- Neal Bawa is the CEO and founder of Grocapitus, a real estate investment company.
- He made a guest appearance on The "Investing in Real Estate" podcast hosted by Clayton Morris, and shared five metrics that will help you determine which cities are worth buying a home in.
- These metrics include the percentage of population growth, the percentage of income growth, and the percentage job growth.
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The "Investing in Real Estate" podcast with Clayton Morris recently featured Neal Bawa, who shared five metrics that will help prospective investors determine which cities are worth investing in.
Bawa is a real estate investor who has seen success in both the single-family and multi-family sectors. He manages a $150 million real estate multifamily portfolio and is the CEO and founder of Grocapitus, a real estate investment company.
The five metrics he provided on the podcast are metrics he said he has learned through his single-family investments.
"They apply to multi-family," he said, "but they apply to multi-family 90% of the time and they apply to single-family 100% of the time."
The first four metrics - percentage of population growth, percentage of income growth, percentage of home-price growth, and decrease in crime levels - can be found on city-data.com. The final metric, the percentage of job growth, can be found on deptofnumbers.com.
Keep reading for the ranges within these five metrics that will help you determine whether or not a city is worth investing in, according to Bawa.
1. Population growth.
"Whatever cities you're investing in, make sure that they have population growth," Bawa said on the podcast.
He explained that most cities people invest in have between 500,000 to one million people living in them.
"For those cities, you roughly want a 1% population growth per year," he added. "But if you want a very detailed metric, between the year 2000 and the year 2017, you want there to be 20% growth."
If the city is bigger than 500,000 to one million people, the growth can be a little lower than 1%. On the contrary, if the city is smaller, then you want the growth to be higher than 1%.
2. Median household income growth.
According to Bawa, the median household income needs to be going up, and it needs to be going up faster than or at least as fast as inflation.
In addition to 20% population growth between 2000 and 2017, you want to make sure that the median household income in the city grew by at least 30% in that same time frame.
Income growth should "grow significantly faster than inflation or at least at inflation levels," he explained. "At 20%, you're not growing at inflation, you're growing slower than inflation. So you're actually losing money by investing in that city. Once you're at 30%, you're growing at inflation. If you look at inflation over those 16 years [2000 to 2016], it was roughly 30%, maybe a little bit lower."
3. An increase in home prices.
Growth in both population and in median household income leads to an increase in home prices.
Bawa explained that the city-data.com page will show two figures for the median condo or home value, and those two numbers should be up by 40%.
"A 20% population increase drives a 30% income growth, which drives a 40% growth in home prices," he said.
4. A decrease in crime levels.
Bawa explained that if a city is improving, crime tends to decrease.
For the most current year, Bawa said, you want to see a crime number of under 500 and declining. Or in other words, the numbers for the previous years should be higher than the numbers for the current year.
5. Strong job growth.
To find a city's job growth, you will need to go to deptofnumbers.com/employment/metros. You want to make sure that job growth in the city you're investing in is up by around 2%.
"If it's a really big city like Los Angeles, a percent and a half is fine," he said. "But in that Goldilocks zone of a quarter-million to one million person cities, [you want to] be at 2% or higher."
How can you make sure you're not investing in a bubble?
To figure out if you are investing in a bubble, Bawa explained, you want to look at income price. It's okay for prices to double in a city where incomes are increasing quickly. But when prices are going up in a city where income is not increasing, that's a problem.
"You don't want more than a 20% gap between the price that people can really afford, the income price, and today's price, because above that 20% is where bubbles develop," he said.