BiggerPockets Real Estate Podcast - 886: How to Choose a Real Estate Investing Market (Step-by-Step)

Episode Date: February 5, 2024

Before you buy your first rental property, you’ll need to choose a real estate market. If you’re like many Americans, your own backyard may not offer what you want out of an investing area. So, where do you go to find cash flow or appreciation? Today, we’re walking you through choosing a real estate investing market, the metrics to look for, signs of growth and decline, and which markets offer investors the biggest benefits. How hard is it to do market research? If you have access to the internet, you can research a market in a matter of minutes. But knowing WHAT to research is the most crucial part. Dave Meyer, VP of Market Intelligence at BiggerPockets and host of the On the Market podcast, shares his steps to market analysis and how he analyzes each market to ensure it’ll make him the most money in the long run. We’ll touch on population and migration, supply and demand, vacancy rates, rent-to-price ratios, landlord vs. tenant-friendly states, and the telltale signs that a market will have high or low cash flow. So before you buy your first or next rental property, make sure you do THIS research! In This Episode We Cover: How to choose a real estate market in 2024 (market analysis 101) The market “fundamentals” that show whether an area is worth investing in Vacancy rates and signs that you’ll have a HARD time finding tenants  The 1% rule and whether or not we’d still use it in 2024 Cash flow vs. appreciation markets and who should NOT be chasing cash flow Tenant vs. landlord-friendly states and how to quickly tell which is which And So Much More! Links from the Show Find an Agent Find a Lender BiggerPockets Youtube Channel BiggerPockets Forums BiggerPockets Pro Membership BiggerPockets Bookstore BiggerPockets Bootcamps BiggerPockets Podcast BiggerPockets Merch Listen to All Your Favorite BiggerPockets Podcasts in One Place Learn About Real Estate, The Housing Market, and Money Management with The BiggerPockets Podcasts Get More Deals Done with The BiggerPockets Investing Tools Find a BiggerPockets Real Estate Meetup in Your Area Expand Your Investing Knowledge With the BiggerPockets Books Be a Guest on the BiggerPockets Podcast Ask David Your Question Dave's BiggerPockets Profile Dave's Instagram David's BiggerPockets Profile David's Instagram Henry's BiggerPockets Profile Henry's Instagram Grab the “Picking a Market Worksheet” Catch Dave and Henry on the “On the Market” Podcast Census Reporter ChatGPT FRED Books Mentioned in the Show: Long-Distance Real Estate Investing by David Greene Start with Strategy by Dave Meyer Click here to listen to the full episode: https://www.biggerpockets.com/blog/real-estate-886 Interested in learning more about today’s sponsors or becoming a BiggerPockets partner yourself? Email [e-mail]. Learn more about your ad choices. Visit megaphone.fm/adchoices

This is the Bigger Pockets Podcast Podcast Show 886. What's going on, everyone? Welcome to the Bigger Pockets podcast. I am your host, David Green. Join today by Henry Washington and Dave Meyer. Gentlemen, what's going on? Hey, hey, what's going on, David? So when I record with both of you, is it like, who's David and who's Dave?

I'm Mr. Meyer. Please call me Mr. Meyer for the rest of the episode. Well, I won't be doing that, but we do have a. great episode for you today. And you know when Dave Meyer is here that we're going to be talking something about data or numbers or economics or foreign policy or something else nerdy. I feel like I'm getting typecast a little bit. Like, you know, this is always that actor who's always like the really boring, weird uncle or something like that. Like, I'm just only always, even in my private life, just talking about economics.

That is you, Dave. But see, that's not fair because you're actually a very cool guy. And we're going to be picking your brain as we do a show about how to pick a market. Yeah, well, I guess some of the typecasting is fair. I do do this for a living. So I think that's fair. But I am also a real estate investor. So I will take some credit there.

But we are going to be talking about one of my favorite topics, something I spend a lot of time doing, which is figuring out what markets work for what strategies. and we're going to jump into that today. And actually, for this episode, I created something cool. It's the first time we've ever done this, but I created a little worksheet that you can use to follow along. You can just go to biggerpockets.com slash resources and get it for free. And it has all sorts of different market research tips,

like what data you should be looking at in little areas where you can write it down and keep track of it. So if you want to do that either while you're listening or later, go get that for free, at biggerpockets.com slash resources. All right. Make sure you check that out and let's get into the show. All right, Dave, the first book that I wrote for Bigger Pockets was called Long Distance

Real State Investing. So I frequently get the question of David, how do I choose a market? Now, the book focused on the systems that you need to buy real estate in any market, but I do sort of briefly cover things that I look for in a market. What are some metrics that you think investors should be looking for when determining what market to invest in? So I think when you talk about picking a market, there's actually a market. there's actually three different steps.

The first one, we probably won't get into too much today, but that's really just figuring out what your priorities are, because as we're going to talk about today, there are different kinds of markets that are good for appreciation, some are good for cash flow, some balance them. And so before you actually dig into data and start looking at numbers and stuff, you have to figure out what your objective is, and that's going to help you figure out what markets are best for you.

So that's sort of like the first step. The second step is what I call building a short list, is going from all the possible markets in the country to a list of maybe five, maybe 10, if you want to be really ambitious, because you obviously can't research every market in depth. And so I recommend you either use a list that we provide on bigger pockets or talk to other investors about where they're investing and come up with just like a short list of five to 10 markets that you're going to do a deep dive into. And then you can move on to step three, which is the market research and what we're

going to get into today. But once you get to that market research phase, I think that there's two different areas you want to explore. First is what I would call market fundamentals, which is sort of like the background information about the economy, about what's generally happening in this area beyond just real estate. And then the second part is looking into real estate specific stuff like how much prices are, what rent is, the rent to price ratio and all of that. So does that sort of make sense as a framework for picking a market? Yeah, so we're going to be getting into population growth and migration patterns, median home prices. That's a pretty big thing that you want to think about because price-to-rent ratio was so important when looking for cash flow. Inventory available because you don't want to be in a market that's too hot where you can't even get anything or at least you want to know that's what you're stepping into.

The price-to-rent ratio itself and unemployment rates, et cetera. All right. So first question, everyone wants to know where do we find this data? So let's first talk about market fundamentals. This is kind of like the macro economic type of stuff. And I recommend people first and foremost start on like an aggregator website. There are a lot of different websites out there. Most of them are free that will pull together just various government data and various public sources.

The one I like the most is called Fred. It's the Federal Reserve Bank of St. Louis. They aggregate tons of data. It's completely for free. But there's also various different census. There's something called census reporter you can check out. And those will have. all the information on a market-specific level about like population growth, job growth, and all

that. And, you know, I think people want to do this research and then get overwhelmed by what it takes to aggregate it and, you know, hearing you say it is one thing. But what's the learning curve or the necessary skill set one would need in order? Can like anybody hop on this website and put together data in a way that's, that makes sense and it's fairly easy? Yeah, it is really actually quite easy, especially in some of these aggregator websites. Like, if you go to census reporter, for example, you could just type in, like, the name of a city, and it will pull up stuff like the population growth, medium household growth, unemployment rate. And also, the other way to do this is, like, plug these questions either into Google or into chat GPT. Like, chat GPT can easily

grab a lot of this data for you. So if you wanted to say, like, what is the home ownership rate in Philadelphia? Chat GPT will be able to do that. that relatively easy for you. I think actually the harder part is just knowing what numbers to get and to organize it, which is why we put together that worksheet, by the way, which you can download is because people hear me name seven different things and then they kind of forget. So it's kind of helpful to just have like a checklist and a place to write down the individual metrics that you find on the internet. And what do you think about resources that a lot of investors use to just research areas in their backyard like bestplaces.net? Do you find that that has accurate?

data because some of that already comes a little bit of aggregated. You could just kind of put in a couple of cities and it'll give you some of that information. Totally. Yeah. A lot of those websites are good. I don't know. I've been on best places. I don't know anything like particular about their specific data.

So I can't comment on that. But there's like those kind of websites generally are pretty good. It's, you know, they're all using basically the same data. And so if you find a UI, like an interface that you find easy to use and like easily to interpret, use that. And there are a lot of good places where you can do that kind of thing, just like Henry saying. Personally, I like finding the source of the data, one, because then you know it's more accurate if you can find the primary source. And the second thing is I like to make my own comparisons.

So I think it's like easier for me if I go on the Fred website, I can say like, what's the unemployment rate in Dallas compared to San Antonio? And I can see them on one chart when I'm trying to compare two markets. And the last thing I'll add to this conversation in terms of research tools is most large language model AIs have access to the internet. And you can very simply ask a question to AI about these metrics. Give me a comparison of population growth in XYZ City versus ABC City. And usually you can get pretty good results just from a quick AI search. That's 100% right. And I think that's true for the stats. Also, some of the more subjective things. So, like, within market fundamentals, we talked about, you know, population growth,

household income, those are important. But sometimes, like, one of the ones that's kind of harder sometimes is what are the biggest industries or what are the biggest employers in a city? So asking chat GPT or something like that, that question can be really helpful. Or, like, what are the best public schools in the Dallas metro area is a good question to ask a large language model? And one of the ones I like the most is this is kind of ambiguous, but is a metric I personally care a lot about when I look at markets, is what is the regulatory environment like?

Like, are there any landlord-tenant relationships or laws that I should know about? Are there any bans or restrictions on short-term rentals that I should know about? ChatGPT does a pretty good job identifying those things. Or what is their history of exercising eminent domain, which was never the thing I had to think about, But our buddy Henry here is dealing with the hostile takeover for the city of one of his own rentals. Apparently that's something that you got to think about. It's coming from every angle. All right.

Now that we know what to look at and where to find the data, how do you use that information to make smart real estate decisions? And what is the most commonly overlooked risk factor you should avoid in a market? We'll get into that after the break. Real estate investors, the April 15th tax deadline is coming fast. If you own rental property and haven't done a cost segregation study yet, you could be handing thousands of dollars to the IRS that you don't have to. These studies let you write off as much as 25% of your building and generate huge tax deductions. Costsegregation.com is an online self-guided software that makes cost segregation fast and affordable.

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All right, Dave, I think one of the issues that new investors get wrong is they ask the wrong question. Typically people will say, where will I get the most cash flow or where are the cheapest properties? Because that can sometimes go hand in hand. At least it can on a spreadsheet, but it doesn't always work out that way in practice. I prefer to ask questions of how population and migration are playing a role. in that individual market.

What do you think about that strategy? How much should investors be looking at where people and jobs are moving? Ultimately, market analysis comes down to the same thing everything in economics do, which is supply and demand. And so that's ultimately what you're trying to get to. When you look at population growth, when you look at job growth, when you look at median age, these are questions that impact supply and demand. And that's why I think Henry mentioned earlier, people get overwhelmed.

But if you can remember that all of these metrics are really, really just trying to figure out how many people want houses and how many homes are going to be for sale. Like that's really what you're trying to understand because that's going to determine the direction of home prices. And it will also determine rent and vacancy rates and all of the things that we care about as real estate investors. And so one of the most fundamental elements of demand, which is half the equation, is how many people live in a particular city and which direction that's going in. I hope you all can understand that, you know, if you're living in a city that is growing, demand is going to go up for very likely. They're obviously caveats.

But if you're living in a market that is declining in terms of population or household formation, then you might see a softer real estate market. And so in softer real estate markets, you often see higher cash flow. And this is why there has historically been, a trade-off between markets that offer great cash flow and markets that offer great appreciation because the supply and demand dynamics are different. I actually, one of the first projects I did when I started making content for Bigger Pockets about this stuff was looking at the historical relationship between appreciation and cash-on-cash for the entire country.

And what I found is that the markets that have the best cash flow have the worst appreciation, and vice versa. The markets that have the best appreciation have the worst cash flow. Now, there's a lot in the middle that offer some appreciation and some cash flow. But the extremes are, you know, the outliers for appreciation are negative outliers for cash flow. And so that's why I think it's really important what you said, David, is that if you want cash flow, that's fine, but you have to understand that you're making a tradeoff.

And that's why market analysis is so important is because it is very rare to find an exceptional cash flow market that also has exceptional appreciation potential. Now, another thing to consider when we're looking at what type of people and how many people are moving into an area and what the industry is, is that's going to be the tenant pool that you're choosing from. If you've got an area where you don't really have anybody moving into it, the same people have lived there for generations and generations. There's not a lot of economic opportunity. You're definitely going to get a tenant with a different set of ambitions than maybe when you've got fresh blood moving in, people graduate.

in college and moving into a city to take a job there versus the type of area where maybe someone moves to because they want to raise a family. How much of a factor do you think that should play in choosing the market? Because as an investor, the type of tenant we get is going to have a very big impact on the type of experience we have investing. Yeah, I think it's within a market that's really important. It's hard to, I think, categorize entire markets that way because sometimes it's like, you know, if you go into a market that is, you know, really struggling economically, then, yeah, I think that's very important. I think for most markets, there's a tradeoff and you have to decide within that market, do you want to be in a Class A neighborhood? Do you want to be in a Class B

neighborhood, a Class C neighborhood? Because that will really impact, you know, how much rent you can command, what vacancy rates there are and any potential for, you know, rent not being paid or anything like that. So I do think that's super important. And generally speaking, my opinion is that, and this is opinion, this is not fact, but my opinion is that places where the economy is growing and is likely to continue to grow offer the least risk for real estate investors. That might not mean that they have the best possible upside, but if you are one of those people who wants to mitigate risk, looking for strong economic growth is a very good way to do that. Yeah, I agree with you from that perspective. Like economic growth is huge because if you've got economic growth and population growth, I think you're on the right track in terms of putting your money in a market where you think it would be safe. But there are a couple metrics that I look at as well that I'm interested to see what your thoughts on them are. We touched on them a little bit early on in the show and that being inventory and vacancy. So vacancy can be looked at a couple of ways, right? So you can look at vacancy. If a

market has a very low vacancy. What that suggests is that you're probably going to get higher rents because there's less properties to rent and you're probably going to have maybe not less turnover, but the time to find a tenant should be shorter than in a market that has a higher vacancy. And if the vacancy is higher, it's the opposite, right? You'll probably get lower rents, but I think the secret sauce is somewhere in the middle, right? Where's your head on this? Yeah, that's a really good point. I think it's a really good point. I think it's sort of boils back down to what your objectives are as an investor. For me, I think that one of the key components when I look for market personally is how quickly you're going to be able to

fill your units. Because I think people really obsess over how much rent they can get and raising those rents. But if you miss one month of rent, that's probably going to eat up your annual rent increases and more. And so I've talked to a lot of people about this. It's like you're going to kick someone out and raise rent 50 bucks and like get a month. You know, if your rent is $1,200, you know, raising it 50 bucks a month is going to get you $600 a year. But if you miss one month of rent because of that, you're losing $1,200 a year. So that's- Two years behind. Yeah, exactly. So I think vacancy is one of the most overlooked things. And I just think it's really important to get a good feel for the market for these things. Because you can be in a market where

there's high vacancy rates, but if you're buying quality assets, then you're still going to be able to lease it. I think where that really comes into play is when you're buying low quality buildings, low quality apartments, where if things start to soften up and there's more vacancy, that generally pushes rents down everywhere. And that means tenants, they're still going to live somewhere, but they're going to take that opportunity, usually, to move up in terms of quality. And they're going to go up to maybe from a C neighborhood to a B neighborhood. And that is one of the reasons why I personally don't like buying rentals that are like really run down is because you are sort of at the whim of the macro economy.

And if things turn poor, you're probably going to be on the short end of the stick. Little throwback, quick tip for everybody here. Much better to put somebody in your unit at a cheaper. rent, like Dave said, to cut down on the vacancy and then raise rents once they're in there because it's a massive inconvenience to have the pack of all your stuff and move somewhere else to save $100 a month when the rent goes up than it is to try to get the top rent in the very beginning when they could be picky, not move into your unit and move into somebody else's that is cheaper. Learn where you have leverage and where you don't and no one to hold them and no one to

fold them. Now, this whole idea of price to rent ratio or as you called rent to price is a big that investors need to be aware of because typically as investors, we're going to be buying for cash flow, or at least we want there to be some hope of cash flow when we're buying a property. The Burr method isn't a great method if you end up pulling all your money out of a house that's bleeding money every single month. So the end goal is always to have something that cash flows. And if the price of the property gets to be too high, rents typically don't keep up and you're not going to get cash flow. So what are some percentages that an investor should be targeting in today's market. So just so everyone knows, the rent to price ratio is basically just a way of

comparing the price of a property to the amount of rent that you can generate from that property. And generally speaking, the higher the rent to price ratio, the better. Now, 10, 12 years ago, when, you know, right after the great recession, there was something called the 1% rule that came out that said that to get a good cash on property, you need to have a rent. price ratio over 1%. Now, there are still deals and there are still markets that offer 1% rule, but I think it is better and healthier for investors to recognize that that was actually a very unique time, not that it's the normal one. But 1% rule and being able to find markets or 1% rule is very rare historically. And so we're in an era where the average rent to price

ratio across the country is closer to 0.6. And so if you think about it that way, And you look at a market where it's 0.7 or 0.8, that is above average cash flow potential for a market. And I think what's really important here is when I'm talking about a market and an average, if I'm saying that the average in, you know, in Detroit is 0.8, then that means by rule that there are deals that are better than 0.8 and there are deals that are worse than 0.8. That's how averages work. And so that means your job as the investor is to go find the deal that is better than 0.8. so you can find the ones that are cash flowing better than the others.

So that's sort of generally how I advise people is like, go look for markets where it has above average cash flow potential. So you're not going to be looking at, you know, Los Angeles or New York City or something like that. But if you can find a place where the average for the whole metro area is like 0.6 or 0.7, there are going to be pockets in that market that offer cash flow. And you, as the investor, your job is to go find them. Now, here's some ways that you can make the price to really.

rent ratio metric work in your favor. It's not always about picking the cheapest market. Let's say you find a market where homes are priced higher than the median home price across the country. Maybe they're 500, 600,000 houses where you're not very likely to get close to the 1% rule. You're not going to be buying a $500,000 house that rents for $5,000 a month, at least not as a single family home. But what if that property has a basement and an ADU? And you have three income streams that you can bring in that all add up to being close to $5,000 a month. You've now found a property that gets close to the price to rent ratio that you're looking for. That is also in the better neighborhood where you're also going to get more appreciation and better tenants.

The same thing applies to small multifamily. Maybe it's a triplex or a fourplex. You've got more to rent or the people that take advantage of the rent by the room strategy. So if you just rented the house out on its own, maybe it gets $2,200 a month. But if you can find a property with six bedrooms and you can rent all of them out for $700, Now you're at 4,200 a month, which is significantly more. This is how investors that are savvy figure out how to use metrics like the price to rent ratio and make them work as opposed to just doing what worked in 2012, which was, look at all

the houses that were out there. 80% of them had a price and rent ratio that was favorable and making it work. I 100% agree, David. I 100% agree, David. I often tell people, if you can't find a deal in your market, there is likely an opportunity where you can make a deal in your market. And so looking at rent by the room, looking at midterm rental strategies, looking at ADU strategies is a great way. Another thing you could potentially do is take your existing home and make it a multifamily.

There are easy ways to make a single family a multifamily. Now, obviously you need to make sure that your zoning laws in your area are going to allow for it. But there are ways you can take a three-bed, two-bath single-family home in an expensive market and make it a duplex that has a one-bedroom studio on one side and a two-bed, one-bath house on the other, especially if it's a split-wing house where the primary bedroom is on one side of the house and then the other two bedrooms and living room and bathroom are on the other side of the house. because then you can just close off the primary bedroom, add a one wall kitchen in there. You've already got plumbing. You've got water access. And so you can take a single and make a duplex. Now, I know it sounds easier right now than it probably is.

But it's just as easy as calling down to the local city or municipality that that property is in and making sure, A, that it's zoned properly. And getting some quotes from a contractor on being able to do the work. And you can essentially take something. that might cost you $500,000 and then another, you know, $20,000 to $50,000 in renovations. And now you can get the rent that would put this above or at the 1% rule. Awesome. Dave, Henry, we've covered some valuable info so far, like population trends to look at and how to think about the rent to price ratio. But we're about to get into one of the most crucial questions on investors' minds today.

How do you assess a market for cash flow versus appreciation? Stick with us. We'll be right back after this quick break. For decades, real estate has been a cornerstone of the world's largest portfolios. But it's also historically been sort of complex, time-consuming, and expensive. But imagine if real estate investing was suddenly easy, all the benefits of owning real, tangible assets without the complexity and expense. That's the power of the Fundrise flagship fund.

Now, you can invest in a $1.1 billion portfolio of real estate, starting with as little as $10. The portfolio features 4,700 a single-family rental homes spread across the booming sunbelt. They also have 3.3 million square feet of highly sought-after industrial facilities, thanks to the e-commerce wave. The flagship fund is one of the largest of its kind. It's well diversified, and it's managed by a team of professionals. And it's now available to you.

Visit fundrise.com slash BP Market to explore the fund's full portfolio, check out historical returns, and start investing in just minutes. Carefully consider the investment objectives, risks, charges, and expenses of the Fundrise Flagship Fund. This and other information can be found in the fund's prospectus at Fundrise.com slash flagship. This is a paid advertisement. When I bought my first rental, I thought collecting rent would be the hard part.

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the other. Henry, I'm going to throw this one to you first. What is your philosophy on which is better or which type of investors should be starting with which strategy? Man, I'm going to give the political answer, right? It goes back to what Dave was saying in the beginning of the show. Like, you have to understand what your goals are. What are you trying to accomplish. What I may be trying to accomplish is different than what a brand new investor may be trying to accomplish. And if that brand new investor is, if their goal is, I need to generate enough monthly income so that I can leave my job so that I can go do this other thing that I have a passion for doing, well, then that sounds like you're going to need some cash flow.

And so you might want to focus on a more cash flow intensive market. If your goal is like maybe somebody like Dave who's like, look, I love my job. I make a great salary. I enjoy real estate. I don't necessarily need to make thousands of dollars a month off of my cash flow. What I need is to build long term wealth through equity and appreciation and get the tax benefits that come with owning rental properties offset not just my rental property income, but my W-2 income because W-2 earners are the highest-tax are one of the highest-tax people on the planet. So that's a completely different strategy,

which would say investing in a more appreciation-friendly market would make sense. So that's my general thoughts. I agree with Henry because, I mean, I basically wrote an entire book and took two years of my life trying to answer this question once and for all, which is that you need to like think about your own personal strategy before anyone could answer this for you. So I will just say that like Henry said, there are different approaches for different people. I'll give you a couple of examples. I think most people who are earlier in their investing career should weight appreciation higher than cash flow. Like if you don't intend to retire for 10 or 20 years, then you probably don't need as much cash flow. And appreciation gives you an opportunity to

take some bigger swings and try and make some more wealth. And as you approach retirement, whether that's early retirement or a traditional retirement age, it probably makes sense to shift your focus more towards cash flow. So I think that's just like a general rule of thumb. My personal approach is to look for properties that at least break even. I don't want to come out of pocket. Like if it does a month or two, I don't really care. But I look for a minimal cash on cash return.

It doesn't have to be great. That's not what I'm doing for. But I want to get a property that will sustain itself in an area that is likely to appreciate and that has some value add opportunity like Henry was talking about. If I can buy something that off the shelf breaks even, and then if I make improvements to the property, then it gets me a 7, 8, 9% cash on cash return. That to me is a winning strategy. All right.

Now, certain markets are going to be more favorable for cash flow. Others are going to be better for appreciation. What are some of the fundamentals that each of you think an investor should be noticing in choosing a market that would lead them to believe, hey, this is more likely to have properties are going to be worth more in the future. And this is a property that's more likely to have a higher volume of cash flowing properties. So in the beginning, I said that my market research, basically, I break it down into two different areas. One is like market fundamentals. One is housing market data. I think for cash flow, it really comes down to housing market data.

Like, if you want to know cash flow, it's like, how much rent can you charge? What is the price of the house? What are your property taxes? What are your insurance? It's really just straight math. The reason that appreciation is hard to predict is because it's not objective like cash flow. It's just a little bit more subjective. And I think that's why you need to also be looking at these market fundamentals.

You want to look at long-term trends. Like, one, how many people are moving to the area? How well-paid are those people? How many houses are being built in those areas? Because again, property appreciation sounds crazy. It just comes down to supply and demand. So if you can figure out shortcuts to measuring supply, measuring demand, that's going to give you a good indication of which markets are going to appreciate the most.

Henry, what about you? Yeah, for me, if I'm looking for cash flow, then what I'm going to look for is a market where the average rents are higher maybe than the national average or are going up at a higher rate. And then I'm going to look for if I can find a market that also has a median home price that's at the average or lower than the average. So if I can see a market, it's got high rents, but I can buy a house for lower than the national average. I'm going to just go out on a limb and say I'm probably going to get the cash flow that I'm looking for there. And if I was looking for appreciation, I'm going to look, just like Dave said, I'm going to look more at the economics of that

market and the population growth. So I'm going to look for a market that's had population growth, positive population growth for at least the last five years. And then if it's got the population growth that I'm looking for, I'm then going to look at the economics. What is driving the jobs in that market? What industries? And I'm going to be looking for industries that are up and coming based on what's happening in the world right now. So things that I would be looking for are fintech jobs, technology jobs, in general, government jobs and health care jobs. Because these industries aren't going anywhere. They're improving technologies, improving them. And they're high paying jobs, typically. So if I've got people moving into an area where there are new companies or companies

that are hiring in technology positions and they're paying a hefty wage, then you may be looking at a market that's going to get you some appreciation over time. Right on. That's a really good way to look at at some of the things that I look at when trying to figure out what are the strengths or weaknesses of a market. You can start with just median home price. If the homes are priced higher than the national average, that usually means that wages are going to be higher in that area, which means more people will want to buy homes, which means it's not going to be a strong market for finding renters, and you're going to have a harder time getting cash flow. So the price of the home itself is one way that you can tell if it's higher price,

it's probably gonna be an appreciation market. And if it's lower price, it's probably gonna be closer to a cash flow market. Another thing to think about is the supply and demand dynamics here. It's really simple when you boil that and you understand the fundamentals. If the demand is growing but so was a supply. Like let's say that businesses all started

to move into Topeka, Kansas or something, they'll just build more houses. So you're never gonna see a ton of appreciation in an area where they could just add supply. But if you find an area where jobs are moving into and you don't have the ability to grow supply where it's constricted, you're going to find that is a high appreciation market. Look at the highest appreciation markets the last decade or so.

It's been Austin, Texas, San Francisco, California, Seattle, Washington, Miami, Florida. All of these were cities that had a restricted amount of land where they could even build, but jobs move into there with high wages, which forced appreciation and made it not cash flow strong. I think the mistake that investors make is they hear where everybody else is buying. And then they just go, okay, I'm going to go by there. Right. And then like a bunch of locusts, they all settle on the same market. And then you just hope that the fundamentals of that market were good.

When you hear other people are buying somewhere, that should make you want to look into the market more and study it, not necessarily just piggyback on to what everybody else did. I've seen a lot of mistakes get made when people bought properties because it was the flavor of the month. Dave Henry, any other tips that you can give for investors that are trying to figure out what market would work for them? Yeah, I think you touched on something pretty important there. where you don't want to rely on the research of someone else.

Especially not me. I agree with you for the most part. But I think what was really essential there is that you said, hey, you can take their advice. And then that should trigger you to go do your own research. Because along the lines of that, we do have to acknowledge there are large companies who have entire real estate teams whose sole job it is is to analyze these markets from a real estate perspective to determine if their company should go there. And so you can essentially follow the whales, but you're right. It should trigger you to go and do your own research. And so I like doing

things like looking at markets where there are minor league baseball teams, right? They do a lot of market dynamics to determine, are there people who want to live? live here who make enough to want to spend money on going to ball games. And they typically put these teams in places where they feel like they're going to be successful. And so that can, like if you find a company like that who has demographics who might be the same demographic who's going to rent your place, it is totally okay to like piggyback off of where are they looking for properties. But that should trigger you to go dive in deeper and do your own research because it is just, Just because they're moving there doesn't mean you're going to have success as a real estate investor.

But even large companies do this. Even large companies don't just, they say, hey, I hear so-and-so company is building a new place over here. Maybe we should dive into that market and then they do their own research from there. Dave, give us some advice for what an investor who says, tell me how to do my own research. What should I be doing? Where should I go? What should I be reading?

And does bigger pockets have anything that can help me out in this area? Yeah, of course. So you should definitely check out this spreadsheet. You know, we've talked about a lot of different things. It's not a spreadsheet. It's a worksheet. But we've talked a lot of a lot of different metrics. And if you want them all just in a simple place where you can go and just go one by one and look at this, use chat, GPT, use Google. You can just get this completely for free. And I think the other thing is we are going to be doing, stay tuned for this. It's in, it's going to be in late February. I'm actually going to be doing a workshop on this where I'm actually going to show people. like step by step, I'm going to screen share basically and show you how to do this thing one at a time. But just like with everything in real estate, the number one thing is just to start doing it. Like go look up a couple of stats right now and see that it's not that hard. If you, you know, sit around and wonder the perfect way to do it, you're never going to make a lot of progress. But if you just start exploring a little bit, use your computer and Google, you're going to be getting better at it all the time. All right. One last question before I get you two gentlemen out of here.

landlord-friendly states and laws. What are things that investors should look for or what are things that they should look to avoid? Dave, let's start with you. I think most of all, what what landlord-friendly means is sort of subjective. So I think different people interpret certain laws as positive. Some people interpret laws as negative. I just really think the most important thing is that you understand what you're getting yourself into. So certain places might have, you know, restrictions on rent growth or might have really difficult evictions or, you know, stuff like that. You know, sometimes it's really detrimental. Sometimes it's not so bad. But I really think you should spend some time either going to a RIA talking to your agent or just looking on the local

government website, the rules. Like, you know, I invest a lot in Denver and they have really good resources, both for tenants and for landlords to look this stuff up, which I think is great. like tenants should know what they're getting themselves into in my opinion and any property owners should know what are getting themselves into and I think you can interpret for yourself what is landlord friendly and what is not the more important thing is you know what you're doing I agree I would look at this after you have figured out some of these other metrics and dynamics like if you've got your if you've got it dialed down to two to three markets based on everything that we've talked about today call a couple real estate attorneys in each of those markets and just ask them

Hey, what's it like when you have to do an eviction? What does it cost? How long does it take? Tell me the, you know, tell me the worst case scenario and then tell me the best case scenario. And with that bit of information, you will understand for yourself if that's something you can stomach or not and how that might impact your financials if you had to actually evict somebody in those markets. Really good point. Here's the last thing that I want to add a little cherry on the top of this episode. when you make your decision based on states that have landlord-friendly laws, you're making an entire investment strategy based off the worst-case scenario in a real estate investment. When you're dealing with a literal eviction, a tenant that won't leave, remember, that is different than a tenant that stops paying their rent and just leaves the place voluntarily. That sucks when that happens, but it's not an eviction. Eviction is your worst-case scenario. you're planning your whole strategy around something you hope never happens, right?

It doesn't happen a ton. So I try to invest in areas where I can be picky about my tenant and choose a tenant that has the most to lose. So if they lose their job, if they come across hard times, if something terrible happens and they send all of their money to some Nigerian prints, or they get caught up in a crypto scam from one of the fake David Green or Henry Washington profiles that are ripping people off. They just leave voluntarily because they don't want to see their credit score destroy. by an eviction, you can avoid needing the laws to be in your favor by picking an area and a location in a neighborhood where people are going to have more to lose. All right, that's all I have to say on that topic. And I had a great time with you two gentlemen today. Hopefully everybody learned

more about how to choose the market to invest in so that they can start taking practical steps towards saving that down payment, finding the right property, and building that wealth today. If you'd like to know more about Henry Washington or Dave Meyer or myself, you can find our information in the show notes. So please do go look those up and give us a follow. And if you'd like to know more on this specific topic, my advice would be you check out the Bigger Pockets forums where we have tons of questions on this very same thing with lots of information for you to check out. That being said, I'm going to let you guys get out of here. This is David Green for Henry Washington and Dave the Oscar Meyer signing off. Thank you all for listening to the Bigger Pockets real

estate podcast. Make sure you get all our new episodes by subscribing on YouTube, Apple, Spotify, or any other podcast platform. Our new episodes come out Monday, Wednesday, and Friday. I'm the host and executive producer of the show, Dave Meyer. The show is produced by Ian K. Copywriting is by Calicoke content, and editing is by Exodus Media. If you'd like to learn more about real estate investing or to sign up for our free newsletter, please visit www.com. The content of this podcast is for informational purposes only. All host and participant opinions are their own. Investment in any asset, real estate included, involves risk. So use your best judgment and consult with qualified advisors before investing. You should only risk capital you can afford

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