So, even though the property is cheap, it is not profitable. On the other hand, some markets are very expensive. Although you can rent the property for more money in those high-priced areas, it is not usually enough to make the expensive home a profitable, cash-flowing investment. So your first high level step in identifying the best real estate markets is to eliminate the ones with unfavorable price to rent ratios.
Next, after you identify markets with favorable price-to-rent ratios, you need to go a step deeper and look at your market-specific operating expenses. Sometimes, even with an advantageous price-to-rent ratio, high property taxes, insurance or other expenses can eat up your positive cash flow. After you factor in all your operating expenses (and an estimate for maintenance and vacancy), you are left with your Net Operating Income (NOI). Divide your annual NOI by your purchase price and that gives you the "Cap Rate", which is a more substantive comparable metric.
After that, you can go even deeper and factor in your mortgage payment to calculate your "cash on cash return". Understanding real estate investment analysis is important. And there are many other calculations you can use to understand your rental property performance potential at an even deeper level. But these are good cursory metrics to start the process.
The next step in identifying the best real estate markets is to assess the economic indicators in the market. As a real estate investor, you want to be on the supply side of high-demand trends. Some of the key economic indicators that can help drive rental demand as well as home price appreciation are Job Creation, Population Growth and Cost of Living. When a market is creating jobs people move there to take those jobs, putting upward pressure on both housing prices and rents. When a market has a lower than average cost of living (for the qualify of life it affords) that increases desirability for people to move there and stay there. When a market maintains low unemployment, that provides a solid rental pool of qualified tenants with stable jobs. All of this helps provide you a steady stream of cash flow during your hold period. It also contributes to a gradual increase in your rents and helps drive your property price up. It also helps provide an exit strategy when you are ready to sell your property to a primary homeowner down the line. After you have built up enough equity in your property, you can either sell for a profit, do a cash out refinance and keep holding the property, or learn how to do a 1031 Exchange for maximum tax benefits.
The third factor to keep in mind when identifying the best real estate markets is that all markets go through a “property cycle” which means that the same markets are not always and forever going to be the best real estate markets to continue buying in.
Different markets are more or less advantageous to buy in at different times. However, most real estate agents and sellers won’t tell you this because they only have access to properties in one market so they always try to represent their market as “the best market” regardless of where it is in the property cycle. That's why traditional real estate agents can be hazardous for investors.
Maverick Investor Group created our business model so we could put your interests first, and help buy in the best real estate markets at the time you are ready to buy. We want to get to know you, understand your personal real estate investing goals, and support you in buying in the best real estate markets for you. As a first step, I invite you to register here for a free video consultation with Maverick, where we can answer all your questions and help you select the best markets and properties for your criteria and goals.
Maverick monitors these property cycles closely. We also monitor these other economic drivers and combine them together to identify the most investor-advantaged markets — the sweet spots. We can provide you with relevant market data and support you in your market selection process. You can register here for your free personalized video consult with Maverick to discuss all of this further.
We are not legal, tax, or financial professionals. The content on this page is for informational purposes only and should not be construed as individualized advice. It is your duty to consult with your own tax, legal and financial professionals about your individual situation, applicable laws, and the suitability of any investment property for you personally. All real estate investing involves risks, which buyer assumes, and no specific returns can ever be guaranteed by anyone.
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