Ten questions that will help you avoid the second most common mistake in real estate investing

Buying in the wrong markets. Imagine that. Many investors bought houses through promoters in areas that are declining and have subsidized rents from the Federal government with Section 8. These properties will have continuous maintenance issues and may never go up in value.

The U.S. is made up of 50 states and over 250 major cities. I’ve personally bought houses in over 50 cities from Florida to New York and from Georgia to California. Unless you have this type of experience you will never know the distinctions between real estate markets. Keep in mind real estate markets are a local phenomenon and these markets rise and decline in different time frames. And that’s exactly what a promoter will tell you as they would use this information to act informed with all the ongoings in each market. Remember, just ask them if they’ve bought there and the conversation can become much shorter.

What you really need is common sense when evaluating markets. Following are 10 simple questions for what markets are hot:

1. Where are jobs being created?
2. Where are people moving to?
3. Where is there newer house inventory available?
4. What states have low property taxes?
5. Where is the weather best for quality of life?
6. Where
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   are there lower costs of homeowner’s insurance?

7. What states are inexpensive to do business in – especially for recording legal documents and state income tax?
8. What states favor landlords over tenants?
9. Where can you find price points for houses that are less than it costs to build?
10. Why will there be future growth in this area?

The answers to the above questions will certainly point you in the right direction. If you can answer these questions accurately, it will be easy to select the right cities to buy in and you won’t need promoters. In fact, if you have the skills to buy, rehab, select tenants, rent the house, collect, manage and sell – you don’t need turnkey operators like me, either.

So, come into my common sense corner and let’s just rule out some areas of the country real fast by eliminating states. California, New York, Massachusetts and Connecticut have the highest income tax in the nation, approaching 10%. The cost of doing business in these liberal states, along with adverse landlord legislation, should kick these states to the side of the road for most of you.

Michigan, Indiana, Ohio, Missouri and Kansas are states that are losing population and have a very high cost to do business. The declining population alone is enough of an issue to skip these states because there must be a demand for housing in order for it to go up in value.

Mississippi, Alabama, Louisiana and Arkansas have more people in poverty than people out of poverty. There could be some instances to buy and flip a house to make a fast buck, but we are talking about the long term holding of cash flow houses and these states don’t make the cut.

Florida and Texas have high property taxes (3% of purchase price in Texas) and a high cost for homeowner’s insurance for locations anywhere around the coast. I live in Tampa and have owned homes in 20+ cities in Florida. This is not where I want my long term houses and I have gotten rid of all but a handful of Florida properties. Houston does have job creation as a result of the oil boom and could be a place that I would consider if I didn’t know what I know and do what I do in Atlanta. But at the end of the day there is no comparison between these two cities.

When I was researching the best areas of the country to acquire long term holds I also looked at potential issues and disasters that could impact my investments. The threat of hurricanes, wild fires and droughts and a rising heat index influenced my decisions. I’m not a chicken-little kind of guy that thinks the sky is falling. But I do think long term, and safety is my greatest concern.

Just think about all the wild fires that have increased in the West over the last few years. Devastating fires are up 42% and there are already reservoirs drying up in Northern California. Do you think there could ever by a real water issue out west impacting California, Arizona, Nevada and other states in the mid-west? I do – and I avoid these areas for long term investments. Equity funds have driven small investors right out of Phoenix and Las Vegas and I wouldn’t have bought there anyway.

There is no excuse for you as an investor to ignore market fundamentals. You must do some common sense research. You can get the “low down” on any city in the U.S., but you still must use your common sense to make an informed decision.

I’ve already stated that I target the Atlanta metropolitan area for the answers to the 10 questions I’ve listed above. Just a little bit of research on the internet will inform you of jobs being created, one million people immigrating in the next six years, busiest airport in the world, 75% of the Fortune 1000 companies have operations there, transportation hub of the Southeast, great climate, all major sports teams, theaters, and on and on and on.

If you’re one of those people that bought in Detroit, or Dayton Ohio, or Kokomo Indiana, get the hell out of there and cut your losses. I also bought in every one of those areas and it was the acne of my house portfolio. Did you ever have acne or pimples? If so, you know how good you felt when it cleared up and you’ll get that same feeling when you dump your dog houses in these areas.

Agree? Disagree? Leave a comment below and I will respond.

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