What Makes a Location Good for Investing?

You've heard it before - success in real estate is all about "Location, Location, Location!" When looking for an investment property, I recommend searching in locations with the following characteristics:

House Construction

  • Diverse economy - if the local economy is reliant on just one or two sectors, the health of the economy could swing drastically with the success or failure of that company or sector (think the car industry in Detroit). Conversely, when the economy has a variety of strong companies and industries, the local economy is likely to weather economic storms - and your investment will be more likely to experience less vacancy, steady cash flow, and retain/grow its value.

  • Positive Net Migration - When more people are moving INTO a state than are moving OUT, the state is said to have positive net migration.  States with consistently positive net migration would tend to be safer to invest in because the demand for housing would be expected to continue to rise with the population growth. As the housing affordability crisis worsens in the more expensive regions of the country, the regions with better housing affordability will experience greater net migration.

  • Strength of Rental Market - A local market with low inventory (measured by Months of Inventory) are experiencing a rental shortage. Considering the laws of supply and demand, in markets with a housing shortage combined with population growth, you should be able to expect that both property values and rent prices will continue to rise, and vacancy rates will be low. Additionally, if the neighborhood has a low Days on Market, this indicates that properties get rented quickly and have low vacancy. Certain populations tend to be more likely to rent versus own, such as military members and Millennials. The more of these populations an area has, the stronger the rental market is likely to be.

  • Affordability - The ability to diversify your investments is greater when each property costs less to acquire. Investing in a more affordable area allows for more diversification in your portfolio. Additionally, when the housing is affordable for your tenants, your investments are more "recession-proof."

  • State Income Taxes - Little to no state income tax means that living expenses are more manageable, and running a business is more profitable. These states see more positive net migration when other regions get too expensive.

  • Landlord-friendly State - A state is said to be "landlord-friendly" when it favors the rights of property owners over their tenants, allowing the owner more control of their property when there are serious lease violations. They also tend to have a quicker eviction process and no government rent control.

  • Steady growth in Property Values - Slow and steady wins the buy-and-hold race. Some areas of the country, particularly the coasts, tend to have quite volatile property values. Chasing the high appreciating areas may be tempting, but if your goals include capital preservation, you would want to favor areas with low volatility.