What Makes a Good Investment City?
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At the beginning of the year, I wrote a blog post recapping a proven roadmap for successful real estate investing. On that roadmap, I emphasized that the most important investment decision you will make is the city where you invest.
So, what makes a good investment city? In other words, where should you invest?
A good investment city enables financial freedom. Financial freedom isn’t a fixed dollar amount since inflation constantly erodes purchasing power. Three key factors define a good investment city:
- Significant and sustained population growth
- Rapid and sustained appreciation
- An experienced investment team
Before I explain why these factors are essential for a good investment city, I want to explain the difference between observation and analysis.
Observation vs. Analysis
Observation often provides more accurate insights than analysis. For example, if you’re tasked with determining which of two countries is more desirable to live in, analyzing data may not reveal what people value most. However, observing migration patterns—where people are moving—gives a clear answer.
Similarly, when evaluating a city for investment, observing trends like population growth and property appreciation is more reliable than relying solely on analysis.
Let me explain each of these three location selection factors in detail.
1. Significant and Sustained Population Growth
If there is significant and sustained population growth, you can infer a lot about conditions in a city.
- Job creation - Most people move to a city for employment. So, if many people are moving to a city, you know there are abundant jobs.
- Acceptable housing costs - People believe they can earn enough to afford adequate housing.
- Reasonable cost of living - People believe that the cost of living is commensurate with the wages they will earn.
I used observation, not analytics, as the basis for the three investment city factors.
2. Rapid and Sustained Appreciation
Property prices are driven by supply and demand. When demand outpaces supply, prices rise. However, population growth alone doesn’t guarantee price increases. Cities with ample room for expansion may see slower price growth as new properties are built on the outskirts, drawing buyers away from existing homes. Only cities with sustained population growth and limited room for expansion (such as Las Vegas) have a high probability of strong appreciation.
Rapid and sustained appreciation offers two key benefits:
- Rent growth: Rents are driven by prices. When prices are high, fewer people can afford to buy a home and are forced to rent. The increased demand for rental properties causes rents to rise. If there is significant and sustained population growth, rents outpace inflation.
- Portfolio growth: Rapid and sustained appreciation allows you to tap into accumulated equity through cash-out refinancing, enabling you to acquire more properties with minimal additional capital investment.
Rent Growth and Financial Independence
Why is rent growth above the inflation rate essential for lifelong financial independence? I will explain with two examples. The first is for a city where rent growth is less than the inflation rate.
Imagine you purchase a rental property with an initial rent of $2,000/month and expenses of $1,500/month. If rents increase at 1.5% annually while inflation averages 5%, how much purchasing power (in today's dollars) will you have after expenses?
- Today: $2,000 - $1,500 = $500/month profit
- 10 years: Approx. $356/month (adjusted for inflation)
- 15 years: Approx. $301/month
- 20 years: Approx. $254/month
Because rent growth did not keep up with inflation, the eroding purchasing power will force you to return to work.
The second example is for a city where rent growth exceeds the inflation rate.
Now, consider rents increasing by 8% annually and inflation is 5%:
- Today: $2,000 - $1,500 = $500/month profit
- 10 years: Approx. $663/month (adjusted for inflation)
- 15 years: Approx. $763/month
- 20 years: Approx. $878/month
Here, rent growth outpaces inflation, increasing your purchasing power and enabling you to achieve lifelong financial freedom.
3. An Experienced Investment Team
Everything you learn from classes, seminars, podcasts, books, and websites is general knowledge. You will buy a specific property in a specific location, subject to local rules and regulations. You will also need local expertise and resources. The only source for what you need is an experienced investment team.
An experienced investment team can assist with:
- Tenant segment selection
- Property selection and validation
- Inspections, due diligence, and renovations
- Ongoing property management
Successfully completing each of these tasks requires extensive skills, knowledge, and experience. Click here for more on how to find and qualify an investment team.
If you can’t find a capable local team, consider investing elsewhere.
Summary
The city you invest in determines whether you can achieve and maintain financial freedom. By focusing on population growth, property appreciation, and partnering with an experienced investment team, you set yourself up for long-term success.
