Myth: You need to buy investment real estate in the same city where you live.
Reality: You’re free to buy investment real estate anywhere 👏🏽 you 👏🏽 damn 👏🏽 well 👏🏽 please.
When you choose a location for your rental property, you’re looking at two critical factors: returns and affordability.
Two metrics that express this calculation include:
#1: Price/Rent Ratio: The ratio of home prices to annualized gross rent. I recommend calculating this for any given neighborhood or zip code that you’re interested in.
The lower the P/R ratio, the better for landlords. The higher the ratio, the better for tenants.
For example, the 12345 zip code might have a median home price of $350,000 and median annualized rent of $30,000, giving it a P/R ratio of 11.6.
Meanwhile, the 67890 zip code has a median home price of $275,000 and median annualized rent of $18,000, giving it a P/R ratio of 15.2.
This tells us that the 12345 zip code has better returns — it’s a better area to buy — despite the fact that it’s more expensive than the 67890 zip code.
You can also use this ratio to compare individual properties against one another, or to decide rent vs. buy for your personal residence.)
To calculate this for a particular residence, divide the price of that specific property by its rent. My apartment in Manhattan, New York, for example, has a P/R ratio of 28, which tells me it’s much, much better to be a renter.
The P/R ratio shows you where you’ll find the best (and worst) returns as a landlord. Yay for Youngstown, Ohio; boo for Manhattan, NYC.
It measures returns, but not affordability. That leads us to our next metric:
#2: Debt-to-Income Ratio: This is a measure of how much money you’ll put towards debts, as a total percentage of your income.
Lenders look at two versions of this, your “front-end DTI” — the mortgage (principal, interest, taxes and insurance), plus HOA if applicable, as a percentage of your income — and your “back-end DTI” — all debt payments combined as a proportion of your income.
Your DTI is an important factor in how much a lender is willing to give you. And that will be a marker for affordability — where are you able to buy? And what are you able to buy: condos? Single-family homes? Duplex? Fourplex?
One benefit to real estate investing is that a proportion of the rental income that you collect will count as your income (because, well, it IS your income).
In the world of residential investing, lenders count the income you’ve collected, not future income you hypothetically project you’ll collect. (They do the latter in commercial investing.) As your portfolio grows, the income from past investment properties will boost the denominator of your DTI, helping to qualify you to acquire more properties.
But for today — your DTI, plus the downpayment you’re able to save, will determine the price point of rental property that you can hunt for, assuming you use institutional lending.
(We get into much more detail inside the course.)
Once you know how to hunt for both returns and affordability, you can start to analyze cities.
Indianapolis? Kansas City? Cincinnati? Youngstown? Texarkana? Where do you want to buy?
My Process to Find Places to Invest
On January 1st, 2021, I had never set foot in Indianapolis.
By March 2021, I bought a duplex in Indianapolis.
What’s my process for finding a city in which to invest? I’ll describe it below. You can follow along with this nifty printable worksheet.
Step 1: Make a list of “city options”
Create a list of cities with which you have some sort of familiarity.
Maybe your best friend, sibling or uncle/aunt lives there; you typically visit twice a year. Maybe your spouse grew up there. Maybe you used to travel there for work. Maybe you were an AmeriCorps volunteer there.
Brainstorm a list of cities with which you have any degree of familiarity, anything greater than zero.
Step 1a. Write down a list of cities in which you (or your investing partner, such as your spouse) have either personally lived, or are familiar with. By “familiar with,” I mean something like:
- “My two best friends live there, I’ve been there dozens of times, I’ve Airbnb-ed a place there for a month; I know it pretty well.”
- “I travel there on business a lot and have gotten to know it well over the years”
Step 1b. Make a list of cities you don’t personally know well, but where someone you really trust, like a sibling or close friend, lives.
Step 1c. Make a list of cities you don’t know much about, but that you think are likely to have a lower cost of living than yours, and you’d love to have an excuse to visit occasionally.
Step 2: Narrow down the lists
At this point, we have three lists of options, arranged in descending order of priority.
The best-case scenario is that one of the cities in the list from Step 1a will work out.
For each of the cities in your lists, use Zillow to compare the “sold price” of recently sold homes with asking prices for rent on similar properties in the area.
Remember to check for multi-units — it’s often easier to find duplexes selling for $300K, with each side renting for $1,400/month (total of $2,800/mo).
Cross-reference on Google Maps to find pockets of the map where there are clusters of properties with attractive price-to-rent ratios.
You’ll create a narrower list of cities (and pockets within those cities) that have landlord-friendly price-to-rent ratios and warrant further analysis. 🎉
Want an example?: Follow along with me as I go through this process for a city I knew nothing about, where I bought a duplex in March 2021.
Note: This video is just one part of the YFRP “Finding” module, so I hope you don’t watch this one little video and and think it encompasses everything I teach in YFRP about finding a good rental property. 😂
Step 3: Dig deeper
Once you have this narrowed-down list of cities, the next step is to evaluate and decide which cities meet your personal preferences for neighborhood classification.
(I go through my analysis process in the video above.)
The first module of YFRP is dedicated to giving you the knowledge, tools, and formulae to properly analyze properties so that you can know if they’re a good deal before putting six figures on the line. 🙂
Maybe you’re thinking–
“But Paula, wait! I did this exercise and none of my cities worked!”
Don’t worry, it happens.
In fact, it happened to me.
None of my cities from my own “Step 1a” panned out. I didn’t have any familiarity with any place where I’d want to invest.
So I moved further down the list. I began analyzing my “Step 1b” and “Step 1c” neighborhoods.
That’s how I bought a duplex in March 2021 in a city that I knew absolutely nothing about (Indianapolis).
I’d never set foot in Indianapolis prior to 2021.
Never visited it.
Didn’t know anyone who lived there.
Didn’t know anything about it.
(Okay, technically I knew that people from Indiana were called “Hoosiers,” but I had no idea what a Hoosier is. TBH, I still don’t.)
Prior to 2021, I had no relationship with the city whatsoever, but I’d heard a lot of excited chatter about it among other investors, so I decided to check it out.
When I did, I could see why they were excited; there were great deals to be found there!
The main reason it’s helpful to have a connection with a city is because it’s important to have “boots on the ground knowledge” about a city before you invest.
Buuuuut there are ways to get that knowledge without actually living in the city.
For example, you can talk with property managers or real estate agents who specialize in working with investors in the city; they’ll know about the neighborhoods and be able to answer those “boots on the ground” type questions.
Better yet —
If you’re finding yourself without a list of cities that have investor-friendly price-to-rent ratios, here are a strategy you can try…
Draw concentric circles — if you live in a high-cost-of-living area, you can look on the map and imagine yourself drawing concentric circles outward from your home city. Draw these until you hit cities that have a lower cost of living, and run these through the evaluation steps above.
Along this journey:
You’ll need the courage to consider leaving the comfort zone of investing in your home city.
We’re here to teach, encourage and support you.