For Growth Potential, Look for Growing Markets
BY CHRISTOPHER MILLER, MBA SPECIALIZED WEALTH MANAGEMENT
When advising clients, or while shopping for my own account, I look for investment properties with good growth potential.Rising property values come from rising income – which in turn comes from higher demand.Even if I’m more concerned with current income on my properties – that rising demand can help my rents stay high.How can I focus on properties with good appreciation potential? I look in areas with good population growth.In this month’s first part of a 2-part series, I’ll discuss the growth that we are looking for, and explore a few different geographic areas.
While researching this article, I found that historical population data is hard to come by.Fortunately, I have population research spreadsheets from articles I have written over the last 10 years and, by combining new data with what I have already collected, we can take a look at longer term trends.
According to the US Census Bureau, a new American is born every 8 seconds, while one dies every 11 seconds, and a new international migrant arrives every 29 seconds.The combined effect of these 3 influences yields us a net gain of one person every 12 seconds, or over 2.5 million per year.This means that we are building the equivalent of the San Antonio, TX region every year to give these people places to live work and shop.These new residents are not all spreading all over the country equally – where are they going? To answer this question, we need to look at the growth of individual areas – called Metropolitan Statistical Areas, or MSAs.
Where are more people moving? What areas of the country are growing faster than the U.S.population as a whole? Let’s look at a few states, and examine their fastest-growing MSAs:
CALIFORNIA – STILL THE GOLDEN STATE?
California is continuing to grow, but that growth is slowing.Those of us who have lived in the state for a few decades, (Southern California, in my case), have seen the explosive growth that the region experienced – the Los Angeles suburbs in the 1950s and 1960s and Orange County during the last 30 years.Many of us believe, however, that we have seen all the explosive growth that we are going to get.How would it be possible to add 30% to the population over the next 20 years? Where will they all live? The Los Angeles-Long Beach-Santa Ana MSA added 944,000 residents between 2000 and 2016: a 7.6% increase.That may look like a large number, but remember: this is a large area we’re talking about.This MSA goes from Malibu in the west to Gorman in the northwest, (on I-5 North: almost out of the Grapevine if you’re heading north), to the town of Hi Vista (east of Lancaster), south all the way down to the Orange County line with the Camp Pendleton Marine Base.That is a large area to put all those new residents, and it illustrates why I prefer to focus on % increases.
The San Francisco-Oakland-Fremont MSA added 555,000 residents between 2000 and 2016; a 13.47% increase.I was expecting to see a higher number here, with all the press that the “second tech boom” is getting.(We all need to remember how that first one ended.) These growth numbers may seem healthy at first; but not after we look at competing MSAs in other states.
Aside from slowing population growth, the largest factor that’s steering my investors away from California is price.If you’ve shopped investment properties in California recently, you see what I mean.Extra low CAP Rates equaling extra high prices which lead to lower returns.Fortunately, there can be “greener pastures’ out of state.
Many of us are familiar with the Texas story: companies are fleeing high regulation and taxes in other states for the lower property, wage and tax costs of Texas.(Recall the 3 automakers that fled the Torrance, CA area in the last decade for the Lone Star State.) As a bonus, Texas charges no state income tax – so an employee can keep the same California salary, buy much more house, and pay no state taxes after he moves to Texas.His employer has just raised his standard of living and given him a 9.3% (the most common California state income tax bracket) raise.
The population growth numbers are truly astounding: between 2000 and 2016, population in the Dallas-Fort Worth-Arlington MSA rose 40%, while Houston is up 43% and San Antonio grew by 42%.I’ve been talking about the growth in Texas for almost 20 years, and these numbers even shocked me.
Along with Texas, the Atlanta suburbs have also been a favorite of mine for at least the last 10 years.Atlanta grew 9.5% between 2010 and 2016 for a total of 36% growth since 2000.The smaller city of Savannah deserves some consideration, too – it’s MSA’s 31% population growth since 2000 means an addition of over 100,000 residents.
Sometimes I’ll develop a concept for an article and my research will yield so much material that it becomes a two part series.That certainly has become the case this month.I prefer to buy properties in growing metropolitan areas so that population growth can drive demand for my apartments or for the stores that lease space.Since owning rental property that is an hours-long plane ride away can be problematic, I find that partial interest properties are appealing investments when buying out of state.We’ll discuss this in more depth, along with a few more of my favorite MSAs, next month.
Christopher Miller is a Managing Director with Specialized Wealth Management and specializes in tax-advantaged investments including 1031 replacement properties. Chris’ real estate experience includes work in commercial appraisal, in institutional acquisitions for a national real estate syndicator and as an advisor helping clients through over three hundred 1031 Exchanges. Chris has been featured as an expert in several industry publications and on television and earned an undergraduate business degree and an MBA emphasizing Real Estate Finance from the University of Southern California. Chris began his real estate career in 1998, began working in the partial interest industry in 2001 and has been a broker advising clients since 2003. Call him toll-free at (877) 313 – 1868.