This guide will show you how to choose the ideal location for your investment properties. When you choose the right location, your investment will tend to give you the easiest and highest financial rewards. But if you choose the wrong location, you could pay a very low price and still lose. I know this from painful experience!
Real estate is very local. So, one person’s ideal investment location may look very different than the best investment location for you. But in general, any location needs to be both desirable to your end customer and profitable for you.
In the rest of this guide, I’ll unpack ideas and tools that will help you pick the ideal investment location for yourself. Here is an outline of what you’ll learn:
- How Demand Real Estate Makes You Money
- Big Picture Real Estate Market Criteria
- Small-Scale Real Estate Market Criteria
I’ll also give you links to additional resources that help you use this information in your local market.
Now, let’s get started!
How Demand Real Estate Makes You Money
Real estate investment is best understood as a business. Like any business, supply and demand determine your bottom line profits.
An ideal business has a product or service that everyone wants (high demand). It also has a product or service that is difficult to replicate (limited supply). Warren Buffett calls this powerful combination a “protective moat” around your business. If Buffett makes this one of his most important criteria, shouldn’t we?
An excellent location for your investment creates a powerful “economic moat.” Why? Because new construction and future growth can not replicate what you have. Most growth occurs on the perimeter of towns or cities. I’ll be encouraging you instead to invest in the heart of an area.
Once you own properties in a location that your end customer loves, the economics benefit you. You will command the highest rents or prices, enjoy the lowest vacancy rates because your tenants will stay longer, and increase your prices the most over time. In other words, you’ll make the most money.
Now let’s talk about what these ideal locations are like.
Big Picture Real Estate Market Criteria
Think about your choice of investment location like using Google Maps. You begin zoomed out to view the entire country or even the entire world. From this 30,000-foot view, you consider bigger trends that will affect the profitability of your investment.
Later you’ll judge properties on the neighborhood, school district, or street-level. But at this stage, you’ll consider criteria at the level of an MSA (Metropolitan Statistical Area). Your goal is to find the MSA or another population center with the best investment criteria possible.
Here are some of those criteria to think about.
Jobs & Economics
Real estate investments only work if the customers who live in them have good jobs. If you own an investment in a 1-factory town and the factory moves, your investment will suffer dramatically. Why? Because rents go down, vacancies go up, and you lose your ability to sell for top dollar.
So, it makes sense to study the job market of your location first. Here are a few things you want to consider for a strong job market:
- The number of jobs in your overall market:. Is this number increasing? Decreasing?
- The median salary for workers: Increasing? Decreasing?
- Types of jobs: Professionals? High-tech? High-paid technicians? Low-paid laborers?
- Diversified jobs: 1-2 major industries (like a military base, one big factory, etc)? Or a stable variety of industries and job sources?
No location is perfect. But ideally, you’ll see a well-diversified source of jobs, a solid mix of worker types, a rising median salary, and a low unemployment rate. It would also be nice to read in the news about local government efforts (state, county, and city) to attract jobs.
To learn more about jobs and local economies in the U.S., the following sources are good places to start:
- BLS.gov – Federal agency that tracks job-related statistics and trends. Some of my favorite data from here include unemployment rates and regional economic and job trends.
- Chamber of Commerce – The Chamber is an organization funded and run by local businesses. They often have job and economic news and statistics for their area. A strong local chamber can also be a good sign of a thriving (or soon to be thriving) local business community. Google the Chamber of Commerce in the location you are considering.
- Comprehensive Plan – Most cities and counties create a comprehensive plan every 10 years or so. These documents are rich with data and trends about population, jobs, infrastructure, and other interesting criteria like zoning and land planning. It also shows you the direction the community will be moving (or hopes to move) in the next decade or two. Google your location + comprehensive plan to find your local report.
- Comprehensive Annual Financial Report – This is a report created by a local government entity to outline the state of their finances. The finances of a municipality are closely tied to the economics of its location, so these reports share a wealth of information about the local economy that you can study. Google your location + Comprehensive Annual Financial Report to find the local report in your target area.
- Article – Real Estate Market Fundamentals – Local Economy – This is an article by a fellow real estate blogger and friend of mine O.B. at OutofStateInvestor.com. O.B. does an excellent job of explaining the topic of local jobs and economies.
Closely related to the jobs and economics of a region is the population growth (or decline). People tend to move towards regions with better job prospects. But there are also many other criteria like weather, the price of housing, natural attractions (mountains, lakes, parks), and local politics that attract people to a location.
For real estate investing, you like to see a region with an increasing population because this will tend to increase the demand for housing. And remember – a higher demand + limited supply leads to higher rents and higher values. Those trends are one of the ways you make money in real estate.
Not only do you want to look at population growth of an MSA (Metropolitan Statistical Area) compared to other MSAs in the country, you also want to look at population growth within the location you’re studying.
A perfect example is this real life case study by Ben Leybovich, a fellow investor and blogger at justaskbenwhy.com. Ben decided to pass on a deal in an MSA with good jobs and economics. Why? Because in the local zip code of the subject property, the population was declining (among other problems). I recommend you do a similar analysis on your locations.
Here are some additional resources to study population trends in your location:
- U.S. Census Bureau – This agency within the Department of Commerce studies population demographics. You can use their statistics to evaluate the population trends for your area.
- In his Investor’s Guide to Population Research, O.B. from OutofStateInvestor.com recommends doing a simple Google search using the term “[your location] population.” Google pulls census data to give you a population trend graph.
Ever heard of a P/E ratio (price to earning) in stock investing? The price/rent ratio is very similar. And it’s a simple way to begin financially evaluating an area for its overall economic efficiency (aka potential profitability).
To calculate the price/rent ratio, you simply take the median price divided by the median yearly rent. For example, if my area has a median housing price of $200,000 and a median yearly rent of $15,000, my price/rent ratio is 13.33 ($200,000 ÷ 15,000).
The higher the price to rent ratio, the worse the market will be for real estate investing (rentals in particular).
For example, SmartAssett.com shares that as of February 2016, San Francisco has a price/rent ratio of 45.88. In other words, a $550,000 property would only rent for $1,000!
On the other end of the spectrum, SmartAsset.com also shares that Detroit, Michigan has a price/rent ratio of 6.27. You could buy a $75,000 property that rents for $1,000.
For perspective, using national Zillow.com statistics as of January 2017, I calculate the overall U.S. price to rent ratio as 11.59 ($195,000 ÷ $16,848). Also for perspective, most rental investments that I purchase have a ratio of between 5 to 8.
If price/rent ratios were the only factor, then you’d only buy investment properties in Detroit and never in San Francisco. But as you’re learning in this article, this is only one of many criteria. The price/rent metric is important, but it must be balanced with the others. A location with a low price/rent ratio may be low for a reason (a bad one!). You have to do your complete homework before getting too excited.
To gather data on price/rent ratios, you can use any service that gives you regional or local housing price and rental rates. For quick analysis, I like the following:
- Price/Rent Ratios For Major Cities – Price to Rent Ratios in 76 U.S. Cities – by Nick Wallace SmartAsset.com – This article has a handy chart for larger cities and a solid explanation of the concept.
- Sales and Rent Data Nationally – Zillow.com Local Market Report – I love the ease of use and free data that Zillow publishes. I sometimes find their data for a particular property to be less accurate, but for macro and comparison purposes, it’s very handy.
- Local Price Reports – MLS (Multiple Listing Service) – The most accurate and up-to-date local statistics for sales prices come from the MLS. While only real estate agents have direct access to the MLS, most local associations publish data reports. For example, the local Realtor association in my area in northwestern South Carolina publishes free reports for consumers. You can Google “Association of Realtors + your location” to find the association for your area.
- Local Rental Reports – The MLS does not always have comprehensive rental data like they do sales information. To calculate my own local price/rent ratios, I like to combine MLS price data with other databases like the HUD Fair Market Rent Index By Local or rentbits.com (for bigger cities). Zillow.com also has a solid collection of local rental data.
Small-Scale Real Estate Market Criteria
We’ve finished looking at our Google Map from 30,000 feet above. At this point, I assume you have picked a general location or region (or multiple regions). Now it’s time to zoom down to the neighborhood and street level.
As I said in the beginning, real estate is very local. So the tastes and preferences of consumers for housing will vary by location. But below are characteristics common to some of the best small-scale (micro) locations for real estate investments.
One of my earliest investment teachers and mentors, Greg Pinneo, used to say he wanted to invest within 10 miles of a major economic center. At the time, I thought “wow, that is very specific.” But I’ve learned the wisdom of his criteria.
Some people choose to live more than 10 miles from jobs, shopping, and other community centers. But not most people. Remember the supply and demand principle? As investors, we want to give ourselves the best chance to succeed by owning investments where most people want to live.
Greg Pinneo also has a second investment location criteria. This one is very local and very subjective. He calls it romance.
Romance is the fuzzy yet palpable criteria that attract people emotionally to a certain location. And make no mistake, a choice of housing IS an emotional decision.
In some places romance could include:
- Proximity to parks and green spaces where people can relax, stroll, and enjoy themselves
- Streets lined with mature, tall trees
- Sidewalk-lined boulevards
- Quaint commercial districts with interesting, local shops and restaurants
- Coffee shops, pubs, and microbreweries
- Beautiful views of water, mountains, and other scenery
But romance is different in every location. That’s why you have to get your boots on the ground and find out for yourself. This means you have to get out from behind your computer, get out of your car, and stroll down the streets of your target location.
Even if you’re investing cross country or in another country, in-person visits where you act like a real estate customer for your location are key. These visits will give you the micro-level, highly important factors of romance that don’t show up on searches from your computer.
Walkability is near and dear to my heart. I place it above almost all of the other criteria in my own personal housing search. And improving walkability has become so important to me that I spent two years on my local City of Clemson planning commission. And I helped start a non-profit to create a system of greenways (walking and biking paths) to connect the green spaces, residential areas, university, and commercial areas in my town (go Green Crescent Trail!).
But walkability isn’t just something I love. An entire website called walkscore.com rates locations around the country for their friendliness to walkers. From “walker’s paradise” to “car dependent,” you can plug in your specific locations to see how it ranks.
Walkability can affect your investment’s bottom line according to Zillow Talk: The New Rules of Real Estate. The data wonks at Zillow.com combined Walk Score ratings and other data to study locations across the country. They found that walkability is correlated with higher property appreciation and more price resilience during downturns. The trends were a little different in small towns and rural areas, of course, but in metro areas, the connection between walkability and valuable real estate was consistent.
Safety & Crime Rates
I’ve traveled to many places in the U.S. and around the world. People everywhere want a safe place to live with minimal crime. Your tenants and buyers are no different.
And as a landlord, crime can cost you money in terms of stolen A/C equipment, vandalizing, and more. Local crime is a difficult and slow trend to reverse, so you’re better off avoiding the worst areas no matter what the financials look like on paper.
How do you study these trends? Several ways.
You can start with online searches. It seems the sites change all the time, but here are a few I found that will give you maps and statistics on a local level:
- City-data.com crime reports
- ADT Crime Map
- Trulia.com maps – use their mapping feature to search for crime by location
But after an initial online search, the best practice is to go visit a neighborhood. Look for signs of crime like protective cages over HVAC units, bars on windows, boarded houses, etc. Talk to neighbors. Talk to other landlords and property managers. And be sure to visit locations after work time – like 6:00 pm or Saturdays. Many places give the illusion of safety at 9 in the morning!
For families with children, public school districts are a critical factor in a good location. Like crime and some of the other criteria, a good place to start research is online. Greatschools.com is a website that rates schools of all different levels.
But also like the other criteria, online ratings aren’t everything. Talk to local real estate agents who represent buyers or renters. They will be able to tell you which school districts are the most popular among local residents.
And be careful of placing too much emphasis on school districts alone. District boundaries do change, and in some locations, there are no boundaries for school attendance. Get to know your own local situation.
In urban areas, proximity to public transit like buses, trolleys, trains, and subways is an important factor for housing. If your potential tenants or buyers will use public transit, you may want to focus first on locations served by the local transit routes.
I like to begin with the website for my local transit service. You can usually find a map of the routes so that you can identify the locations. I also recently found Google Transit, which uses Google Maps to share public transit routes around the world.
When you use these tools, be sure to identify bus stops or subway stations. Even a 5-minute longer walk could make a difference in the desirability of your investment.
Neighborhood Covenants & HOA
Many neighborhoods and condominium complexes have recorded covenants, conditions, & restrictions (CCRs) that indicate what can or can’t be done by residents. When you buy a property, your closing attorney or agent should share these with you.
On the positive side, the CCRs often prevent people from putting ugly old cars on blocks in the front yard. But on the negative side, they also could prevent you from renting your property. Some CCRs prohibit rentals in their neighborhood. THAT would be good to know ahead of time, wouldn’t it?!
In addition to CCRs, some properties will be part of an HOA (home owners association) or condo association. This is typically a non-profit corporation that enforces the CCRs and maintains the common areas. As a homeowner, you will be a member and you will also be required to pay an annual fee. The amount of the fee can vary greatly, so that is an important fact to find out.
When you buy a property, you will, of course, do in-depth research about your CCRs and HOA. During this stage of choosing a location, avoid locations with overly restrictive rules and excessive fees that don’t give you commensurate value as an owner. And look for locations with reasonable rules and well-managed HOA boards.
Local Laws, Finances, Taxes, & Infrastructure
The local government (state, county, city/town) can have a big impact on your investment property. Here are some issues to pay attention to:
- Property taxes – Are they high or low relative to rents? Are the state, county, and city entities that tax you managing their funds well? Are taxes rising rapidly to cover poor past decisions? Or are they stable? You can find a lot of this information in the city’s Comprehensive Annual Financial Report I referenced earlier.
- Municipal services – Are property taxes used to provide helpful services like trash pick-up, streetside leaf pickup, water/sewer access, police and fire service, and planning/code enforcement?
- Rental laws and licenses – Local regulation of rentals is a growing trend. In my town, I have to obtain a rental license, pay a yearly fee, and meet an inspector at each property annually. This uses the time and money of both me and/or my property manager. Rental laws can require basic things like smoke detectors in houses, but they can also go much further. For example, I have friends in cities where before you can sell a rental property, you must give your tenant the first right to purchase.
- Rent controls – Some bigger cities actually regulate how much you can rent a unit for and/or how much you can raise rent over a certain period of time. This is obviously a concern for your overall investment return.
- Eviction laws – State governments in the US typically regulate landlord-tenant laws. Some states are landlord friendly, and others are tenant friendly. If you are buying investments in a tenant -friendly state (looking at you, New York, Massachusetts, and California), prepare for additional costs and time if you need to evict a bad tenant.
Almost all of this information can be found at the website of the local government entity. In the case of cities, I also recommend that you call or visit the code enforcement office directly and ask them all of the relevant laws you should be aware of as a potential investor.
Barriers to Supply
Barriers to supply are characteristics that I don’t hear investors discuss often. It’s an advanced analysis that can make you a lot of money as an investor.
Remember the supply and demand idea I presented at the beginning of this guide? Most of the location criteria I’ve shared so far affect demand. This means they affect how many people want to live in your investment unit.
But barriers to supply affect how many competing units can be built in your area. The harder it is for developers to build new units, the more valuable your existing unit will become (limited supply, increasing demand).
Here are some of the criteria I look for that limit supply:
- Natural borders like lakes, rivers, oceans, and mountains that prevent expansion
- Man-made borders that prevent expansion, like protected parks, land, and universities
- Restrictive land development rules that make construction more difficult and expensive
- Limited amounts of particular types of zoning (like commercial or multi-unit properties) that make properties with that zoning more valuable over time
There are probably other barriers to supply I’ve missed here. But use your creativity and find local angles that you can take advantage of.
What’s the Ideal Location For YOUR Investment Property?
I’ve just shared a guide to help you choose the ideal location for your investment properties. But the key word is guide. The most important step is how you apply these principles to your unique, local market.
You can use this guide to perform a market analysis for your location at any stage of investing. If you are brand new, use this to choose the market where you will invest. If you have already begun investing, use the guide to evaluate the strength of your location. You may confirm that you made a good choice. Or you may learn you need to get out before everyone else discovers the same thing!
I wish you best of luck in your investment search! I hope this information has been helpful for you.
What criteria are most important for your choice of investment location? When you look at your current home or investment, what are its positives? What are its negatives? Did I miss any other location criteria that are important to you?
I’d love to hear from you in the comments below!
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