I had this problem, too. I live in Brooklyn, New York, one of the most overpriced markets in the country. Even after the Great Recession, when I got started, cash-flowing assets were very hard to find in this market. I was competing with cash buyers happy (for some reason) to wait years for appreciation and home-buyers who were not thinking about returns at all.
What could I possibly do to make money in real estate?
I had to look elsewhere.
But how do you identify good markets from a distance?
You do it with the numbers. Here are the steps I followed to identify South Carolina as a market to get started in.
- Start with the U.S. Census bureau. The 2010 census data came out in 2012. I sorted all Metropolitan Statistical Areas (MSAs) by growth rate, and threw out any that grew more slowly than the country overall. Then I threw out any west of the Mississippi, because I did not want to travel far. That left the Southeast. (Pick the ones most convenient for you, preferably within a day’s drive or in a market where you can fly in and out in the same day.)
- Every MSA contains areas that are growing and areas that are not. Identify the areas that are growing. You can do this with websites like Hometown Locator and City-Data (though C-D’s data is older.) States and counties also put out a lot of their own data, so you can access this too.
- Once you identify cities/towns with good growth, how do you figure out which submarkets to invest in? One shortcut is to look for strong school districts. Strong school districts attract people.
- Cross-check the good school districts with growing areas by using Hometown Locator, which allows you to search population statistics down to the zip code level. When buying a property, I always want to make sure that it’s located in a growing zip code within a growing municipality within a growing MSA.
- Next, look at jobs. Again, start with the federal data, this time from the Bureau of Labor Statistics. You want to make sure that the absolute number of jobs is growing. Don’t pay attention to the unemployment rate, because that only shows you how many people have jobs who want jobs. Look for year-over-year and month-over-month growth in the number of people who are employed.
- Do this again on the municipal and zip code level using Hometown Locator and the county- and municipal-level data.
- From this data, you can make a list of the most attractive markets to look into. Do searches on Google for news about major employers opening or closing. See if there are any “anchors” there, like state government, major universities, or major hospitals, etc. You’re looking for major infrastructure and institutions that never go away.
- At this point, there is no substitute for traveling to the market and looking around. You will need to get to know the market, understand the good areas and bad areas, where the major employers are, where the amenities are, where the good schools are, etc.
- Now you’re ready to start looking for properties that fit your target!
What is your experience? Do you live in a market that is too expensive for investment? What has been your strategy to find good places to invest?