Choosing the Right Market to Buy In

TLDR

On a flip, forced appreciation through a good buy and a smart rehab is worth more than a year of market appreciation. Pick a house that is under value after the rehab is done. Market analysis is a distraction from the fundamentals you actually control.

Table of Contents

• Forced vs Market Appreciation
• The Math on Market Analysis
• The Levels of the Market
• What I Actually Look At
• Control What You Control
• FAQ
• Related

Forced vs Market Appreciation

There are two types of appreciation and most new investors get them backwards.

Forced appreciation is what you create by buying a house that needs work and doing the renovation. You raise the value of that house through force. It works anytime, anywhere. It is not dependent on interest rates or a Fed chairman or the S&P 500.

Market appreciation is the house going up in value because the broader market is going up. You do not control it. You ride it.

When people ask me about market analysis, what they are really asking is how to put market appreciation at their back while forced appreciation does the heavy lifting. That is a fair question. But it is the second question, not the first.

Forced appreciation is the whole game on a flip. Market appreciation is gravy.

The Math on Market Analysis

Let me show you why I am so dismissive of this.

Say the median house in your area is around $350,000. You own a flip for six months. You want to know how much market appreciation buys you.

Even in a strong market, six months of market appreciation is under ten grand. You can make that up a dozen different ways on the front end. A better buy. A tighter scope of work. The digital introduction when you go to list. A better curb appeal decision that pops the house harder.

Common Mistake

New flippers freeze on market timing. They sit on the sidelines waiting for a perfect market. Meanwhile a guy in the same city is closing three flips and stacking forced equity on every one of them. Timing paralysis costs more than any market swing will.

The Levels of the Market

The market exists at several levels stacked on top of each other. It helps to know which one matters for your deal.

• World economy. Macro sentiment. Matters almost not at all for one flip.
• US economy. Matters a little more but still not much over six months.
• Region. The Southeast, the Midwest, the Mountain West. Regional trends move slowly.
• City. Your city can underperform the region and still have good neighborhoods.
• Neighborhood. This is the one that actually matters. A great neighborhood in a flat city is still a great neighborhood.

A city can be performing terribly compared to the US economy while a specific neighborhood inside that city performs beautifully. Your job is to know the neighborhoods you buy in, not the world economy.

Neighborhood knowledge beats macro forecasting every time.

What I Actually Look At

For the people who cannot sleep without looking at something, here is what is worth a glance and what is not.

Worth a glance

• Zillow year-over-year market data for your specific city and neighborhood. Directional only.
• The 10-year treasury bond. Mortgage rates follow this more closely than they follow the Fed rate. When the 10-year goes down, mortgage rates go down, which means buyers can afford more. When it goes up, the opposite.
• The secured overnight financing rate. Another signal on where rates are heading. Same logic as the 10-year.

Not worth the attention

• Predicting where the S&P will be in six months
• Predicting what the Fed will do next
• Regional economic forecasts for a single flip
• Trying to time a bottom

Interest rates matter more when you are holding long-term rentals. On a single six-month flip they do not move the needle enough to justify the worry.

Pro Tip

If you watch any rate, watch the 10-year treasury bond. It is the best single signal for where mortgage rates are going, which is the best signal for where house prices are going.

Control What You Control

My approach on this stuff never changes. Nothing in the market matters when you buy right and renovate right. The people who are always on a shoestring are the ones trying to play every variable just right, thinking that if they dot every i and cross every t perfectly, everything will work out.

Here is the thing. Nothing ever works out exactly like it should. That is why we have systems in place. That is why we have rules.

Do I have the ability to see what houses will sell for in the neighborhood? Do I have the ability to go in there and get deals? That is what I care about. Everything else is noise.

Nobody knows what is happening tomorrow. What you do know is what you control today.

FAQ

I am in a high-cost market like California. Is the game still the same?

It is the same game with bigger numbers. You still need an under-value buy and a smart rehab. The competition is different and the entry cost is higher, but the forced appreciation math does not care about the zip code. Deals exist everywhere. You just have to go find them.

How many comps do I need to be confident in an ARV?

A handful of good ones in the same neighborhood, sold in the last six months, with similar square footage and bed/bath count. A few good comps beat twenty bad ones. I have a whole walkthrough on ARV math in another article.

Should I only invest in high-appreciation markets?

No. Forced appreciation works in flat markets too, and flat markets have less competition. Some of the best operators I know work in steady markets where they pick up houses cheap and force equity through the rehab. They just do not ride a market tailwind.

What if interest rates spike while I am mid-flip?

You already ran the numbers assuming a base-case buyer. If rates spike, your buyer pool tightens. That is why the 70 percent rule builds in a cushion. You bought the right way, you have room to adjust. Panic is not the play.

I am just getting started. Should I do market research before my first deal?

Know your neighborhoods. Know the range of comps in the blocks you want to buy. Do not read macro forecasts. The macro will not help you find your first deal. Driving your target neighborhoods and meeting agents will.