041: How to Determine What a Good Market is For Rental Properties

On this episode of the InvestFourMore Podcast, I interview myself. I just took a trip to Florida to explore rental property locations and have a nice vacation with my family. I learned a lot about the market, codes, insurance, neighborhoods and towns, while in Florida. I saw quite a few houses, met with multiple agents and I get a really good idea of what it would be like to buy rentals in that area. I think I have decided that the Florida market is much better for rental properties, than the Colorado market and I am going to move forward with my plan to invest in rentals in a new market.

Why am I thinking of investing in a new market?

I have been over my reasons for investing in a new market on other podcasts and in articles. The main reason I am looking to invest in other markets is our prices are going through the roof in Colorado. I have 15 rentals in Colorado and I love the fact their values have increased, but rents have not increased as much as values have. While I am making more on each property now, than when I bought them, I have a lot of equity in my properties that is not making a very good return. While I am making great returns based on the cash I have invested into my rentals, I am not making that much money based on the equity I have.

The other problem I am running into, is I can not find great cash flowing rentals in my area anymore. Prices have increased from $80,000 to $130,000 to $150,000 to $220,000 for the rentals I am used to buying. Those prices are considering I am getting a good deal and buying below market. Not only are rents not rising as fast as prices are, but it takes much more cash to buy more expensive properties, which reduces my cash on cash returns.

I have still have a goal to purchase 100 rental properties by 2023, so I have to do something different.

What do you have to do to choose a market to invest in?

Picking a new market to invest in is not easy. There are many towns and areas of the country that have decent cash flow and decent prices, but they all different economies. Here are the basic things I looked at to choose a market.

• Price point: I want to invest in an area that has decent rental properties for around $100,000. That was my sweet spot in Colorado and worked awesome for me. If you buy more expensive rentals it is tougher to cash flow and takes more money. If you buy cheaper rentals they may have more vacancies, maintenance and can be harder to finance.
• Rent to value ratios: It makes no sense to buy rental properties in a new market, if they do not cash flow. I want to make sure the rentals I buy, at least meet the 1 percent rule (buy for $100,000 and rent for $1,000). I would prefer the rents are higher than the 1 percent rule, but that would be my minimum requirement.
• Price trends: I would like to buy when the market is down and not at its peak. It is hard to predict what markets will do, but history can tell me if prices were much lower or higher in the past.
• Population trends: I want to buy in places with increasing populations, and locations that are not huge so I can figure the market out easier.
• Economy: I want to invest in places with a diversified economy that are not dependent on one or two industries.
• Fun place to go: The more I want to go to a place, the more likely it is I will go there. I think you have to visit places you want to invest in, if you want to get the best returns.
• Who do I know? I think it is wise to start looking at locations where you know people. They can give you insight into markets and neighborhoods.

After looking at all of factors, I decided Florida was a good place to explore.

What did I learn while exploring rentals in Florida?

I learned a lot about the market in Florida. I took my time choosing a location to explore, finding areas that had good prices, as well as price to rent ratios. There were many things I learned about the market in Florida.

• Utilities: Hooking up to water is much cheaper in Florida than Colorado.
• Construction: CBS homes are preferred over wood frame homes.
• Market: The market is definitely improving in Florida. There is not much inventory, not many homes for rent and prices are increasing in the areas I looked at, but prices are still very low.
• Agents: I met a few great agents in the area and some lenders as well.
• Termites: There are many things to watch out for in Florida that I don’t worry about in Colorado. Termites are very rare in Colorado, but termite control in Miami, FL is another matter. Hurricanes can cause damage and higher insurance, which we tend not to have in Colorado, but they don’t have damaging hail as much as Colorado.

For more detail on all of this, make sure you listen to the podcast.

What is my real estate investing plan moving forward?

After visiting Florida, seeing the market and having a nice vacation with my family, I have decided it is a good market to invest in. I have two properties in Colorado, that are vacant or will be vacant soon that I plan to sell and use a 1031 exchange to buy multiple rentals in Florida. I am also moving forward with refinancing 7 of my rentals with a national lender to 30 year fixed rate mortgages, which will give me about $250,000 cash out. I can use that money to buy more rentals in Florida. If you want to get more information on 30 year fixed rate mortgages from national lenders, check out the article below.