Investment Locations - Do Not Forget Jobs

The profitability of any investment property is totally dependent upon the tenants remaining employed at a similar level of income. Despite this critical requirement, few investors take the time to consider the long term viability of the major tenant pool employers. In this article I will discuss the investment location evaluation process I would use and show where employer viability fits in the process.

So we start on the same page, I believe any investment property must meet the following criteria:

While the above sounds simple to meet, in reality it is not. Very few locations will meet all three criteria. Plus, the location must continue to meet all three criteria into the foreseeable future. Below are a few of the factors I considered when I chose to move to Las Vegas (from NYC) to sell real estate:

While there is no perfect location, I found Las Vegas best met the criteria of all the cities I considered. However, since I do not gamble, drink or smoke, Las Vegas was not a place I would have chosen for "life style". Fortunately, and to my surprise, Las Vegas is an excellent place to live once you get away from the strip.

I am a visual person so I put together the following graphic of the process I will outline.

The Steps

Using a basic set of selection criteria such as I outlined above, reduce the number of potential locations to a relatively small number and rank them.

Working with local experts (property managers, Realtors, etc.), determine answers to the following four questions.

Also ask about average tenant stay, typical rehab costs, typical turn costs, major employers, etc.

Now that you know the type, configuration, location and rent range, you can easily determine the cost of properties that will meet these requirements (Zillow, Realtor.com, Redfin, etc.)

Now that you know the approximate cost to acquire and rehab properties (from a local Realtor, property manager, etc.) that match your target tenant pool, you can determine whether you can make an acceptable return. Remember to include realistic costs for:

If after including all major cost factors the return is acceptable, the next step is to determine the job quantity and job quality of the city. Remember that even if all the tenants are employed today they could all be unemployed a year from now. The initial sources of information I would check is the chamber of commerce and city/county web sites. Next, research the current and long term viability of these employers and their respective market segments. Every business and industry will be different but below are some ideas:

What and how you will research the probable economic future of you tenant pool and the local economy depends on the specific businesses and industries.

Once you decide that your target tenant pool is likely to remain employed for the foreseeable future it is now time to compare this location to other potential locations. Remember that there are no perfect locations (or perfect properties). The tool I would use is called SWOT Analysis. Google "SWOT Analysis" and you will find many information sources. One good article I found is, "SWOT Analysis - Do It Properly!"

Summary

The short and long term profitability of any investment property is dependent upon the tenants remaining employed at a similar level of income. Determining the short and long term odds of your target tenant pool remaining employed is critical. However, it is just one component of factors to consider when evaluating locations. Use a tool like SWOT to compare potential locations. You will not find a perfect location but you can eliminate potential disasters before you invest.