July 18, 2021

JF2511: 3 Essential Tips for Selecting Investment Markets

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In this episode of “Best of Best Ever,” we talk about how to select the best markets to invest in. Marco Santarelli talks about the key items to look at when choosing a good market, as well as how to avoid overpriced, bubble markets. Brent Maxwell teaches us the tell-tale sign to identify up-and-coming markets by studying single-family trends. Lastly, Adiel Gorel shares his secrets for selecting the best markets for landlords using his research on demographics. 

Marco Santarelli


Brent Maxwell


Adiel Gorel

  • CEO of ICG, a real estate investment firm
  • Based in San Francisco, CA
  • Say hi to him at: https://icgre.com/
  • Episode #2152


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Theo Hicks: Hello, Best Ever listeners, and welcome to the best real estate investing advice ever show. I’m Theo Hicks, and today we will be featuring three more previous best ever guests. You will hear their expert opinions on how to select the best market to invest in.

The first clip comes from episode 1804, with Marco Santarelli. Here’s what Marco had to say about selecting the best market.

Marco Santarelli: The first thing I’m gonna say about that are markets that are experiencing depression, lost population, meaning their net migration is negative and has been negative for years, meaning that is the trend… Because you need people in the market, and more people coming in, or more people growing there organically, to sustain the demand on real estate. So the people who rent your properties have to be people who live there and work there. So if you see negative migration, that’s a bad sign; you probably wanna do really good due diligence, or stay away from that market.

Same thing with jobs – you wanna see positive job growth, job stability, and a diverse economy. If you don’t see that, that may be a market you should avoid. Because let’s face it – there’s so many other markets you can choose from, and the United States is such a large market geographically speaking that it’s really made up of over 400 metropolitan statistical areas and probably over 600 if you include micro-markets. So there’s a lot to choose from, and this is why you shouldn’t necessarily be investing in your so-called backyard… It’s because odds are there are better opportunities in other markets if you just look around and start to look at things such as job diversity, the economy, growth, population, housing demand, and all that good stuff.

So stay away from markets that have negative factors like that, and then if you wanna break it down a little bit more granularly, I would stay away from submarkets and neighborhoods within markets that are not that great, that are not providing you with solid returns in solid locations.

Joe Fairless: You come across a million dollars; who knows how you came across it, but it’s an extra million bucks, and you have to invest it in turnkey rentals in the United States. But there’s a catch. You can invest it in any market in the U.S, but the catch is that there are five markets that you’ve got to cross off your list; you would never ever, ever invest in those five markets… But they’ve gotta be major cities. What are the five markets that you must cross off your list before you actually pick the market that you wanna invest in?

Marco Santarelli: That’s a good question, it’s very interesting. Joe, do these markets have to be ones that I would consider otherwise?

Joe Fairless: No. They can just be five major cities that you wouldn’t consider, so the first five off your list.

Marco Santarelli: Well, if I wouldn’t consider them right from the get-go, then that’s easy, because there’s many of those markets… And I will just rattle off some names: San Francisco, Los Angeles, New York, Washington DC, parts of New Jersey. I don’t know if I’m answering your question, but I can tell you what all these markets have in common…

Joe Fairless: Yeah, please.

Marco Santarelli: If you look at these markets, you’ll see — Seattle, Washington is another one. They’re very, very expensive, and I wanna say overpriced to the point of they’re bubble markets. And the problem there is this — it’s what I’ve talked about before; if you have properties that are so expensive, you have two problems. One is the ratio of what those rental units, whether it’s an apartment complex, or more specifically single-family homes – what they rent for relative to the purchase price or market price of that property is so out of whack, is so out of line, that there’s no way you can get a decent rate of return, if at all, on those properties, without putting a large down payment. But then you’re not really using your capital properly, you’re not leveraging your capital, you’re not getting the greatest rate of return. These are very expensive markets.

So number one, you don’t get the right cap rate, the cash-on-cash returns and everything else. Number two, because they’ve had such a huge run-up, there’s greater potential for there to be a pullback or a turn where that real estate market turns and you see the equity and the property values come down. That means that the downside risk is higher in those markets than in a more stable market, where you see the cycle in that market, appreciation-depreciation, be more like a soft wave, as opposed to a rollercoaster.

That’s the problem with these expensive markets – they’re out of whack, they’re overpriced, often they’re not landlord-friendly, and it’s hard to actually get a rate of return. Besides, you can’t leverage your investable capital as far in those markets as you can in some of these more stable, diversified markets.

Theo Hicks: So Marco provided advice on not only how to choose the correct market, but what are some of the metrics you need to look at to know which markets to actually avoid… And he gave some examples of the markets he chooses to avoid.

Break: [00:05:49].07] to [00:07:50].20]

Theo Hicks: The next clip comes from episode 1628, with Brent Maxwell. Here’s what Brent had to say about selecting the best market.

Joe Fairless: The focus of our conversation today is how to identify an up-and-coming market before everyone else… So how do we do that?

Brent Maxwell: That’s a great question. For the people that have a bit of risk tolerance, I think it’s the question to be asking. When you look at, for example, Detroit as a market, as a whole, there was a trough from 2009 when we bottomed out, all the way for the next few years, and then things started to peak up. In many areas of the city and most of the suburbs property values are at, near, or even above their pre-crash peak values, but there are still many places where the values are still flat. So if you’re buying as a value investor and you’re looking for an increase and appreciation, obviously you wanna buy in an area where that curve is at least at the emerging part of the growth market, and ideally you’re getting in low, obviously… So how do we do that? I think the answer in Detroit is to look for areas where you’re starting to see signs of the percolation of transition.

Joe Fairless: And what signifies transition?

Brent Maxwell: Transition is a change of the demographics of an area. You’re looking at areas that have been stable or declining for a long period of time, and are experiencing a different character of person moving into them, whether it be middle income, middle-class people, or young, hip people, whatever that is – those are areas of transition. Of course, there’s downward transitions as well, but we’re looking for the upper transitions. Basically, we’re looking for areas that, for a lack of a better word, are approaching what many people would consider gentrifying, although really at the beginning stages of any neighborhood in transition you don’t have any gentrification, and quite frankly in the neighborhoods of Detroit there isn’t any gentrification. I realize it’s a bad word for a lot of people, but I don’t have any problem saying it because it doesn’t really exist, even in the central business districts downtown, where you’re seeing $25/ft for rental space… It’s priced appropriately, compared to similar markets nationwide, so you can’t really look at that as being something that’s displacing people.

Joe Fairless: How do you find that data? Where do you look? …and if you’re on the ground, same question.

Brent Maxwell: Well, there’s two questions there, really – how do you find the data and what does it look like from the ground? The data is readily available to anyone with basic access to comps in an area. You can see days on market, prices of properties that have been sold, photos of those properties and such by looking at the MLS or any associated feed that comes from that. So that’s one step. The other step though is actually being in the neighborhoods and in the areas that we’re talking about, and kind of getting a feel for it by being present all the time.

When you see a young couple moving in, with young kids, and a couple dogs, and they look completely out of place compared to the other people in the neighborhood, and there’s a bar that was formally run down and now it’s got some hipsters coming to hang out there, you know that there’s something going on in that particular area. These are kind of harbingers of progress, and leading indicators of an area that is on the edge of hip, or will maybe someday be hip.

Joe Fairless: From the data question and response you said you wanna look at comps in the area, and some specific data points like days on market and prices of properties that have been sold. What specifically are you looking for with days on market?

Brent Maxwell: A decrease in days on market. I like to divide the market into quarters, and I look at the top quarter for my investing purposes. A decrease in days on market on the top quarter of properties means that the people who are buying the more expensive properties in an area are acting faster… And in conjunction with the decrease in the days on market you wanna see a drive-up in prices.

Joe Fairless: Anything from a on-the-ground standpoint? You mentioned young couples with a dog, and hipsters going into a bar that’s been opened… Anything else, a type of business maybe that you’ve seen, that indicates that the property value is increasing?

Brent Maxwell: Yeah, absolutely. Big rooftop data companies like Trader Joe’s and Whole Foods. Obviously, when those come in the neighborhood, you know that the neighborhood is going to experience some continued resurgence… But they’re looking at rooftop data and they come later in the process.

On the front-end though, a lot of people think that they have people move to an area, and then the prices start to go up, but in my experience, before the hipper people come, you have the artists, the pioneers who come, who are looking at just cheap, cheap, cheap prices, and the ability to live and focus on their art or their lifestyle, and still  have a neighborhood that works for them. So that’s something that people think is the driving force, but in my opinion, what really makes the difference is, like you said about the businesses, when you’ve got a hip restaurant that lands in a neighborhood, or a hip coffee shop, that kind of thing, that brings in people to drive to as a destination to the neighborhood, that is the big number one sign.

Break: [00:13:04].15] to [00:15:07].18]

Theo Hicks: So Brent’s major focus is identifying up-and-coming markets, and he actually does this by analyzing single-family trends. So he looks at the data and determines if the particular neighborhood is going through a transition. Then he also talked about how you can’t just look at the data, but you actually need to go to the location, look around the area, and he gave us some things that if you see them also indicate that an area is transitioning.

The third clip comes from an interview we did with Adiel Gorel, episode 2152. Here’s what he had to say about selecting the best market:

Adiel Gorel: My criteria of where to buy are pretty simple – I’ve been a student of the demographics in the U.S. for decades, and if you look at the U.S. census, you can easily see the part of the country that the demographic growth is the best is what I like to call the Sun Belt states. The Sun Belt states are states like Nevada, Arizona, Texas, Oklahoma, Louisiana, Florida, Georgia… Where the sun shines, in the South.

Not only are these states the ones with the biggest growth and demographic growth for the future – and we can talk about why, but we may not have the scope here – they also happen to be states where they are pro-business, which also means they are fair to the landlord… Unlike the state of  California, for example, the state of New York, which are very harsh on the landlord. But these states are very good for the landlord, they’re affordable… So my first criteria is Sun Belt states.

The second criteria is pretty self-explanatory – it’s large metropolitan areas. That’s because you have job diversity and industry diversity. If one factory, god forbid, goes out of business, there are many others. So large metropolitan areas in the Sun Belt states.

The third criteria is where the numbers work, meaning the ratio between rent and price makes sense. And as of the month of April 2020, it does not make sense, as I said, in some of our classic markets like Vegas, like Phoenix, like Dallas, like Austin; markets where we bought many thousands of homes do not work. So what does work now?

One market that does work right now is the Oklahoma City market. If you look at the map, it’s not that far from Dallas, and yet the prices are a lot lower than Dallas. The rents are somewhat lower, but not that much. The property tax is 250% lower than in Dallas, and they have the lowest unemployment in the whole United States, out of all the big cities in the U.S. Of course, now we have the crisis, but I still believe their unemployment is quite low relative to many of the other big cities.

In addition, they’ve found enormous reserves of oil and gas no far from Oklahoma City. Of course, oil is super-cheap now… I don’t look for things like this, but it’s just an extra that you get. A strong economy… And we are buying brand new homes. I like to buy brand new homes. It took me a while to realize it. I started off, as all new investors, as a cashflow cowboy, buying old stuff in not-so-great locations, but I learned – you buy in good areas only, and you buy brand new homes, that come under warranty… So we are buying brand new homes in Oklahoma City, from about 150k up to about 190k. And they rent well. Typically, the 170k home would rent for about $1,400/month, with very low property tax. So that’s one market that works.

Another market that still works is what I would call Central Florida. Well, the Orlando market is too high now, for the same reason that the Phoenix market is too high. And the Tampa market is too high. Between Orland and Tampa, we have bought a few thousand properties over the years, but they’re too high. However, between Orland and Tampa there is growth, and it does make sense there. North of Orlando there’s very interesting stuff as well; East of Orlando, including on the shore, and South of Orlando. So the prices there are different. The prices are between 200k and maybe 225k, except there’s one pocket North of Orlando where there are properties to be had for as low as 140k; and we can talk about that.

And then another market that still makes sense – there are parts of Atlanta (it’s a giant market) that do not work anymore, but there are parts that do. So that’s another market.

And our most expensive market right now is the Raleigh-Durham market, the Research Triangle in North Carolina. The prices there would be between 200k and 260k, but they still work, and of course, it’s a very popular market. We also buy in Baton Rouge, Louisiana, where the rents ratio is good… And pretty much, these are the few markets that right now in 2020 make sense.

Joe Fairless: What part of Atlanta works?

Adiel Gorel: Well, again, it’s not a formula. It’s not like you say “Oh, you only buy in the South”, but it is true that parts of the South of Atlanta work. But one thing — this is an important question, Joe, that you just raised… I live in the San Francisco, Bay Area, and I learned a lesson over the 36 years that we’ve been doing it. I like to build trust with my teams in the field, with the people with whom we work, with our brokers and managers, and listen to them. So I listen to what they say; just like you, Joe, would be a super-expert on the area where you live – your street, your city. I listen to them. So when I work in Atlanta, I listen to what they say as to what would be a good area.

Theo Hicks: So what I really liked about Adiel’s episode is that he talked about based off of his 30+ years of investing experience that the Sun Belt states are the best markets for multifamily for rentals right now… And we’ve done a lot of episodes focusing on the markets that performed the best during the Covid pandemic… And sure enough, all the top markets are in the Sun Belt.

Then he also provided us with a little secret to finding the best markets, which is to trust your boots on the ground and rely on them to help you identify the best market and the best neighborhoods.

So those are three experts on how to select the best target market. First we have Marco Santarelly for episode 1804, who focused more on the data and the metrics side. Next we had Brent Maxwell, who also focused on the data, but also talked about some of the intangible feelings that you get by walking a market to understand if it’s a good place to invest. And then lastly we have Adiel, who talked about why the Sun Belt states are the best to invest in; also going into data, and then a little tip on relying on team members to point out the best neighborhoods in the market you are investing in.

So that will conclude this episode. Thank you for listening. As always, have a best ever day, and we’ll talk to you tomorrow.

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