I often am asked where real estate investing is hot (or not), and I love this question.
The answer, however, is a moving target. Macro and micro fundamentals are always changing. This is why it is so often said that real estate is local in nature.
A hot market for the cash flow investor may be an altogether different market for the equity investor. Let’s break it down:
Hot investing markets for the cash flow investor
• Philadelphia, Pennsylvania
• Little Rock, Arkansas
• Birmingham, Alabama
• Indianapolis, Indiana
• Cleveland, Ohio
• St. Louis, Missouri
I always suggest to my cash flow investors—who typically are newer to investing and want to build up cash flow so they can buy more investment properties—that they need to have great control over their expenses.
They should be targeting areas with low insurance rates, low taxes and where there are favorable rental rates compared to purchase price.
This typically embodies the “1 percent rule.” This rule suggests the monthly rent should be equal or better than 1 percent of the purchase price. So a $100,000 property should rent for $1,000 or more.
As prices continue to rise, the 1 percent rule gets tougher and tougher. But these properties are still around. The challenge is to be able to apply the 1 percent rule in areas that also generate a sustainable investment.
Many properties cash flow great on paper. It’s harder—yet key—to sustain that investment when factoring in repairs, vacancy loss and moving economics of a local area.
I continue to see more and more investors putting too much emphasis on the pro-forma and missing the most important diligence of all: confirming the sustainability of the investment.
Hot investing markets for the equity growth investor
• Atlanta, Georgia
• Philadelphia, Pennsylvania
• Chicago, Illinois
• Oklahoma City, Oklahoma
• Williston, North Dakota
My seasoned investors who have been investing for a while are looking for equity growth.
In any city in the U.S., this of course is best obtained by investing in nicer properties that can be purchased near or below the area’s median priced homes.
They should be in nice school districts and be purchased with the mindset that your exit strategy will be to sell to an end user who is a retail buyer looking to move his or her family into the house.
These properties will represent the most liquid investment class and will produce the best equity growth.
As you add in the best locations that are poised and positioned for growth (such as those listed above), you will increase the potential for best equity acceleration.
Hot markets for the lifestyle investor
I talk with investors frequently who are interested in investments for different reasons altogether.
I must admit this was new to me until I moved to Florida.
There are a large number of people, especially from overseas or from our cold northern states, who have lifestyle as their No. 1 objective. It is no mystery that Florida holds the top spot for lifestyle investing. Not only is it a highly desirable place to live, visit or have a second home, It has suffered from the recession and the price corrections were massive.
So equity growth is very highly anticipated here. Fundamentals of Florida are very strong, which positions the state closer to those that both equity growth and cash flow investors are seeking.
Markets that are not so hot
There are a number of cities or markets that are great places to live and considered very hot markets.
Many markets in California and New York come to mind. Many are great places to live, and perhaps places that may even have some good equity growth, but do they represent safe investments?
Affordability is paramount. Do you know some of these areas take 70 percent or more of your income just to pay for housing?
The standard, I suggest, is to invest in markets where affordability is equal to or less than the national average of 30 percent.
I suggest to my investors that they invest in a safe market in which they can purchase the median home for 30 percent of the median income or less.
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