Why do rentals perform better in some markets that others?
I follow the real estate investment model of invest where it makes the most sense and live where you want to live.
In today’s world, there is no reason to only invest in real estate in the city or region you live in.
I have developed my own data analysis to determine what cities have the best rental markets to invest in.
For the last two years, I have been studying with experienced rental property investors to determine how they determine what markets to target for rental property investments.
On July 15, I wrote about the Demand Drivers of Residential Housing. In that post, I described briefly several factors that look at to determine the best cities to invest in rental properties. History has shown that these factors indicate cities where rental properties will perform better than the national average.
In that post, I described the need to categorize cities into large, medium and small categories. Large cities will not grow as fast as the fastest medium and small size cities. So, I only compare cities withing these categories.
I also described why certain states are not friendly to landlords. Based on that cities in certain states are automatically eliminated based on the legal environment of the state.
Today, I wanted to explain in more detail how I pull together the demographic data I gather for each city.
From my July 15 blog post, I listed three demographic factors that I gather for each city and use to rank cities. Those three are job growth, population growth and income growth.
Below I will describe exactly where I get the data and how I use it to rank the cities.
First, Job Growth
Why is job growth important?
Job growth really drives everything. If people don’t have jobs, they will struggle to afford to pay rent or make mortgage payments if they own their house. When companies create new jobs in an area or move to a new area, it creates an environment where people can afford to live. This also increases demand for people to move from other areas where there is no job growth or the number of jobs are shrinking to areas where the number of jobs are growing.
Where do I get this data from?
There is a website called the Department of Numbers. Great name, eh! It has job data by city from the Bureau of Labor Statistics. The URL is https://www.deptofnumbers.com/employment/metros/. The website looks like this.
This page includes this job data for over 300 cities around the country. As you can see it is updated monthly. The first column shows the number of jobs added in that city with the second column being the percentage increase. The third and fourth columns show the one year change.
How do I use this data?
I have a spreadsheet that I update monthly and I keep the historical data. Based on the number change and the percent change, you can back into the actual job count. For exemple, the clipped image above shows an increase of 11,600 jobs in June for Norwich, CT, which was an 11.98% increase. Through some simple math, we can calculate that there were approximately 96,828 jobs in May and 108,428 jobs in June. In order to smooth the numbers a little, I look at the average number of jobs in a city over the most recent three months vs the average for the same three months one year earlier.
Then, within each city size category, I calculate the cities into quartiles based on their relative job growth rates.
What if I don’t have the historical data?
If you don’t have the numbers from months in prior years, there is way to get them. There is a website called The Wayback Machine. It’s an archive of the internet. You can find it by searching Google for “The Wayback Machine.” When you go to the website, it has an input box where you paste the URL you want to view. When you go there, The Wayback Machine will give you links to historical snapshots of the website saved by The Wayback Machine. The Wayback Machine is basically an historical archive of the internet.
Second, Population Growth
Why is population growth important?
Job growth should lead to migration of people to the cities with the highest number of jobs. Population growth numbers should confirm this.
Where do I get population growth from?
There is a wikipedia page with population by city for the years 2010 and 2019. The webpage I use is https://en.wikipedia.org/wiki/List_of_United_States_cities_by_population.
How do I use this data?
I add the population of both years to my spreadsheet by city. I calculate the total percentage population change from 2010 to 2019.
Then, within each city size category, I calculate the cities into quartiles based on their relative job growth rates.
Third, Income Growth
Why is income growth important?
Income is what allows renters to pay the rent. If income is growing, then renters will slowly move up to improve their living environment or will be able to handle increased rent that could be caused by increased demand for rental property in a region.
I track median household income rather than median individual income, or per capita income. We need to understand the level of income in “each household” because that’s what supports the ability to pay rent.
Where do I get income growth data from?
I get median household income by city from a website called http://www.city-data.com/. Here is a snapshot of how the website looks for Birmingham, AL (just an example).
I circled in red the numbers we are interested in. You can see the median household income for 2017 was $33,553 and in 2000 was $26,735.
How do I use this data?
I calculate the total percentage change from 2000 to 2017. In the example above, the change is an increase of 25.5%.
Then, within each city size category, I calculate the cities into quartiles based on their relative job growth rates.
Demographic Data Summary
I calculate a number to rank the cities as follows. As I stated above, I calculate which quartile each city falls into for each of the three demographic data points above. Then I calculate an average of each of the three quartile figures.
Here is an example using Austin, TX.
Based on job growth, I calculated that Austin is in the 2nd quartile of growth.
Based on population growth, I calculated that Austin is in the 1st quartile of growth.
Based on income growth, I calculated that Austin is in the 2nd quartile of growth.
Averaging all three together, I get a ranking numbero 1.67.
Within each city-size group, I then rank the cities by my average quartiles. This sort is after I have screened out cities that are in states not friendly to landlords.
This helps me start to see where I might be interested in investing in rental properties.
There are more factors that I look at to further separate cities and I will describe why and how I use that data in some future posts.
How do you determine what cities are good for investing in rental properties?
Please comment below or email me with your thoughts.