AMA - Which States Should I Invest In?

Kevin from California asks,

I currently live in California and would like to know which other states are good for investments within the next 5-10 years and why?

Kevin,

This is a great question. The first thing to remember is that real estate is hyper local. We will come back to discussing the hyper local aspect of investing in a minute.

The direct answer to your question. Generally speaking I’m looking for areas where there is influx of jobs, and influx of population. That increase in demand in the presence of modest supply means that we should experience increasing prices with all other things been equal. I like to pay attention to demographic trends. I like low tax states where both residents and corporations pay a minimum of tax. I also like states where there is a demonstrated flow of both jobs and population. This means places like Texas, North Carolina, Florida, Nevada, Arizona, and Alabama. You want to choose places where there is an already an established flow of migration.

But in each of these states there are locations that are not suitable. So if you choose a state like, say, Florida, there are local areas that are great investments, and others that aren’t. I might be much more interest in Fort Myers than, say, Ocala. There is a clear migration flow to certain locations in Florida from cities in the North East like New York and Boston to communities like Boca Raton, Jupiter, West Palm Beach. There is a clear migration flow from California to Texas, Nevada, and Arizona. 

In fact, Some 660 companies moved 765 facilities out of California in the past two years, and Dallas-Fort Worth has been the beneficiary of many of the relocations, according to a recently published report. Discount brokerage Schwab is among the latest announcements. The company has already moved several hundred roles from its San Francisco location to Dallas. The latest announcement will move about 400 jobs to Dallas to be housed in a new campus being built in Westlake Texas.

Even Uber is moving it headquarters to Dallas from the SF Bay area. One of the culprits that is often cited is the increasing regulation that is making it difficult to do business in California. One of the latest is a law in California that was passed in September that requires companies to hire workers as employees, not independent contractors, with some exceptions. The law is intended to give basic labor rights and benefits to hundreds of thousands of California workers now classified as independent contractors. This is a major shift that fundamentally alters how businesses conduct themselves.

So you want to pay close attention to the specific moves that are taking place. You want to look at the migration of several hundred jobs to a specific office location and then draw a circle of a few miles around that office and see what the dynamics are within that radius. You want to see where the shortage is. There might be a surplus of 3-4 bedroom residential properties and a shortage of one and two bedroom properties.

You also want to look at asset class. Maybe the shortage is in single family residential, perhaps apartments, or maybe self storage.

There are other dynamics affect the value of property. Specifically the distance from a major airport affects property values significantly. The further you get from a major airport, the more prices drop generally. If you look along the Gulf coast, you would find that properties in towns like Englewood are very inexpensive, including waterfront properties. These towns also lack major industry. As you get closer to an airport heading North to Sarasota, prices increase.

Higher prices are not something to shy away from. They’re a reflection of higher demand. Even in those higher priced markets, there are opportunities to acquire bargains and create tremendous value. Again, these moves are subject to the local supply and demand balance.