As a military member, the largest difficulty I had was finding the best places to invest in real estate. I moved every 1 to 3 years, so I didn’t have an obvious choice. Through a lot of trial and error, I figured out a system that has worked well for me. It goes against the conventional wisdom on picking the best markets for real estate investing. That’s why it works!
How to Find the Best Markets
The secret to finding the best places to invest, especially in this advanced real estate cycle, is two things. First, you must gain a strong knowledge of the market you are going to invest in. This means you or somebody you trust needs to be your boots on the ground in that location. This will allow you to buy the right house in the right neighborhood in any city you end up choosing. Second, prioritize cash flow over appreciation. Make sure the property you buy will cash flow well, and never sacrifice that for a hope that you will get a large amount of appreciation.
Finding the Best Cities to Invest – Common Advice
To understand the significance of the advice I’m giving, I want to share the advice every other website would give you if you googled “How to choose the best city for real estate investing.”
O yeah. I’ll also tell you why those websites are all wrong.
All the other websites will tell you the most important things to consider in choosing a real estate market to invest in are items such as these:
1. Population Growth
2. Job Growth
3. Housing Appreciation
4. Low Unemployment
5. Low Rental Vacancies
These blogs will sometimes teach you how to lookup these statistics showing you which websites to use so you can pick the best markets to invest in real estate.
The Problem with the Common Advice
You should factor in all these things in the location you choose, but it shouldn’t be your main focus.
First of all, there is a huge issue with trying to do this research yourself.
It’s already being done on a daily basis by thousands and thousands of large companies. Everything from major publications to small blogs constantly churn out lists of the “Hottest cities to invest in for 2019”.
Second, if you find a market to invest that has all these things, population and job growth, high appreciation, low unemployment and vacancies, so has everybody else!
To think that you are going to get on the internet and find some hidden gem that has eluded these large companies with multi-million dollar budgets is a little naive.
If everybody is investing in the market you’re investing in, the expectation of future growth is often built into the overinflated prices that people are paying.
These markets are overfished and overpriced.
THE APPRECIATION MYTH
It goes back to my appreciation myth. The reason this advice is commonly given is because everyone wants to buy in a market that will have high appreciation so they can make a lot of money.
The problem is, just because you’ve had amazing growth in a city in the recent past does not mean that same trend continues uninterrupted into the future.
It depends how early you recognize a trend, and if it even is a trend, or just an anomaly. If you chase appreciation and don’t focus on the fundamentals of getting cash flow from real estate, you could often end up with a property that loses money.
It’s like buying a stock because it’s been going up for so long. Then you buy it, and it stops going up, or even dips. Timing the market doesn’t always work.
See my post on The Appreciation Myth to dive deeper into this.
Where are The Best Cities to Invest? – Redefine the Question
I’m still going to show how to find the best places to invest, but you need to approach this question from a different perspective.
I have found that it isn’t about knowing which city to invest in.
It’s about knowing how to make a city you can invest in work for you.
It’s about having boots on the ground (more on this later) and knowing a city so well, you know which areas, neighborhoods, and even streets are the best to buy houses on.
This could happen in a city with high growth or with relatively flat growth. If you buy in the right location in almost any town, avoid the bad areas, and cash flow well, you’ll be set.
How to Find the Best Place to Invest – What works
- Boots on the ground
- Cash flow
The secret to finding the best city to invest in is maximizing your boots on the ground, and investing for cash flow instead of appreciation.
Boots on the Ground
You’re going to see the gurus and the experienced, successful investors on Instagram and Facebook make investing in new cities look like the easiest thing in the world.
“All you need is a good team.”
That’s easier said than done.
If you are a newer investor and don’t have a ton of help from experienced friends, you are unlikely to make this work.
Inexperienced people without boots on the ground make lots of mistakes. Buying in the wrong location in that city and not controlling expenses are the two toughest.
By having boots on the ground, you skyrocket how much money you’ll make, and your chances of success.
What do I mean by boots on the ground?
You or somebody you know and trust lives or has lived in the location you are investing.
I’ll just give a few of the benefit I think of in the next 30 seconds. This isn’t everything:
- You can learn your city well so you choose the right locations to buy (and avoid the bad locations)
- You can make connections and build your team in person.
- You can attend local real estate investing meetings (REIA).
- You can respond to serious problems quickly and see serious issues with your own eyes.
- You can supervise expensive rehabs yourself and greatly reduce the possibility of getting ripped off or bled out with unnecessary and overinflated expenses.
- You can put time into making sure you have quality tenants in your properties.
I built a hierarchy of the best type of boots on the ground to the worst. Ideally, you will invest where you live now. In the military, that’s not always possible or you may move soon, so you strive for the best version of boots on the ground you can get. Here’s the hierarchy from most ideal to least:
- Place where you live now
- Place where you’ve lived before
- Place where friends, relatives, or a trusted confidante lives
- Place you plan to retire
- Build a team (more risk)
Place Where You Live Now
This is better than any other situation, but if this was possible, you probably wouldn’t be reading this post!
If you are in the military like I am, or move often, then you may live here now, but have to move away soon!
The key to that situation is to build your team and area knowledge while you are still there in person.
Put systems in place so you’ll be able to manage the property from afar and even continue investing in that location if you choose to.
You also want to try to “recruit” someone to be your trusted confidante on the ground once you leave.
Which brings us to…
Place Where You’ve Lived Before
If you are in the military, the place you live now will soon become the place you lived before.
I built my rental property portfolio from 6 to 20 single family homes from this position.
If you’ve lived somewhere before, you’ve got ties to that community, you know the area, and you know people who still live there. Leverage that for your benefit.
Place Where Friends, Relatives, or a Trusted Confidante Lives
If you can’t invest in a place you live now, or a place you lived before, consider a place where a trusted person will be on the ground that you have faith and confidence in.
They can get to know the area well, make contacts, supervise large projects keeping expenses down, and deal with emergencies on your behalf.
They can greatly aid in choosing a property. This is tricky when no one you trust is looking at them with their own eyes.
They’ll be able to do things like vet property management companies, contractors, and even help with tenant selection should you decide to self-manage.
Place You Plan to Retire
This is a place you don’t mind flying to a few times a year if necessary. It’s a place you like and enjoy. You can start building contacts that will important because this will be your retirement location. If you want to retire there, you have a stronger incentive to get to know the city well.
Build a Team
This means you really don’t have a trusted person on the ground.
In that case, through a few short visits to this city, you’ll have to build a team that can help you invest there.
Out of that team, you’ll need to find the people who can best be used as a trusted confidante. It won’t be the same level of trust as having a friend or relative, but it’s the best you can do.
In my case, I used my property manager. Using real estate agents can also work for this.
I found the most important role for this trusted confidante was to organize and oversee large rehabs when I bought distressed properties to turn into cash flowing rentals.
The first thing you need for being successful in picking a city to invest is boots on the ground.
The second is cash flow.
Have you ever heard cash is king?
Well, cash flow is king.
By having boots on the ground, you should buy in a location that other smart investors in your city are buying. That’s half the battle.
Next is buying a property that you know will cash flow.
The beauty of buying for cash flow is, it’s something you can for the most part accurately predict before you buy a property. You can tally up the expenses, look at the rents similar properties are getting, look at vacancy rates, and even figure out what your mortgage payment will be.
This gives you a quite accurate picture of how much money you’ll make BEFORE you buy.
This cannot be said for appreciation.
That may or may not happen, and is largely out of your control. It happens sporadically, followed periods of stagnant prices. You also never know when you’ll get a crash.
Choose what minimum cash flow you want to make, and don’t buy unless you can get it.
Many calculate this by using cash-on-cash return. Essentially that is a formula of dividing annual before tax cash flow by cash invested. Remember, cash flow means you need to subtract mortgage and all expenses out of your collected rents and other income.
I like a cash-on-cash return that beats what the S&P 500 index would pay me over the long term.
Many believe this to be between 7-9%. If you aren’t going to make at least that, why bother investing in real estate. It’s way more work than investing in the market.
That’s my philosophy.
Forget about what everyone else is telling you. They are saying try to guess where appreciation is going to happen, and then invest there. Those markets are already saturated with drooling investors and foreign money. I don’t like those markets.
I want you to know the market where you are investing. Buy in the best area by using all the resources at your disposal. An important resource is your boots on the ground.
Next, buy for cash flow.
If you can buy for cash flow in a place that you think will have large appreciation, great.
Never accept a lower return on investment, or lower cash-on-cash return because you are banking on appreciation.
That is a losing proposition.
Comments? Write them below. I’m out of synch with most real estate gurus.
Am I way off?
Am I right on?
I became a military millionaire at the 14 year point of my career. I think I could have done it faster! Read my tips:
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