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Know In Which Real Estate Market to Invest

Many real estate investors get their start buying local investment properties, but there's no reason investors need to limit themselves to just buying in their area.

Other regions may offer a better housing market, cheaper property prices and positive demographics to support a growing U.S. real estate market. Experts say to know in which real estate market to invest, investors should review overall property trends. Here is some real estate investing advice when you're looking to invest in property outside your local market:

-- Look at tax rates and population growth.

-- Review overall real estate market trends.

-- Regional REITs are an option.

Look at Tax Rates and Population Growth

Kristina McPherson, a real estate agent at The Corcoran Group in Palm Beach, Florida, says investors interested in long distance properties may want to look at states with no income tax or low sales taxes such as Florida and Texas. Some cities in those states also offer tax incentives to real estate investors, she adds.

[See: 8 Real Estate Investing Mistakes to Avoid.]

Noah Rosenfarb, the founder of Florida-based Freedom Family Office, invested in more than 3,500 multifamily units. He looks to invest in real estate markets within an hour's drive of a metropolis that has a growing population with job growth. Those areas include areas such as Phoenix, Atlanta, Dallas and Houston.

Investors can use U.S. census information about the population and economic growth to help target areas, McPherson says. Look for real estate trend information such as the number of renters versus owners, household income and other demographic data.

"You can look at all of that information and make a determination on which specific city in a state that you want to invest in," she says.

Once investors identify a desirable city, McPherson says the potential buyer should work with a local real estate agent who understands the market. McPherson says property values can change significantly from street to street.

[SUBSCRIBE: Start Your Day With Investing Advice. Sign up for Invested. ]

"It really varies on the specific location," she says. "If you're two blocks off the intercoastal [waterway] here, it's suddenly a different price than if you're right on the intercoastal."

The biggest mistake a novice investor who is long distance can make is not partnering with a local real estate agent and property manager on a rental property, Rosenfarb says.

In addition to helping investors find and manage properties as well as locate a tenant, these contacts will have a strong sense of the local economy and give investors updates if there are economic activity or changes that may affect housing prices.

Review Overall Real Estate Market Trends

One real estate trend McPherson sees in her area of Florida is a rise in apartment rental buildings, rather than condominium buildings as millenials are continuing to rent.

"That's a trend occurring across the country," she adds.

The rise of companies like Airbnb and Vrbo has led to a growing number of people in the short-term rental space, according to Vered Raviv-Schwarz, chief operating officer of Guesty, a technology platform in the vacation rental market.

Raviv-Schwarz says investors in this real estate market niche should consider aspects unique to vacation rentals such as comparing the yields on long-term rentals versus short-term rentals, the length of the tourist season and whether the property is close to a major city.

"If you buy a property in a ski resort, is it also available for summer holidays like hiking trips in the area?" she says. "If so, then you're also likely to have occupancy in the summer months, too. If it's near a major city, long-term rentals may make sense."

Rosenfarb says low interest rates have spurred real estate investing and that demand is pushing up prices in many regions, making mortgages more costly. That's made the premium investors demand over the interest rate smaller, too.

[See: 9 Must-Have REITs for Sustainable Investing.]

He says investors need to look at the interest rate and the capitalization rates, known as cap rates, which is the rate of return a property generates. The cap rate minus the cost of the debt is known as the spread. Five to seven years ago, investors wanted a spread that was three to four percentage points between the cost of the debt and the cap rate. That spread is now as low as one percentage point.

If an investor's interest rate is 4% and the cap rate on a multifamily unit is 5%, the investor makes 1 percentage point on that spread, he says.

When it comes to real estate investment and investing, people should also be mindful of whether rental income can support the price they pay for a property, whether it's a multifamily unit or a single-family household.

Rosenfarb says a general guideline is for the property's price to be about 100 times the rent for sustainable cash flow.

"If the rent is $1,000 a month, then you should pay $100,000," he says. "If you're going to buy a condo for $250,000, you should hope that the monthly rent is $2,500. If it's only $1,800 you're going to have a tough time servicing the debt, paying maintenance, covering the taxes and so on."

Regional REITs Are an Option

Robert Johnson, professor of finance at the Heider College of Business at Creighton University, says investors can also look to REITs traded in the stock market as a way to invest in certain regions or types of properties.

Mid-America Apartment Communities (ticker: MAA) is a REIT that focuses primarily on the acquisition, development, redevelopment and management of multifamily homes throughout the southeast and southwest regions of the U.S. It's up 40% year to date, which is significantly more than the S&P 500's 25% gain this year.

Essex Property Trust ( ESS) is a REIT that acquires, develops, redevelops and manages multifamily residential properties in California and Washington. The fund is up by 25% year to date.

There are even REIT exchange-traded funds, or REIT ETFs, that focus on certain locations. The PPTY U.S. Diversified Real Estate Fund ( PPTY), for example, weights its investments toward large real estate markets such as New York and Los Angeles and fast-growing markets such as Houston and Boston.

Johnson says the National Association of Real Estate Investment Trusts is a good place for investors to research REITs, as investors can search by property type and there is a breakdown of geographic concentrations for each REIT.

"One can stick to broadly-diversified sector types, or one can choose to zero in on specific geographies," he says.

By using a publicly traded REIT, investors can bet on a region and not just a specific property.

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