The Fifth Migration
From my initial start as an investor in the 1970’s through the early 80’s it seemed like I could do nothing wrong. Every single property that we purchased was incredibly easy to get rented. As well, when we would decide to sell - it was a cakewalk. Even my worst deals were like getting a bad haircut. Just give it a few weeks and it will be just fine. Another fact of that time frame was that we always had a stable of eager buyers for the homes and small rental properties that we bought and cleaned up. In addition, the properties that we held onto appreciated like clockwork. Life was truly good and very easy for the real estate investor.
We were putting into action the advice of what the big boys have advocated in their best-selling real estate books and courses. They told us - real estate investors, that the key to our profits in any and all markets was basically to simply buy real estate and just wait. However, Jeff from Seattle is still waiting. So are hundreds of thousands of other real estate investors in North America . We were told that our properties would always appreciate and we were surely on the yellow brick road to personal financial freedom.
Unfortunately for us and the hundreds of thousands of other “real estate guru” students that golden rule became obsolete in the early 1980’s in a lot of the real estate markets around the country. Yes, you still could buy real estate quite easily in most of these areas. In fact, it became extremely easy to buy in a lot of real estate markets. There were thousands people who wanted to dump their real estate investment property. The fact of the matter was that income properties in most markets just about across the board had quit appreciating. It seemed like overnight that getting and then maintaining a positive cash flow, as well as being able to do a quick flip (buy and resell) had become a nightmare. However, I was unwilling to give up on my real estate endeavors like thousands of other investors had done. I went back to college to academically seek the answers to the new real estate reality.
While I was in Graduate school the value of our income properties was attacked even further. The 1986 tax reform act destroyed many of the individual benefits for owning investment real estate. In addition, the Savings and Loan disaster dried up most conventional sources of financing.
I felt lost.
Was I stupid?
What was I doing wrong?
Why didn't the buy and fly program work anymore?
During graduate school in my Masters and into my Ph.D. program I discovered not only a new trend in real estate but also an economic model that would literally rescue my real estate profits. Little did I know that this new way of investing in real estate would affect the lives of so many other people.
This all started with my discovery of what I have come to call the “Fifth Migration.” To be able to understand and forecast the future I knew that I had to research the past history of all real estate investments.
What I discovered has become the most radical revolution in real estate investing since the revolutionary concept of “Nothing Down.” It all started with an understanding what a migration consists of. A migration in real estate economics is a major shift or move of the population in any given area.
History documents America ’s first major migration as the initial colonization of the United States . Thousands of pilgrims relocated from Europe to America seeking economic opportunities and other freedoms that were not available to them in the old country. America was a land of seemingly unbridled opportunity. This original colonization and subsequent increase in population gave value to both the land in America ’s new cities and even the seemingly endless tracts of land outside the cities that could be improved and farmed.
As in every economic model change is inevitable. Over the years as demand increased on the Eastern sea coast so did the value of its land and properties. As the price of the land with the improvements appreciated the new arriving pilgrims were denied the opportunity of ownership because of the increased cost of real estate.
This increased demand led eventually to westward expansion. Westward expansion became the second major migration in America . Pioneers hungry for opportunity left the eastern coast and headed west with their dreams of land ownership still intact. Westward expansion continued through the end of the 19th century. By this time the majority of the land in the United States that was arable had been homesteaded, granted, gifted or purchased. A population that had always had opportunity just a little further down the road now found its new generation denied.
The invention of the steam engine and America ’s industrial revolution that started in the 1870’s signaled the United State ’s third major migration. Young Americans and farmers unable to adequately support their families flocked into cities where the new factories offered stable employment. This migration continued to build through World War I. During the third migration our inner cities were developed to house America ’s new workforce. Towns that had access to transportation by rail or water grew and blossomed.
The fourth major migration in America didn't start until after World War II was won. Prior to World War II there was essentially no long term financing available for home purchases in the United States . If an individual or family wanted to buy a home in America they had to do so with all cash.
As a reward for the returning veterans of World War II and with a nation that had supported the war effort the federal government established the first long term federally insured home loans. For the first time in American history an individual or a family could obtain long term financing and actually buy a home of their own with payments spread out as long as thirty years. These new loan vehicles gave rise to the invention of the single family home subdivision. The very first single family home subdivision was built in Levittown, New York, just outside of New York City on Long Island .
America ’s fourth major migration I call “suburbia.” This major migration was the movement of America ’s working class from the inner cities of the United States industrial towns to the single family subdivisions located within an easy short driving commute from the cities. This flight from America ’s inner cities created America ’s ghettos as working families left the cities for the freedom and opportunities of home ownership.
When you think about it each of these migrations make sense. As well, each migration was created from individuals seeking new opportunities and personal freedom.
America ’s fifth major migration started in the early 1980’s. I call it “survival.” When I first discovered it I was totally blown away. Understanding this concept explained why not only myself but also most of North America ’s estimated 10 million real estate investors now felt like they were spinning wheels in most attempts to invest profitably in real estate. I often use the analogy that today’s real estate investor feels like they are trying to fit a square peg into a round hole in terms of their real estate investment success. Indeed, we truly were working hard enough but without the desired results. In many areas of the United States we were trying to invest in real estate markets that had already or were facing enormous job cuts.
Think about it. There is hardly a single day when you don’t hear of massive job cuts from some company on the news. With InnerCircle membership NAREI will teach you how to find out where those lost jobs are actually moving to.
Underneath the economic surface unbeknownst to the hundreds of thousands of real estate investors - corporate America had started to relocate. As I researched, I was shocked to note that in my backyard investing area the net professional job numbers had started to drop exactly at the same time that my real estate investing program began to languish.
I also noticed that for each of the years that I did incredibly well in real estate that that net professional job base in my investing areas had been growing.
It doesn’t take a rocket scientist to understand that supply and demand drives not only the price of rents but also the sales price of a piece of real estate. It made instant sense to me. As long as the job market was healthy and growing I had done well because there was an optimistic eager group of potential tenants and buyers who were standing in line for my properties. Take that same investment area and remove 50,000 jobs and relocate them to another part of the country or of the world and you have a formula for disaster in for real estate investing for that market.
I then took a major step. I did a detailed investigation of cities in the United States with a population base of over 250,000. I researched every one of those cities for the net professional jobs created or lost from the end of World War II through the present.
It was wild. It all started to make sense. I then went one step further. I obtained the rental vacancy factors for each of those cities during those years.
I then obtained the average real estate sales price for a basic three bedroom single family home for each city during every one of those years. It got even better.
All three of those factors were linear. Each one of them followed each other when graphed out. As the number of net professional jobs grew in a city, vacancy rates dropped and real estate prices appreciated. As net professional jobs were lost vacancy rates increased and real estate prices were stagnant or dropped.
I then contacted the economic development council of the Mayor’s office in each city that was currently experiencing job cuts. I simply asked for an explanation for the job decreases in their area. 100% of those cities named major industries that had closed up shop in that neck of the woods and relocated to another place in the country or of the world. I dug a bit deeper and asked them where these companies were moving to.
I made a simple list of all of the cities and where the companies were relocating to.
I was shocked even more.
Every one of the cities that were registering strong job gains had decreased vacancy rates and stable if not already improving property values.
I couldn’t believe what I was starting to understand. How logical and really quite simplistic this process is.
I saw clearly that a fifth migration had begun. This migration though was not being fed as in the past by an individual’s desire for a home ownership or freedom. This migration was being fueled by the flight of corporate America from high priced anti-business regions of obsolescence to inexpensive pro-business regions of opportunity. It doesn’t take a brain surgeon to figure out that the restriction that I had placed on all of my real estate investing back when I first started (that all my investing had to be done within 30 minutes of my home) was real estate investing suicide in today’s market. At best, it severely limited my ability to continue to invest and receive the profits that I had become accustomed to.
As I talked with the development council in my local city, I was informed about the “economic missionaries” that other parts of the country were sending out to the high priced, anti-business, regions of obsolescence. Areas just like I used to live in. I was educated regarding the free building sites, tax abatements, low interest bond financing, relocation assistance packages, free utilities, etc. that other cities were offering companies in America’s high priced areas (regions of obsolescence) if they would relocate to their economically desirable city (region of opportunity).
I then contacted each of the top ten cities of registering job growth in North America . I talked directly with their economic development councils. I told them that I was a real estate investor who was interested in investing in their city. I then asked if they could help me with getting answers to some very detailed questions about their city. I told them that I had a market survey form that I had prepared. I asked them if I could fax them my survey and have them answer my questions. They told me absolutely yes. They told me that that was their job to do this as mandated by their Mayor’s office.
I got the fax numbers and sent off ten of my extensive market survey questionnaires that I had prepared. Within the week I got all ten detailed packages back. Seven of them were sent back to me by Overnight Courier and contained not only answers to my questions but also more detailed information, color brochures on the city, and even a video or two highlighting the advantages of and specific incentives for having a business relocate there.
Here is the list of the questions that I have learned to ask the economic development council in each city that we are interested in investing in. Please note that these questions are worded in such a way as to help the economic development council treat you as a serious real estate investor.
Real Estate Market Analysis Survey
1. Description of the market area
Metropolitan Area
-Identification of entire area
-Geography
-Climate
-General urban structure; location of facilities
-Direction of city growth
-Commuting patterns (journey to work)
-Any major community developments and special features or characteristics germane to the market analysis
2. Demographic analysis
Population
-Most recent estimate for total population
-Past trends in population growth
-Estimated future population
-Distribution by age groups
Households
-Most recent estimates for household formations
-Past trends in household formations
-Estimated future total households and average annual rate of growth
-Current trends in household size (increasing, decreasing)
Schools
-School districts in market area
-District boundaries
-Total annual K-6th enrollment for past 10 years by district
3. Economy of the market area (demand-side analysis)
Economic history and characteristics
-General description
-Major economic activities and developments
Employment, total and nonagricultural
-Current estimates
-Past trends
-Distribution by industry groups
-Estimated future employment
-Trends in labor participation rate
-Trends in female employment
Unemployment
-Current level
-Past trends
Economic-base analysis
-Metropolitan area compared with national and state employment data
-Discussion of principal employers
-Payroll data (census of manufacturers, trade, services, governments)
Income data
-Personal income by major sources
-Per capita personal income
-Family-income distribution
-Projections for growth in personal income
4. Construction and real estate activity (supply-side analysis)
Building and construction industry
-Residential buildings by type (single-family, multifamily, rental or sales)
-Nonresidential construction
-High-rise building activity (minimum height of five stories above ground)
-Heavy engineering construction
Demand-and-supply analysis for properties other than residential
-General demand factors in metropolitan area
-Existing inventory, by property type
-Projected production, by property type
-Housing inventory, by type (single-family, multifamily)
-Most recent estimates
-Past trends including most recent census
-Principal characteristics
Residential sales
-General market conditions
-Major subdivision activity
-Trends in sales prices (past ten years)
-Unsold inventory of new sales housing
Rental markets
-General market conditions
-Major activity
-Trends in rental prices (studio, one - three bedroom apartments)
-Trends in rental prices (single family homes)
-Trends in rental vacancies overall (past ten years)
-Gross amount of available rental units
-New rental housing trends
-Residential units under construction
-Available government rental assistance programs
-Available government assistance rehab programs
Other housing markets
-Public and governmental subsidized housing
-Specialized submarkets for housing demand and supply
Real estate loans and mortgage markets
-Sources and availability of funds
-FHA, VA, FNMA, GNMA
-Interest rates and terms of mortgages
-Recordings of mortgages and / or deeds of trusts
-Foreclosures
5. Political and legal aspects (Legal Environment Analysis)
Land-use planning
-Regional
-County (counties)
-Incorporated cities in market area
Zoning
-Review of present zoning ordinances for county (counties) and cities
-Zoning history and present attitudes of zoning authority
-Identify raw land presently zoned for residential income properties
Ordinances, codes, regulations
-Special building codes for residential income properties
-Special public safety concerns for residential income properties
-Allocation of land for schools, recreational areas, open space
Municipal services
-Public safety
-Hospitals and health care
-Utilities
Ecological
-Environmental impact studies
-Limited growth policies
-Floodplains and flood control
-Solid-waste disposal
-Special lead paint laws
Property taxation
-Tax rate per $1,000 valuation
-Assessment ration as percent of market value
6. Sources of information
Types of data
-Population
-Employment
-Personal income
-Planning
-Building
-Zoning
-Other pertinent data
The key purpose of my market analysis was to determine the expected demand for the market under consideration. Some of you might be thinking “Who would answer all of those questions for you for free?” The answer is simple as each of the original ten cities that I targeted were possible areas to invest in. All of the cities were experiencing incredible job growth. They were hungry for the stability, population growth, and subsequent increased tax base that the new professional jobs would bring to the area. They all had an economic development office. Each economic development office is dedicated to help people like you and me who are interested in doing business in their city. I came up with the questions and the economic council could answer them. On the Internet NAREI uses a website that lists every economic development agency.
I approached each of these economic development councils as a professional. I asked to speak to each of their directors. I directed my fax to that director. I asked them professional questions that they already had the answers to. Each one answered not only every question, but most of them offered to meet me as well in that particular city so that they could show me around and introduce me to their contacts in the real estate investment community there.
Since our initial start in 1986, I have sent this survey to cities to determine the economic health of major real estate markets in the United States and Canada . Real estate investing is defined as the sacrifice of certain outflows for uncertain inflows. Forecasting future income from an investment is risky. As an investor you must examine the factors influencing the possible income and formulate expectations from that analysis. To start the investor must carefully analyze the market forces influencing any potential investment. This type of analysis is critical. Failing to identify the direction of market forces in your target investment area can be extremely costly.
In “old-fashioned” real estate investing the critical elements included the quantity and certainty of gross income, operating expenses, and net income over some future period of time. If you use the old tools today’s property value is a reflection of future income expectations. Such guesswork is risky. I believe that the only good insurance against risk is to:
Determine the direction that your market is moving based on job growth, residential income property vacancy trends, and average property prices.
Identify which stage of the Garrison Cycle that a market is in and develop a game plan that “fits” that market.
Form a firm definition of value in a market based on actual recent sales.
Identify the forces driving your target real estate market and then choose the very best parts of that particular area to invest in. Identify any and all areas of growth. The very best indicator on what are the best neighborhoods to invest in is to study the Kindergarten through sixth grade enrollment statistics available through the local public school districts. Just call you local school district. It’s free. You should try and go back at least ten years. You should focus your investing only in the areas of your market that have the highest elementary school growth.
Never buy a property based on any future appreciation or increase in rents. Buy only properties that give you instant equity and positive cash flow from day one. And, always have a parachute in case your investing program develops engine problems.
If you valiantly do these things your risk will be greatly reduced and you will gain faith in your ability to invest. Face the facts, maybe you are from California like I was. Net professional jobs where you live may be going down the tubes. You need to limit your investing to only the very best areas of K-6 elementary growth in California or other similar markets if you want to maximize your profit in a region of obsolescence. In addition, for any potential investment area you need to define value by getting information on all recent local sales of properties. Also, and you need to know the current rental rates. You need to know the vacancy percentages in that area. You need to know the area trends. You need to know the local laws (is there rent control, etc.?). Also consider the local crime statistics. Ask yourself is this a drug neighborhood? Does the area have a bad reputation? I remember when NAREI was in Phoenix and I was interested in buying a large residential income property. As part of my property personal purchase checklist I always talk to the local police to learn about the crime problems in the neighborhood. While I was outside this property a police officer drove by. I quickly flagged him down and introduced myself. I mentioned to him that I was an investor and thinking about buying this property. I remember the police officer telling me that I was crazy! He told me that this was a drug street and was controlled at nights by gangs. I thanked him for his time which was extremely valuable to me as a potential investor and packed my stuff up and headed out to another property in a better neighborhood.
Again the bottom line here is that before you do any investing in real estate you need to do a market survey on all potential real estate markets with a principal thrust concerning supply and demand. Ironically this market survey is the most neglected aspect of real estate investments today. I have read all the popular real estate investment books that are available. Never once has anybody even mentioned doing a market survey and or forming a definition of value before taking the plunge into real estate investing. The focus instead is on the mechanics of investing. They all seem to ignore the underlying foundation of the economy where they invest. The purpose again of the market survey is simply to reduce the risk associated with real estate investing. Remember, a real estate investor today needs to consider factors such as:
- National and local economic trends, such as unemployment or recession.
- A deteriorating economic base.
- Economic obsolescence, perhaps due to a changing neighborhood.
- Functional obsolescence, lack of quality construction, or age.
- Legal restrictions, such as rent control and zoning laws.
- Population and demographic trends
- Changes in income levels, tastes, and preferences of tenants.
- Finally, remember that I have never been turned down for this essential informational help from a city that is benefiting from the fifth migration.
Each year NAREI extensively surveys the top real estate markets in the United States . The result of this ongoing analysis dictates where the direction NAREI with our BuyingTour students go for investing in regions of opportunity. These demographic studies help give you confidence in your real estate investing. The results from our data have lead thousands of our students into the most profitable real estate investing areas that they ever could imagine.
Since 1986, we have quietly worked real estate investing almost exclusively in 18 different absorption markets. Since 1986, NAREI has taught these principles to an exclusive group of serious students. NAREI has helped create self-made real estate millionaires with absorption market investing.
You are sitting on the greatest investment opportunity of your lifetime. That opportunity is buying real estate in the path of progress. This opportunity is not based on gambling or blind speculation. You invest in real estate based on demonstrable economic facts.
It is really legal insider trading through real estate investing.
This opportunity will take some work on your part. You just need to ask the right questions. The market survey questions for InnerCircle members to use will show you where to invest. As well, you may open up sources of capital from outside investors and lending sources to fund real your estate investments. The results from these surveys also help NAREI InnerCircle members to resell their properties at incredible profits as we share copies of this information with our potential buyers.
Let’s take a closer look at the market survey form and share with you the answers that you would typically get from a region of opportunity (absorption market) and a region of obsolescence (decline market.) There are six basic sections. Let’s look at each one individually:
Real Estate Market Survey
1) Description of the market area
The Answers to these questions will give you a quick picture of the basics of any given city. For example when we chose to move into Oklahoma City the answers to this section told us about the new River Walk section of town, the new baseball stadium, and the focus on urban renewal. In decline markets there typically are no major community developments.
2) Demographic analysis
This helps you to understand the vitality and overall health of a given real estate market. In regions of opportunity you will see a strong steady growth pattern in not only population but also a vibrant K-6 rate increase in student enrollment. These answers can not be viewed though in isolation. For example Los Angeles, California recently registered some of the highest population gains while at the same time they were showing some of the highest job losses. In depth analysis through their economic development office showed that their population growth was due nearly solely to an increase in welfare and other public assistance programs. California has become the welfare capital of America as of late.
3) Economy of the market area (demand-side analysis)
The real estate market can be defined as a mechanism by which real estate goods and services are exchanged. This is a mechanism that is influenced by the demands of the participants in a market. Demand on residential income property is a function of the stability and growth in any given market. It just makes sense. In a region of opportunity you are going to see new job growth. You are going to see new companies moving in. You are going to see local companies expanding. In regions of obsolescence you are going to see a flat if not negative job market. You are going to also see rising unemployment rates compared with national averages. And you thought that economics was hard. It really is just plain common sense.
4) Construction and real estate activity (supply-side analysis)
In regions of opportunity that are at the beginning of the absorption stage there basically is no new construction at all. Typically years earlier when that market was in expansion the area was overbuilt. Typical absorption markets have a high inventory of unsold new housing. Typical regions of obsolescence have some new construction activity, but the trend in sales prices have dropped and there is an increasing amount of unsold inventory.
In rental markets in regions of opportunity vacancy rates are shrinking while in regions of obsolescence vacancy rates are growing or staying flat. In regions of opportunity rents are typically lower than national averages and have been flat for the previous years. In regions of obsolescence gross monthly rents are falling and foreclosures are typically increasing.
5) Political and legal aspects (Legal Environment Analysis)
In regions of opportunity there is an increasing pro-business climate. Allowances are being made and variances are being given to builders and developers. Typically building codes are lax in regions of opportunity and there exists a partially unused infrastructure of available public services such as roads, utility distribution lines, schools, and parks. A good example would be Gilbert, Arizona where we live now.
During Arizona’s boom of the late 70’s and early 80’s local cities thought that their growth would never end. Hundreds and thousands of new roads, schools, and utility distribution lines were built for the seemingly unending demand.
When the market quickly cycled through equilibrium and into decline these improvements were left for the most part unused. Typical regions of obsolescence will have vacant land with developments waiting to be completed.
Markets typically absorb in regions of opportunity until the available supply of existing services is fully utilized. By that time rents rise high enough to justify new construction which leads to higher values and almost inevitable overbuilding one more time.
6) Sources of information
It is important to always be able to double check all of your information. Be an intelligent consumer.
It’s time for a real estate reality check.
Think about this - would you rather buy a 50 unit apartment building at 16% under market value in a region of obsolescence that is loosing 147,000 jobs in the coming 36 months or would you rather buy a 50 unit apartment building at 10% below market value in a region of opportunity that is gaining 87,000 new jobs in the next 18 months?
Now the next question - would you rather open up a McDonalds franchise in a market area that is losing 46,000 professional jobs in the next year or would you rather open up a McDonalds franchise in a market area that is gaining 33,000 new jobs
In the next three to five years?
Finally the last question - if you were currently unemployed would you rather try to find a job in a market area that is losing 93,500 jobs in the next year or would you rather look in a market area that is gaining 57,500 new jobs in the next three to five years?
It’s really obvious isn’t it?
There are many hot absorption markets today. They are constantly changing as new markets rise out of the ashes of the decline stage and rebound into an expansionary market.
Why would a company move their corporate headquarters from an area like the San Francisco Bay or the Big Apple to another location?
The answer really is just good business management. Companies can save as much as 60% off the cost of their facilities and as much as 50% off their labor. Also consider the really wonderful bonus of paying your employees less and having them actually enjoy a better overall lifestyle. The facts are that an identical brand new average home in Orange County , California that costs in excess of $300,000 can be purchased today in an absorption market for about $90,000 dollars. The overall cost of the utilities is less as well. Also, the commute is a fraction of the time. Finally, the pollution and crime issues are almost non-existent.
Through research NAREI has found that an area just doesn’t lose one professional job. An area actually will lose that professional job plus additionally 3-4 jobs in the service sector. Those jobs cuts are a direct result of the loss of expendable income from the professional job that allows for such purchases. This additional element - consisting of the loss of the service sector employment compound the overall climate of an area in decline. All of the supporting jobs including fast food, car washers, gas station attendants, UPS drivers, all customer service personnel, even the teachers, policeman, and other governmental positions.
This ripple or ancillary effect takes about three years to fully impact an area. Remember, this is true whether the jobs are leaving or coming to an area. For example, a market that is gaining 15,000 new professional jobs will realize approximately an additional 45,000 – 60,000 service sector jobs for a minimum combined total of 60,000 new jobs! As well, on the other side of the equation a market that is loosing 50,000 professional jobs will actually lose an additional 150,000 to 200,000 service sector jobs for a total of over 200,000 lost jobs. At NAREI, we like to categorize each of these new or lost service sector jobs as a potential tenant. Often people currently working in the service sector are also the individuals who are at a point in their lives where they need to rent or possibly just ready to purchase their first small single family home. It is really simple do you want your real estate investment areas to be loosing or gaining new tenants?
Discovering the Fifth Migration led me to personally developing a radical new approach to profit in real estate investing. It is an entirely new paradigm or set of criteria and guidelines based on cold hard facts. It’s now called the “Garrison Cycle.”
