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My Favorite Rental Markets

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I’m just getting started with out-of-state investing, but I thought now would be a good time to put together a list of some of my favorite investment markets. Right now, I’m working on closing Rental Property #3 in Chicago, but it’s never too soon to start planning for #4! And then… #5, #6, #7, etc…

When investing in rental property, it is of paramount importance to invest where the jobs are. When the next recession/depression hits, it’s inevitable that real estate prices will plummet again. Foreclosures and short-sales will become widespread. If you’re like me and plan to hold many properties, through many years, you have to make sure to invest in areas that are resilient and can withstand economic downturns. Like a good dividend stock, the rental checks have to keep pouring in, through good times and bad.

Here are the markets I’m most interested in investing in:

Favorite Markets:

Indianapolis, Indiana – Very affordable housing prices. Stable market and landlord friendly state. 10% Cap Rates, typical.

Chicago, Illinois – #1 most diversified economy in U.S. 3rd largest Metropolitan Area. Home to 31 Fortune 500 companies. Strong rental market (55% vs. 36% U.S. average)

Austin, Texas – 20,000 new jobs expected to be created in 2013. Large technology presence. Home prices have appreciated considerably over the last year, but housing, in general, is still affordable.

Dallas, Texas – Population of over 4,000,000 in the Dallas Forth Worth (DFW) area. Home to 18 Fortune 500 companies! Second largest international airport in U.S.

Houston, Texas – 3.8% annualized job growth in March 2013, largest in the nation. Leading the nation in job recovery (post-downturn). Have added 2 jobs for every 1 lost.

Houston

The following areas don’t make sense right now. This doesn’t mean they won’t ever make sense, but it’s very hard to find cash flow deals here:

Areas to Avoid: (Until Recession/Depression)

Bay Area, California – Rents don’t scale with purchase price. Prices are too high relative to rents. Majority of inventory does not cash flow using conventional 20% to 25% downpayment. Next big bubble has just begun…

Los Angeles, California – Both L.A. and Orange County are not far behind the Bay Area. Prices simply don’t make sense here.

Seattle, Washington – Tons of jobs here. Lots of high tech. Unfortunately, prices don’t work here either.

Phoenix, Arizona – Too many hedge funds playing in this market. Prices have appreciated 20% in the last year. Market is tapped out.

Las Vegas, Nevada – Same as above.

Atlanta, Georgia – Also tapped out. Appraisals are difficult here. Many come in too low making it difficult to finance.

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{ 7 comments… add one }
  • MartinNo Gravatar July 7, 2013, 2:34 pm

    FI Fighter, you said that, the check must continue pouring in in thick or thin times. My point of view is a bit skewed by the location I live in and during the crisis even rentals were down here and a lot of properties empty. people simple moved into cheaper locations.

    I see you running up to the stars fast and quickly and I am happy for you (and a little bit jealous). But also do not overdo it. It may hurt…
    Good luck.

    • FI FighterNo Gravatar July 7, 2013, 3:03 pm

      Martin,

      Right, it’s very important to invest in cash flow positive properties that are located in stable areas. From your own experience in a bad market, it would make it seem as though your particular area wouldn’t be the best place to invest (since so many people moved away during the downturn).

      And that’s just the reality of things. Not all locations make for good investments. However, if you find a good enough deal that cash flows stupendously, it could still work even if you had to lower rents. That’s the beauty of real estate investing. Unlike the stock market, purchase prices are never fixed. You don’t have to pay market value! Tons of people make fortunes buying REO’s and foreclosures and either flipping them, or holding them long term.

      Thanks for your concern. I do realize that I am probably moving a bit fast in the eyes of many people (my own family included). That’s why it’s so important for me to make the right decisions. For all investments moving forward, I’m trying to position the purchases so that I have leeway. That is, I can lower rents in a downmarket, and still cash flow. Ultimately, the better the cash-on-cash, the more cushion you allow yourself. I also have other reasons for “rushing” into things, which I’ll address in another blog post.

      Take care!

  • PaulineNo Gravatar July 7, 2013, 4:06 pm

    Interesting info, I was looking at ways to invest as a foreigner in US property, apparently it can be done, and pretty interesting at the moment with all the foreclosures. I was looking at the Midwest and TX as well, and Florida, looks like it is picking up again.

    • FI FighterNo Gravatar July 7, 2013, 5:59 pm

      Pauline,

      The easiest way I know how to do it as a foreigner is to use all cash. This is exactly what a ton of investors have done in L.A. and the Bay Area.

      I’d be curious to know what other methods are available. Yeah, the Midwest and Texas are great areas to invest in — the numbers work much better than the coasts. Florida is an interesting one as well, though I haven’t done too much homework there. I hear Ft. Lauderdale and Jacksonville are good for cheap houses.

      Cheers!

  • PKNo Gravatar July 8, 2013, 9:26 pm

    I’ll have some hard data on the Bay Area for you to dig over in the near future (although it looks like you’ve already smelled bubble). I did this exercise back in 2011 and concluded ‘no bubble’ (and bought). Things are shaping up differently this time…

    • FI FighterNo Gravatar July 8, 2013, 9:37 pm

      PK,

      Bubble or not, the Bay Area doesn’t make sense from an investment point of view. There’s no cash flow!

      I bought 2, 1 in 2012 and 1 in 2013. That’s it, I’m out. 20% to 30% rise in half a year will just about eliminate any possible returns left…

      Good job on locking down a property in 2011!

      Cheers!

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