Real estate investing can be a tough business. More than one investor has learned the hard way that buying real estate with appreciation foremost in mind is not the way to go. Either you lose money or you don’t make as much as you would have made if you followed the long-term buy-and-hold approach most investors today employ.
In other words, the image of investors as a legion of flippers is wrong. If it were true, most investors would have gone bust years ago. Instead, most investors end up being landlords for years on end, counting their cash as rents roll in.
However, the buy-and-hold approach is not foolproof, either. The hard part is projecting what local rental demand will be five or 10 years in the future. For example, an economic downturn can produce high local unemployment. If many workers are renting your properties and leave for greener pastures, you’ll be left without tenants. When your return on investment is based upon keeping the home continuously rented for a long time, a few vacant months can be disastrous.
Many investors attempt to anticipate tenant demand for single family rentals (SFRs) far into the future. Some services, like Weiss Residential Research and Local Market Monitor, have crunched the numbers on past demand in an attempt to forecast future demand.
Ingo Winzer, founder of Local Market Monitor and one of the first economists to raise alarms about the housing bubble in 2005, notes that some markets are overpriced relative to local income.
In these markets—many of which are in California—the home price rebound has pushed prices above the equilibrium home price (EHP), which should be a caution sign for investors seeking to make money in a quick re-sale.
The EHP is an indicator of what the average home price should be based on current economic data versus what the average home price actually is. Average prices above the EHP means prices may be inflated—and there’s a risk those prices could fall.
Winzer says that markets with a positive EHP can still provide strong rental returns for investors because many of those markets have strong population and job growth—factors that generally cause rents to increase. However, a low-risk market isn’t a slam-dunk, either.
“Not all low risk markets are equal,” Winzer says. “When you factor in job growth and unemployment, it’s clear that some markets like Texas have better long-term potential than a market like Florida.”
Below are 20 investment markets and their corresponding risk scores from Local Market Monitor through the second quarter of 2013. Risk is based on population growth, job growth, unemployment, changes in home prices, and whether the market is overpriced. These ratings can help investors choose what risk level they prefer.
When choosing the market in which you will invest, keep in mind your personal goals. Do you want to make a boatload of money, or do you want to make a little less but take less of a risk? The answer will help you with your decision.
Steve Cook is executive vice president of Reecon Advisors and covers government and industry news for the Reecon Advisory Report. He is a member of the National Press Club, the Public Relations Society of America, and the National Association of Real Estate Editors, where he served as second vice president. Twice he has been named one of the 100 most influential people in real estate. In addition to serving as managing editor of the Report, Cook provides public relations consulting services to real estate companies, financial services companies, and trade associations, including some of the leading companies in online residential real estate.