Legacy Wealth Holdings

Where Should You Invest? 6 Factors to Consider When Choosing a Rental Market

Let’s talk a little bit about choosing your market. Here are a few of the factors that I look at when I’m trying to decide whether or not I want to invest in a certain market.

#1: AREA/PROPERTY CLASS

When I’m looking for an area to invest in, I first look specifically for A, B and potentially C+ areas. This is workforce housing.

What I want is kind of middle of the road. I don’t get into the luxury stuff and I don’t get into the war zones. In these areas, everyone can afford rent when the market’s good, and when the market shifts and gets a little bit tougher, a lot of those luxury renters move into A, B, C plus kind of housing

That keeps it insulated from economic shifts.

#2: SAFETY

Another thing I’m weighing out is the safety of an area.

Is this a place where families want to live? Is this a place where you can walk around at night without having to worry about being mugged?

There are a whole lot of online resources you can use to check this. Two of the ones we use are https://www.areavibes.com/ and https://spotcrime.com/.

#3: SCHOOLS

The schools and the school ranking is what’s going to dictate whether or not families want to move to that area, and whether they’ll stay in that area.

Your biggest expense in owning rental property is going to be turnover.

If you’re in a crappy school district, chances are people are trying to get out of that school district in order to get their kids into better schools. If you’re in a good school district, then people will be trying to get into your area, and you will be able to rent and maintain tenants more easily.

So the more you can reduce turnover, the better your income is going to be and the better returns on investment are going to be.

#4: ECONOMIC ANCHORS

What drives jobs to this area? An economic anchor can be anything from a big business to higher education, military bases, or even government jobs. The capitals of most states have a lot of political jobs. That’s a good thing! And of course big business, because then it’s not only jobs at that big business, but then it’s all the ancillary businesses that come from that economic anchor.

Boeing, for instance, is in Charleston, South Carolina.

Boeing brings a boatload of jobs.

Not only that, but it brings the people who make the bolts for Boeing. It brings the people who make the cloth seat coverings for Boeing, brings the people who make the carpet for Boeing. All these other ancillary businesses that are supporting businesses to the main economic anchor will come to town and create more jobs, which creates more money, more revenue and more demand for housing.

#5: POPULATION GROWTH

When it comes to population growth, you have to look at the greater metropolitan area of wherever it is you’re looking to invest.

For example, I live on an island here in Charleston, South Carolina, with about 6,000 people. The island’s built out. The population isn’t changing, BUT it’s an A-class area. So if you only looked at that island, you would think there’s a stagnant population. 

The reality is, if you look at the greater metro area of Charleston, South Carolina, it’s growing dramatically. And because the overall area is growing dramatically, there is more people coming in, more demand, less supply, which pushes prices up. Right? Simple economics. And so although my little island is not growing in population, the overall area is and that pushes all property values up.

So pay attention to population growth. Where are people moving into? If they’re coming into that town, chances are eventually, even if you’re in a C-class area, the path of progress will come towards that building and you’ll be able to eventually grow some rents.

As an aside, we’re talking specifically about residential real estate. If you’re in a different commercial asset class like self-storage, you’ll have to pay attention to population growth in a different way. If you have too much self-storage in an area and the population goes down a little bit, everybody gets hurt, right? It gets cannibalized because for the most part, people don’t care about where their self-storage facility is, versus multifamily and residential housing.

In residential, if the population decreases but you have the nicest building or the best location in that area, your property doesn’t necessarily go vacant.

People will move away from a less valuable property or a less updated property or a property with fewer amenities. If you have the best property, the best areas, the best finishes at the market rate rent, even if the population decreases in that area, you can maintain a high occupancy for yourself.

#6: DEMOGRAPHICS

What is the median income within a mile? Three miles, five miles? 

A lot of that is driven by the economic anchors. The demographics in general are going to be reflective of  a lot of these other things. The better the schools are, the more people are paying in taxes, chances are that means they’re making more money, right?

The better the economic anchors are, the better the jobs are. People are making more money. Population growth comes with people making more money as well. 

A quick ratio that I look at is making sure that the median income for a household is at least three times whatever the market rate rent is that I’m trying to charge because if it is, then I know that these are qualified people who live in this market, and that they can pay the rental rate that I’m looking to demand.

So these are a few factors that I’d be looking at when trying to choose which market you want to invest in. Next thing you have to do is find a good property! But we’ll save that for another post.

We made a video on this! Watch it on the Legacy Wealth YouTube channel here: https://www.youtube.com/watch?v=tk4_nRIc-n4