People constantly ask me how to choose a market to invest in and what factors must be considered before investing This is a very important question as real estate is very much market specific. It is crucial to analyze the market you are interested in. Job, population growth expectations, market affordability, economic volatility, and market stability are all vital data that you should consider before investing. Neglecting to do so could put you in a riskier position than intended, even if you do your homework correctly on the investment itself. Investing strategically in specific markets is something that is imperative to do if you plan on being a successful real estate investor. Before investing in Memphis, we analyzed multiple major markets across the U.S. and opted for Memphis because it has some of the best economic indicators. Here are just a few items that we considered before investing there.
Rent to price ratio– Memphis real estate has one of the best rent to price ratio in the nation. On a $100,000 property the rent will come in right around $1,000 which is a 1% rent to price ratio. In California for example, because the value of the properties are over inflated, the rent to price ratio is significantly lower.
This means that you make a higher return on your money thanks to the rental income by investing in Memphis.
Affordability index– Memphis real estate is actually cheaper to purchase than to rent. This means you can buy a house and the mortgage payment will be less than the comparable rents on that same home which allows you to have positive cash flow every month.
Lack of volatility– Over the last 20 years Memphis has had only a few quarters in which property values declined, and they declined at a very low rate. For example in 2007 – 2009 when the entire U.S. real estate market crashed the values of the properties declined on averages 3% – 4% while many markets around the U.S. when down 50% or more. This is essential, especially in times of economic volatility like in the current environment. By investing in Memphis you can obtain a high cash flow return while being in an economically stable real estate market.
Cheaper to buy than build– Right now due to the large amount of foreclosures and discounted properties across the U.S., you can purchase a home for a cheaper price than you can build a home. This puts somewhat of a floor on what home prices can decline to, hedging your bet against devaluation if it was to occur.
Job growth– There have been numerous reports about the job growth expectation in the future for Memphis. FedEx has their headquarters there and many companies are moving to Memphis to have faster turnaround time on their products and less shipping costs. Companies like Mitsubishi and Electrolux are opening manufacturing plants in Memphis, while most of the manufacturing plants are moving to Mexico or overseas. The infusion of those companies is bringing a large amount of jobs to Memphis and a positive outlook on the real estate market moving forward. The Memphis government actually gave those companies tax incentives in order to bring their facilities to Memphis. It is encouraging to see a pro-job government in place that is actually doing something to bring jobs to the market.
Tenant landlord laws– If you are investing for passive cash flow rental income, it is important to know the tenant landlord laws in the state you are investing in. In California for example, the tenant landlord laws tend to favor the tenant. Therefore a tenant can stay in your property for 6 months without paying. In Tennessee the tenant landlord laws favor the landlords making it easier to evict a bad tenant.
These are just some of the factors we considered before investing in Memphis. No matter what market you are investing in, do your due diligence on the market before investing. It could be the difference between having a long term positive cash flowing investment or an investment that cannot weather the storm.