Researching and Determining a Market

Getting Started in Real Estate 2/5

You have a vague idea for what you want to do in real estate, but where should you buy? There are hundreds of markets in the United States alone, how can you be sure you're investing in the best one?

Best places nationally for real estate investment right now?

I see some variation of this question all the time and it almost never sparks a meaningful discussion. Everyone's understanding of "best" depends on their investment criteria and this makes for wide sweeping opinions that other investors roll their eyes at. Before you start gathering opinions, you need to first define your strategy and criteria.

Some of this ties back with the previous post about identifying your investment goals and target strategy. Your investing "theory" will form the basis of your market search. With that in mind, ask yourself:

• Are you comfortable investing out of state or does it have to be within driving distance?
• What strategy are you targeting? (e.g flipping, short term rentals, long term rentals, storage, brrrr, etc...)
• Are you looking for appreciation or cash flow?
• Do you want to buy single family homes or multifamily homes?
• How much do you have to invest?
• What return are you looking for? You can quantify this as cash flow per door, cash-on-cash, return on equity, or some other measure - just keep it consistent.
• Are your previous answers reasonable when considering them all together?

People are more likely to participate and provide thoughts when your market criteria is well defined. Something like the following drives the conversation far better than sounding utterly rudderless.

"I am looking to invest in single family BRRRRs out of state. Ideally the market has moderate appreciation at or above inflation rate and solid $150/mo cash flow per door. I'm looking for a 12% cash on cash and have $100,000 to invest. What markets are you [other investors] able to hit those numbers?"

If you ask around and start looking for keyword searches that match your market criteria, you will quickly see that some markets are mentioned more often than others. We suggest starting with BiggerPockets and setting up keyword alerts and searches. The more precise your criteria, the smaller your list of potential markets. It is best to start narrowing down markets before you spend significant time diving into the nitty gritty details.

Market Research

Let's say you now have a short list of markets, even though you've managed to eliminate most of the country, you still need to whittle down the list to one or two finalists. You've done as much surface level research as you can, what you need now are the numbers. The goal is to use metrics to gauge market health and discard markets that are weaker in areas you care about. When Kat and I were doing our initial market research, we had nine markets and a laundry list of potential metrics broken into major categories. Here are some examples of what you can consider.

Demographic

1. Average wage
2. Average age
3. Average education
4. Population growth
5. Poverty rate
6. Percent of population that own a vehicle

Employment

1. Employment rate
2. Top industries
3. Top industry growth
4. Average commute to work

Real Estate

1. Median property value
2. Property value increase
3. Median rent
4. Rental rate increase
5. Property taxes
6. Percent of homeowners vs renters
7. Number of new build construction permits issued

Other

1. How landlord friendly is the market?
2. Average crime rate and type

You can easily debate yourself and others in circles on what metrics are stronger indicators of market health. Instead, try to pick metrics that make sense in context to your investing strategy. For example, Kat and I cared most about cash flowing long term rentals, so we wanted to determine markets with the best rent-to-price ratio (one percent rule), friendly landlord tenant laws, all in price of sub $100,000, brrrr-able, and good growth. We didn't care as much for property value appreciation as long as it kept up with inflation.

Thankfully if your market is in the US, the government collects this data and makes it available to the general public for free. There are a few sites that display the data within a friendly UI, we used Data USA. One thing to note is that government data denotes markets by Metropolitan Statistical Areas (MSA). MSAs are defined by the U.S. Office of Management and Budget as having at least one urban area with a minimum population of 50,000. More broadly, you can think of an MSA as a region consisting of a city and surrounding related (societal, economical, etc) communities.

Just be sure to keep in mind that data is gathered and reported on an MSA level but your market may be more specific. As an example, the MSA containing Indianapolis also contains the surrounding submarkets Carmel and Anderson. If you are more interested in the major market [Indianapolis], the data should be relatively accurate as Indianapolis is the main metropolitan market. If instead you are interested in a submarket [Carmel, Anderson], the MSA data can be skewed and may not accurately represent those markets. You may need to look into other data sources more specific to your submarket.

Once you know what market metrics you care and you have all the numbers on a spreadsheet, you can quickly start crossing out weaker markets until you're left with three or fewer choices. If you're lucky, you'll have one standout market. It's time to start networking and getting some boots on the ground opinions.

Networking

You're in the final stretch. The goal is to network and talk to people in your chosen space to get an understanding of whether the actual numbers match your research. By talking to investors and real estate professionals executing your strategy (and many others), you'll have confidence that your investment goals and criteria are possible.

Use BiggerPockets to determine the market expert that shows up or is referenced in every conversation. Is there a popular investor focused agent? Is there an investor who is constantly sharing knowledge and insights? Reach out to them and introduce yourself. Make sure to prepare a loose script so that your conversations are productive and comparable. Most importantly, show that you've done your homework about the market. Seasoned investors and professionals are busy and want to see that you've taken the initiative to do some legwork. You'll find that showing your research, thought process, and due dilligence will open more doors and show you're serious about your investment goals. The more Kat and I have learned and grown, the more we realize that people are really passionate about real estate. We all love to talk shop and are happy to share what we know.

At the end of the day, it's entirely likely that your final markets are still neck and neck. That's ok, we had the same problem when choosing between Indianapolis and Kansas City. The truth is that both markets would have worked out, we just needed to make a decision and commit. We encourage you to do the same. In fact, your decision can be as arbitrary as flipping a coin. In our case, we chose Indianapolis simply because I went to Purdue and had some friends in the area. Don't get paralyzed with indecision so close to the finish line.

Homework

Hopefully this post lays out the steps for how to research and determine your target market. By the end, you should have a chosen market and confidence that you're in the right space. To help you get there, I've come up with a few assignments.

1. Form your market criteria statement.
2. Using your statement, do surface level research and create a list of twelve or fewer markets.
3. Identify what metrics matter most to your investment goals. Remember that these can be based on well-thought-out personal opinion.
4. Compile market specific numbers and pick your finalists.
5. Reach out to investors and professionals in your final markets.
6. Finalize a market.

As always, if you have comments, questions or want to chat, reach out using the links in the footer. If you enjoyed this content and want to get notified when we publish a new post, use the mail list form below to subscribe.