Location, location, location. Most likely the first thing someone brings up when talking about real estate. This platitude holds truth to buying a primary home but even more so when investing in rentals.
When someone is looking for a primary house, location is very subjective. One may prefer a place near downtown while another buyer wants 10 acres in the woods. One family of 4 wants a 2,000 sq ft home while another family of 4 prefers a 4,500 sq ft home.
When investing in rentals, it’s more imperative to look at the location you’re going to buy in and some key metrics to know it’s the right spot before diving in.
On top of that, residential homes (1-4) is based on the comparable approach of similar homes near you. Multi-family (5+ units) bases value on the income approach, meaning it's more objective. In other words, it's all about the numbers.
Because I’m in the Seattle area, let’s take a look at some of the larger primary cities with the key metrics laid out below and some other cities that don't garner as much national attention.
The key metrics are:
-Population growth: 10% or more
-Median household income growth: 30% or more
-Median housing price: 40% or more
-Crime levels: want number below 500 and declining
-Job growth-I didn't include Job growth and will explain later in the article.
Once you get a city that hits these metrics, you can dive in further. Think of this as the 10,000-foot view of which cities to invest in. There’s obviously more to the story such as rental rates, school districts, number of employers, crime within sub-sectors, etc.
Nonetheless these factors set up a solid foundation for future success when investing for the long-term. I took this specific criteria from Neal Bawa, a multi-family syndicator, who has a specific location course which you can find here.
The Primary markets:
All 5 cities have seen tremendous growth in population, income, and home prices. With the exception of Spokane, crime rate has been trending down in the right direction.
These cities are able to provide great appreciation, especially Seattle and Bellevue, but cash flow is a little bit tougher to come by.
Seattle's rent/price index was .34% with the median price of a home at 767k in 2020 and average rent at $2630/month. Compare this to a city like Fort Worth, Texas where the cash flow is much easier. The median price is 191k and average rent is $1663. That's a rent/price index of .87%. The higher the number the easier it is to cash flow.
No wonder many local investors are looking out of state for cash flow. You can find a list of the top cities by population and their rent/price here.
As for the other cities, Amazon is bringing 15,000 employees to Bellevue and is very pro-business. Everett and Tacoma are becoming tougher to cash flow but still offer a good hybrid of both cash flow and appreciation. In 2019, Spokane had the 6th highest rental rate in the US at 8.3%.
Bottom line: expect to see continued appreciation in these areas with more of a cash flow play in Spokane.
The Secondary/Tertiary markets:
Tri-Cities (Kennewick, Pasco, Richland)
Moses lake has some of the cheapest energy thanks to industrial power rates. Big companies like BMW have put $100 million in a power plant to make carbon fibers for new cars.
The tri-cities has much warmer weather and not as dense to Seattle which has been appealing and should continue especially after covid. With a large differentiation of jobs and not enough housing, expect the growth to continue.
Olympia has seen residential permit growth of 64% and still only showing a 4% vacancy rate. Both strong signs that there's more demand than supply.
Bottom line: These areas can offer great cash flow and appreciation.
Why I didn't include job growth
You don't need me to tell you so I'll show you with the graph below.
Because of covid, best to wait a couple years to see how job growth is in the areas around you. There's just too much uncertainty.
I will say, the more jobs there are in technology and industrial the better. A big reason why large cities on the coast will be fine in my opinion.
One piece of advice when looking at jobs: be sure to look at areas where the employment isn't dependent on one employer if they leave. Think the automotive industry in Detroit or Oil towns in Texas where they live and die by that sole company.
You'd assume large cities would have at least some growth given a 17 year time horizon. Unfortunately that's not really the case.
Take for example Detroit. Thanks in part to billionaire Dan Gilbert, his company has invested roughly 5.6 billion in 100 Detroit properties. The media sure sounds like it's back.
Let's see what the numbers have to say about Detroit.
I'm rooting for Detroit but I don't see myself looking into any investments anytime soon based on the numbers above.
We saw not only Seattle grow but other surrounding areas benefit as well. Does this "trickle down effect" happen in all areas? Take a look at Ohio with Columbus, Cleveland and Cincinnati.
Columbus has seen tremendous growth of 24.83% while people are fleeing Clevand (-19.47%) and Cincinnati (-8.33%).
What does this mean?
Real estate is always an industry where it's best to have knowledge of the whispers on the street and boots on the ground. The information above can start you off on the right foot for dialing down your city/cities to invest in then explore further.
If your primary focus is appreciation, Seattle area is still a strong play. If your looking for cash flow, the Midwest and other secondary/tertiary markets in Washington would be best. Can you still cash flow in Seattle and other primary markets? Absolutely. It's just a bit more of a challenge.
There's no shortage of people who've made good money investing in their backyard not knowing any of the info above. At the end of the day, you still have to operate and execute on your business plan.
What criteria is most important to you when picking a city? I'd love to hear what cities you have or are looking to invest in, either in or out of state.
Thanks so much for reading. If you want to discuss further or work together, email me at email@example.com.