There's a question I've heard from several investors over the past few months:
“How do I decide which market to invest in?”
It's a good question – for many reasons.
Especially in an era when “virtual investing” (buying and selling properties without ever seeing them in person) really is a viable thing that anyone can do. With the abundance of property researching tools we have at our disposal and especially for investors who are looking for vacant land properties, the sky is the limit.
Factors to Consider
You can buy and sell real estate almost anywhere on earth these days, so how will you decide where to do business? I've found that there are a few key factors to keep in mind:
- Which markets are easiest to work in?
- Which markets can support a sustainable business?
- Which markets have the benefit of an effective government?
- Which markets are potentially the most profitable?
Keep in mind – it's quite rare that you'll find ALL FOUR of these factors working in perfect harmony in the same market. In other words – I have never found a market that was sustainable, effectively governed, easy to work in AND extremely profitable. So with this in mind, it's important that you figure out which of these benefits are most important to the long-term success of your business strategy.
Let's dive into each of these and I'll explain more of what I'm talking about…
The Value of “Easy”
Have you ever worked in a market where you felt like everything and everyone was working against you? In some cases – it feels this way because they actually are. I've worked in some counties where everything seemed like it was designed to make life difficult for real estate investors. I've also worked in other areas, where doing business was a breeze!
It's hard to know why some places are so much easier than others, but whatever the reason(s) – I've always made every effort to take note of which areas of the country are easy to work in, and which areas are the hardest – because there is a real, tangible benefit to working in a market that makes things easy for the real estate investor.
In my home state, I've worked in 28 different counties over the past 6 years and I'd say that only 6 – 8 of them would qualify as “easy” (not perfect, mind you – but easy enough for me to continue doing business). What makes them “easy”? A few things come to mind:
- The people at the county office are kind, helpful, and responsive.
- It's quick and inexpensive for me to get a good & accurate mailing list.
- The county website provides everything I need to research properties, assessment values, parcel maps, property ownership records, and more.
- When I research properties in DataTree, the information is current, accurate, and fully available.
- Utility companies and city inspectors are easily accessible and they're able to answer my questions.
- I'm able to find the essential service providers that I need access to (e.g. – surveyors, appraisers, contractors, and more).
It's a series of little things, but they all allow me to eliminate ambiguity and make big investment decisions without questioning whether or not I'm betting on a sure thing.
When a market is easy to work in, it can be a serious asset.
Now keep in mind – “easy” is not the whole story (not even close). I've worked in several “easy” markets that had other issues:
- It was difficult to get properties sold (because the area wasn't desirable to live in).
- It was difficult to find properties with good profit margins.
- The local economy was prone to giant spikes and recessions (which increased risk and made it difficult to earn a sustainable income).
- The state government imposed some bizarre tax laws that made it nearly impossible to make a profit in the end.
While it's great to find a market that's easy to work in – it's also important to look beyond this single factor.
The Value of Sustainability
A market is “sustainable” when you're able to continue working in the area (and making a profit) month after month, year after year, in good times and in bad.
A sustainable market is usually an area that has a solid and diverse economy (an area with MANY different business sectors that keep jobs and businesses afloat in all seasons).
Diverse economies include cities like Denver, Chicago, Atlanta, Minneapolis, and New York. Why? Because the fate of these cities isn't tied to any ONE industry. If one of their business sectors goes through turmoil – it's not the end of the world because there are dozens of other robust industries that will level out a small drop in the market's gross revenue.
Some examples of economies that aren't diverse include cities like Detroit (automotive), Seattle (aerospace), San Jose (technology), and Washington D.C. (federal government). In these cities – if their major industry goes through turmoil, everyone feels the pinch.
Probably the most recent and obvious example is Detroit. Whenever the automotive industry takes a huge hit (which seems to happen every other decade), there are massive job losses, people flee the state and the value of real estate plummets – causing severe (but temporary) pain for anyone who has their fortunes tied up in the local real estate.
Of course – economies with a lack of economic diversity can also be a HUGE source of opportunity. Some people have made a killing in places like Detroit – buying properties during bad times and selling them a few years later at a massive premium (after the economy has improved)… so don't forget, you can use this kind of cyclical market to your advantage too.
Nevertheless, many people (if given the choice) would rather work in a market that is sustainable – so if you're looking for a place where you can stay put, invest for the long-term, and make a predictable income (even as the world changes), consider the benefits of working in a sustainable market.
The Value of Government
Something we take for granted here in the U.S. (and in most first-world countries) is the fact that we have a government that takes property rights very seriously.
Take farmland, for example. Many people perceive the United States to have the most valuable and desirable farmland in the world… but it's not because there aren't dozens of other countries that have similar (or better) farmland than the U.S. has.
Yes – states like Iowa, Illinois, and South Dakota all have very high-yielding soil – but the real reason that people feel comfortable buying U.S. farmland is that we have a government that takes property ownership seriously and enforces the law.
Take Africa, for example. There are massive stretches of land on this continent that are extremely good for farming (even better than the U.S. in many cases)… but what about the government? Do the governments in these areas take property ownership seriously? Does the government even have the power to enforce their own laws? There are some counties in Africa where governments are regularly overthrown without a moment's notice – devaluing currencies and calling everyone's property ownership rights into question! Does this sound like a market you'd like to invest your life savings into?
Of course, this is an extreme illustration – but it underscores the importance of the governing body where your properties are located. Do you trust the government to respect and enforce your rights as a property owner?
In the first world countries like the U.S., Canada, Australia, Europe and the like – it's usually less a question of whether the government will enforce your rights (because they will), and more a question of how reasonable and easy they are to work with. For example:
- What if the County Treasurer isn't responsive or helpful to your needs?
- What if the Assessor charges exorbitant fees and taxes, making property ownership unaffordable?
- What if the local municipality has some ridiculous restrictions, making it impossible to use a property for your intended use?
- What if the state has some outlandish laws that make it completely unfeasible to conduct business as a real estate investor?
Unfortunately, a lot of this information can only be learned by getting your feet wet (or by doing a ton of research before jumping in), but wherever you choose to do business, pay close attention to the obstacles you encounter from the state & municipal governing body. In every market, there will always be something that makes life harder. While most of these obstacles will be manageable, some of them will be a deal-killer – so keep an eye out for landmines.
The Value of Profit
Some investors have tunnel vision when it comes to profit – as if it's the ONLY thing that matters (and it's an understandable bias because dollar signs can be very alluring). After all, some markets can justify FAR higher prices than others – as illustrated in this video from BuzzFeed:
I'll give you another example – back in 2012, I partnered with another investor on a property in Jersey City, New Jersey. We found a vacant lot just outside of New York City that was easily worth half a million dollars and we got it under contract for $27,000 (at the time, it was the biggest profit margin I'd ever seen in my life).
Unfortunately, the deal fell through (a long story and huge disappointment), but it did open my eyes to the fact that some markets have a lot of properties with significantly higher profits margins than others (assuming you find the right people and make the right offers in the first place).
The profit potential of any market can certainly be a deciding factor on where you focus your efforts – but don't forget that it has absolutely nothing to do with the process being easy, the market being sustainable, or the government being effective… it just means that some markets value real estate much higher than others – and this can be a source of some serious profit for you if you're willing to jump through the other obstacles you encounter along the way.
What I Evaluate Before Choosing My Market
With these things in mind, there is a shortlist of “deciding factors” that I typically look at before I jump into any particular market.
As a land investor, I always look at the four items described above, but there is also an element of “uniqueness” to my approach because vacant land is a bit of a different animal than most other types of real estate. For a better explanation of what I'm talking about – take a look at the video below:
Is the “right information” readily available?
Before I buy any property, I have to spend some significant time and energy researching it. Since I know that this is a bridge I'll inevitably have to cross in the future – why not give it a whirl with a “test property” BEFORE I spend hundreds of dollars on marketing?
Oftentimes, I'll pull up a few random properties on a platform like DataTree or even the county's website and GIS mapping system (to find your county's website and GIS mapping system, just google, “County Name, State Name, GIS“).
Is it easy for you to find any good comps for the properties you're looking at? Can you find accurate parcel maps and find the size, shape, and location of each property? Cross-check the data you find on DataTree with the data you find on the county website… does the data match? Does everything appear to be current and accurate?
There are some counties out there (usually the ones that are VERY rural) that don't even have a GIS mapping system (they simply don't have enough tax revenue to maintain it). This means you probably won't find any parcel maps in DataTree either. This doesn't necessarily have to be a deal-killer… but it is definitely going to make your property research more difficult.
Whenever I find a county that isn't able to provide this kind of basic information, it's a BIG red flag – and I usually won't do business there. It's just not worth the extra hassle.
How much does the “right information” cost?
One of the primary tools I use to find amazing deals on real estate is the delinquent tax roll. This is a major source of opportunity for finding motivated sellers – so it's important for me to know:
- Will I be able to get my lists from DataTree or directly from the County Treasurer?
- If I'm pulling it from DataTree, will it be accurate and reliable?
- If I'm pulling it from the County Treasurer, will it be affordable? And can I get the list in Excel format? (two crucial questions)
Question #2 isn't always easy to answer – because you won't know if a list is accurate until you do a few test mailings (say, 100 postcards) and measure what kind of response you get (and/or how much returned mail comes back to you). Usually, it will only take one time to figure out whether you're working with solid, reliable data.
Question #3 is pretty easy to answer. Most counties will charge something for their lists (and they typically charge on a per-parcel basis) – so you just need to call them and ask how much it will cost to get their current list. Personally, I don't ever pay more than $500 for any single list (and usually, $100 – $300 is more within my comfort zone).
It's also a good idea to ask the County Treasurer what format their list comes in electronically. It needs to be an actual computer file (preferably an excel / “.xls” file that you can view & edit on your computer). A printout isn't going to work.
If they CAN'T give you the list in a format that works with Microsoft Excel – don't buy it. You must have the ability to sort, re-organize and make edits to your list using a spreadsheet program like Excel (if you can't do this, your life is going to be WAY more difficult than it needs to be).
If you need more clarification on what I'm talking about, check out the video in this blog post.
How easy is the county's website to work with?
Depending on what markets you're working in – the county website can be a very helpful place to find the information you're looking for.
Start by googling “County Name, State Name” of the area you'd like to work in. Click on the county website and poke around for a while.
- Can you find the Treasurer's, Assessor's, Equalizer's & Recorder's information?
- Can you find the county's GIS mapping system (i.e. – does it even exist)?
- Can you find the current and prior ownership information of any property? Sales prices? Legal descriptions? Parcel numbers?
- Can you find current tax information on each parcel throughout the county (taxes owed, tax paid, etc)?
In my experience – it seems like no two counties ever use the exact same system. Often times the information is there, but it isn't easy to find (and/or it isn't user-friendly to use) – which can make things a bit more tricky.
Nevertheless, if you're serious about working in any particular county, it's definitely worth your time and effort to learn the county's website and figure out what kind of information you do (and don't) have at your disposal.
How easy is the county to communicate with?
This essentially boils down to “human relations” – but it does count for something.
Most of the time, you'll get a feel for this if/when you call the County Treasurer (aka – Tax Collector) to order a tax delinquent list.
As you're talking to them on the phone, take note of a few things:
- Do these people sound competent?
- Do they know what they're talking about?
- Are they able to legitimately help you with your request?
- Do they understand what you're asking for, or do they act clueless?
- Do they show a willingness and desire to help you, or do they act like they don't have the time of day for you?
You'll find the full range of attitudes in the various counties you talk to. It isn't necessarily a “deal killer” when people are difficult to work with, but it can definitely enhance the experience when you're working with people who are nice to work with. So before you jump into any market with both feet, take some time and get to know who you'll have to work with!
Is this a “sellable” market where people want to live and do business?
When it comes time to sell your properties (which is how you ultimately make money), this is a BIG question that you'll want to have answered.
How desirable is this area for people to live, work and play in? Is this a place where people want to be? Here are some things to research ahead of time:
- Do the local neighborhoods have the benefit of a good school system?
- Does the area have high or low unemployment?
- What is the crime rate in this area?
- What is the population in this area (is it trending upwards or downwards)?
- What is the median household income in this area?
- What is the median house or condo value in this area?
This information can give you a lot of insight as to whether your market is a “sellable” place where people want to live and do business.
If you're not sure where to find this information – City-Data.com is an invaluable resource that can help you answer almost all of these questions (I use it almost every day in the banking business). It's probably the most legitimate and concrete source of information that you'll ever get for free.
Finding the right market for your real estate business is more of an art than a science. Most markets will have some, but not all of the qualities you'll want to see in your ideal environment.
Personally, I've found that it only takes is a few reliable markets to run a solid real estate investing operation. It took me a couple of years to establish where the most fertile ground was for buying and selling properties, but once I knew where to go, it took a lot of the “guesswork” out of my process.
Once you understand how things work, where to find the right information and how to get what you need in your county of choice – everything gets easier. The thing to remember is – you'll only get there if you put in the legwork and familiarize yourself with several counties. This is the only way to understand what a good market looks like and what a bad market looks like. Once you can see the contrast between the two – you'll know exactly what to look for in all of your future business endeavors.