Key Metrics for Picking Out-of-State Markets
We are always looking for opportunities to grow our passive income portfolio. One of the best ways is through ownership of real estate. However, if you’re living in coastal cities, like us in San Francisco, investment property prices are astronomical. The rent doesn’t even come close to covering expenses for new owners. If you’re a potential investor in a region with costly ownership, it’s easy to fall into a mindset that it’s too pricey to invest in real estate. Don’t give up though, there are plenty of incredible opportunities outside your place of residence.
The obvious reason to invest out-of-state is affordability. Less expensive regions open up your purchasing power. If you’re concerned about lower cost equaling lower profitability, you might be surprised to learn that these properties often offer superior returns. Investing out-of-state also diversifies your real estate portfolio and reduces downside should markets retreat regionally. There’s a reason stock index funds are popular, they spread risk. Consider that your real estate portfolio could also benefit from a similar strategy, your personally created real estate index.
Target a Region
Now that your out-of-state interest is piqued, how do you identify your target region? A declining or stable customer base is going to have limited income potential. Look to where populations are growing, jobs are booming, and taxes are limited. Invest in a market that is landlord friendly without restrictive state or local ordinances. Find a market with positive rent growth, don’t buy into a lagging region. If you want higher rental prices and subsequently higher return on investment, these factors deliver the sweet spot. When considering new markets, there are several online resources you can use to learn whether they meet the criteria we’ve outlined.
To easily research population statistics, Google is your friend. Simply search with a city name and the phrase “population”. The results will return useful metrics such as changes in population. Search parameters can be narrowed to show growth across a specific time period that may be of interest to you. While data is unlikely to be up to the current year, trends will be easy to spot. A valuable website census.gov is managed by our own government. Mostly current data provides an accurate overview of how a region is performing with detailed household and business statistics. This is your reliable treasure trove of data.
Still not convinced about the viability of a region? Try the website www.deptofnumbers.com/employment/metros. Here is where you will find current employment statistics that highlight job growth, or losses, in numbers and percentages. It’s important to pick a metro that has a diversified employment base, that it is not dependent on a single industry or company. Strong job creation drives housing.
Is your target region too affordable, or too expensive? Pay attention to the medians. If median home prices are low, you may be competing with people buying instead of renting. Alternatively, if median median household income that is low, renters may not be able to afford the price you need to charge to be profitable. Finding the right balance will lead to profitability. Another insightful website is www.city-data.com where city profiles have been created by compiling both government and private sources.
Don’t limit yourself by only purchasing properties in your local area. There are many excellent opportunities out-of-state that require some effort on your part, but have the potential to provide superior income and appreciation. The key is finding the right landlord-friendly real estate markets in which to invest. Start by researching trends in population, jobs, household income and home prices. Then, research more. Find metrics that show a healthy economy and give you comfort that you are investing wisely.