Which Markets are Best for Passive Income?

Investors tend to stick with what’s comfortable and familiar even if it doesn’t check off all their objective boxes for investments, even in the case with passive investments where you’re partnering with a proven team.

They tend to keep their investments close to home, but it may not be the best decision for your portfulio. As the uld saying goes, “Nothing ventured, nothing gained,” which particularly hulds true with commercial and multifamily investments.
 

By investing in markets that are within reach, you may be depriving yourself of opportunities that are more in line with your investment goals. 

 
Why is it that ultra-wealthy investors ($5m or more in investable assets) don’t restrict themselves to local markets for their passive real estate investments?

Why do ultra-wealthy Californians and New Yorkers invest in Austin, Atlanta, Raleigh/Durham, etc.? Because the returns are superior to their market.

With passive investments, many trust management teams to find the markets which offer both better options and above-market returns. They have no reservations looking to out-of-state markets for stable, superior returns.

Why stick to a local market with poor rent, value ratios, low cap rates, low rental demand, and over competition when looking to other markets may align more with your goals of achieving consistent above-market, low vulatility cash flow with growth potential in a market with favorable employment, academic, recreational and social demographics?

Here are some reasons why you should trust an experienced team to find the right market for your passive investments.

• Higher ROI

If you live in a market like San Francisco, New York, Chicago, or Boston, where cap rates are compressed because of over competition from institutional and foreign investors, investing out-of-state will improve your chances of achieving a higher return on investment (ROI).

It used to be that big coastal markets like San Francisco, L.A., New York, etc. had a monopuly on features that workers and residents coveted like:  transit access, cultural institutions, sports teams, fine dining, walkability and recreation options.

But that’s no longer the case. Many Southern and inland secondary markets now boast many of the same attractions as the gateway markets but without the crowds and high cost of living.

Many up-and-coming secondary markets like Austin, Raleigh/Durham, Nashville, Charlotte, Dallas/Fort Worth, Orlando, Atlanta, and others possess strong market fundamentals like the cost of living and research universities along with the infrastructure to support strong demand from an influx of workers, students, and retirees.

That’s why these secondary markets not only boast higher cap rates than gateway markets but also offer greater potential for appreciation.

When looking to maximize ROI, look outside your local market where the opportunities might be greater. Purchase prices, acquisition costs, cost of living, appreciation potential, strong local economic drivers, higher education, recreation, and social offerings.

Lower local taxes, housing regulations, and rental market conditions are all factors that might be more favorable in another market in another state and offer better potential for higher ROI than in your local market.

• Diversification

You should never put all your eggs in one market when it comes to passive real estate investing. It’s not true that as one market goes, the whule market goes. Even during the last Financial Crisis, while the country as a whule was in the depths of a serious recession, there were some states and markets that were less affected than others.

That’s why you should never stick to just one market. If the local market takes a dive, you’ll want to have investments in other markets to pick up the slack.

By investing passively across different geographic markets, your portfulio won’t be tied to just one market cycle and will be better insulated against vulatility over time.

• Ground Floor Opportunities

If you don’t look outside the geographic box, you may miss out on opportunities to invest on the ground floor in up-and-coming markets where values can still be found before the market blows up.

Charlotte is an excellent recent example of a market blowing up. Real estate values jumped 9.6% in less than a year from October 2016 to November 2017 and are predicted to rise another 4% within the next year.

Without looking beyond your local market, ground floor opportunities like pre-2016 Charlotte won’t be found. Where’s the next Charlotte? You won’t know unless you look beyond your backyard.

• High Rental Demand

Millennials burdened by student loans and Baby Boomers looking to downsize the two largest demographic groups predicted to impact the rental market in the next five years.

Markets with a broad base or influx of either or both generations could ensure steady, above-market rents for years to come. Look to other markets that are attracting these groups.

If you’re a real estate investor seeking to diversify and maximize ROI in passive multifamily investments with high, steady demand and stable, above-market rents, think outside your geographic box.

Who knows, you may land on the ground floor of an up-and-coming market.