BiggerPockets Podcast 515: Your Step-by-Step Guide to Buying Out-of-State Investment Properties

BiggerPockets Podcast 515: Your Step-by-Step Guide to Buying Out-of-State Investment Properties

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It’s not uncommon for investors to start out by buying properties in their home markets. It makes things like neighborhood research, rehabs, and tenant showings so much easier when you’re only a short drive away from your property. That’s how Dave Meyer, VP of Data and Analytics right here at BiggerPockets, feels.

Dave is currently living in Europe and has invested exclusively in Denver, where he used to call home. Now, as an entirely remote landlord, he’s seen the data on how many markets (like Tampa, Florida) are doing phenomenally for appreciation and rent increases. David Greene, out-of-state investor and the man who literally wrote the book on long-distance real estate investing is here to offer some much-needed council.

With David having the experience as an agent and out-of-state investor and Dave having robust housing data at his disposal, the two come up with some clear plans to invest in up-and-coming markets. David and Dave talk about cash flow, appreciation, wage growth, the investing “spectrum”, and why so many real estate investors aren’t planning far enough ahead.

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Listen to the Podcast Here

Read the Transcript Here

David:
This is the BiggerPockets Podcast, show 515.

Dave:
What do I do from there? That’s what I really am confused, because I like looking at the markets, I like doing this mathematical analysis, but where I keep getting stuck is like, all right, let’s say I pick Tampa, what do I do next?

Speaker 3:
You’re listening to BiggerPockets Radio, simplifying real estate for investors, large and small. If you’re here looking to learn about real estate investing without all the hype, you’re in the right place, stay tuned and be sure to join the millions of others who have benefited from biggerpockets.com, your home for real estate investing online.

David:
What’s going on everybody? This is David Greene, your host of the BiggerPockets Podcast here today with my cohost, Mr. Dave, data scientist Meyer. Dave, how’s it going today?

Dave:
It’s great, man. I’m happy to be back on the show so soon.

David:
Yeah. We call you a data scientist, but you’re more like Dr. Strange. You’re like a superhero that happens to use data like magic to conquer the enemy of financial destruction and achieve financial independence.

Dave:
Wow. That is quite a compliment. And I think I’m going to put that either on my job description or if it will fit on my business card ahead of the BiggerPockets Conference, I’m going to try and get it on there.

David:
Maybe you could make that your voicemail when people call you just so they know who they’re talking to.

Dave:
I think they’ll hang up before the end of it, but I can try.

David:
Well, Dave and I are here today to break down some data for you guys to help make better decisions on where you should be investing and what type of investing you should do. We get into quite a few, actually, I think like nitty-gritty details that should be really good for investors. Would you mind sharing, Dave, a little bit about what you think some of the best parts of today’s show are?

Dave:
Yeah. So I mean, just so everyone knows, basically, we’re talking about how to invest out of state. It’s something I’ve wanted to do for a really long time. I’ve been investing for 10 or 12 years now, but I’ve always invested in one state and I’m really interested in picking David’s brain. So that’s basically what I do throughout this show. We talk about the different ways you can make money in real estate, we talk about how to balance those different ways of making money based on where you are in your life and what your personal goals are. Then we talk about really interesting stuff about metrics and like how to identify which markets actually fit your strategy. And then of course, like how do you actually pull it off? Like, how do you get an agent? How do you get a property manager? And how do you do all this? And I just had to say, David, I learned a ton from you doing this. And it was a lot of fun doing it as well. So I’m excited for everyone to hear what we talked about.

David:
Well, I appreciate that. It’s nice being able to be on the other end of the mic instead of asking some of the questions I’m getting to answer them. And that’s always fun. You did a great job.

Dave:
Awesome man. Well, should we let people listen to it?

David:
Yeah. And everyone be sure to listen all the way to the end of the episode, where Dave and I are going to list four questions or four things that real estate investors should be asking or looking into that many people are neglecting. I think you’ll get a lot of value out of that. So if you like show, please share it with your friends, subscribe to us on YouTube so you can be notified when there’s new shows and let us know in the comments what you thought. Without further ado, let’s get into it. Mr. Dave Meyer, what’s going on? It’s good to have you on the podcast with me today.

Dave:
Thanks man. I’m back. You can’t get rid of me these days.

David:
Yeah. But I like that because you’re the data guy and you always want to have a data guy on your team, that one person that comes along and says, “Hey, what you’re doing makes sense or this is a terrible idea. We should abandon ship right now and go the other way.”

Dave:
Yeah. I could definitely serve the nerd role. I’ll just like validate anything that you said or point out anything that’s just horribly wrong.

David:
It makes me think about it in those superhero movies, they always have a droid or something like C-3PO that will say this plan has 11% chance of being successful.

Dave:
I’m not sure that I love being compared to C-3PO, although I do like Star Wars.

David:
That’s a good point.

Dave:
But I actually think that that’s a really good way to look at it. I like to look at an investing plan or any sort of plan and assign a probability to it. So it probably is a good comparison.

David:
And for those who don’t know, Dave Meyer is one of the OGs here at BiggerPockets. He is a data scientist. So he’s the person that can look at numbers, facts, objective metrics, and help determine if what we’re looking at doing or what we’ve been doing is something that actually makes sense. There’s a lot of data people don’t realize that BiggerPockets has on some of this. Would you mind actually, Dave, for a second, just sharing where people can find some of the stuff is it still through BPInsights?

Dave:
Yeah, sure. So we’re going to start publishing this more on the blog and you can see it through BPInsights. But a lot of what we do is take market data like rent and sales data that’s going on in the market right now and run some analysis. We do some visualization. So if you are trying to keep pace with everything that is going on in the super hot housing market, which is pretty much everyone right now, we are trying our best to get all that data out to you so you can make good real estate investing decisions there. So you can go either search my name or BPInsights on biggerpockets.com or on YouTube, the BiggerPockets YouTube channel, you can find that as well.

David:
Awesome. So what do you think we should talk about today?

Dave:
So I would like to hijack this podcast a little bit, because as you said, I’m a data guy and I also should mention that I’m a real estate investor and have been investing in real estate for 11 years. So even long before I worked at BiggerPockets. But I’ve always done it in Denver. That’s where I lived for 10 years. About two years ago, I moved to Amsterdam. So I’m living in Europe and I want to be investing in today’s market. I feel like it’s a good opportunity to buy, but I have never invested out of state before. And since I have you here captive and you are the expert, obviously people probably know this, but you’re the author of Long-Distance Real Estate Investing. I would love to learn alongside everyone listening today about how you would basically teach me how to invest out of state.

David:
Yeah. It’s either that or teach you how to Dougie.

Dave:
Are you up for that?

David:
That sounds great.

Dave:
How about we start with the real estate, but then go to Dougie?

David:
Yes. That’s a good point. First, build some wealth and then we’ll teach you how to Dougie.

Dave:
I guess, where do you start? Like I’m a real estate investor, I understand the basics, but I’m sitting here looking at this map of the United States, I’m like, “What do I even do? I could keep investing in Denver, but I’m curious if there’s other opportunities out there for me and what the best use of my time and money is?”

David:
So first off, you’re asking the right questions. This is where every investor should start. The mistake a lot of people make that I see is they say what’s the best market to invest in. And what happens is you end up falling prey to whatever clickbait article is telling you, these are the top five cities to invest in or what everybody else is doing. Sometimes you follow the herd. So some influential person could even be through BiggerPockets says, I’m investing what? Like three years ago was Huntsville, Alabama. Man, everybody was going to Huntsville, Huntsville, Huntsville, Huntsville. And then you get a lot of people that are complaining saying, there’s no deals out there. The market’s too hot. Well, you just follow the same path that all the other people were going in. So of course, there’s no deals left.

And who’s to say the Huntsville was the best for you? That’s the right question is we want to be understanding based on where I’m at in life, what is the best market for me to invest in? It’d be similar to a football team that says, well, what’s the best play to run? Is if you just run the same play over and over and over, depending on what the yardage are, where you are in the game, are you winning or losing? What players do you have at your disposal? Like even where’s your momentum? You’re going to call plays differently. So while that answer is going to be a little bit more complicated, that’s why we’re going to take some time to unpack today how we determine what the best markets would be. Does that sound good?

Dave:
Let’s do that. That sounds great.

David:
Okay. So the first thing that I like to talk when I’m dealing with clients that are coming to the David Greene Team for us to help them find investment property is we want to create a framework with which they can understand what we’re trying to do. And the best one that I know of is the spectrum. So we talk about everything is in a spectrum. On one end of it, you have something and on the other end of it, you have something else, okay? So you could live a life where you work out every single day. And on the other end of the spectrum is you’re comfortable and never work out at all. You can’t have a great physique and never work out at all. You’re giving something up in order to do it. So we typically-

Dave:
That would be nice.

David:
Yeah, wouldn’t it be? And that’s actually how people get sold things is that the guru selling this program tells you, you can have something on this end of the spectrum, but you can have all the joy of the other side. I remember-

Dave:
Totally. There are always trades.

David:
Like I remember in the ’90s, they had stuff that was, hey, put this like shock thing on your abs and you can lay there and watch TV and wake up with a six pack when you’re done. Like, it’s working out, but it’s not hard. Okay. And the reason I point that out is that’s how people get your money is they look for the part of us that just falls prey to hole, oh, I just have to take one course and I can make hundreds of thousands of dollars flipping houses. And that’s all it is. So nothing works that way.

A few of the trade-offs that we make in real estate will help us understand where we should be investing. So the first would be on one end of the spectrum, you tend to have cashflow. On the other end, you tend to have appreciation. Now, this has often been presented in the past, like appreciation is risky and cashflow is safe or better. So you should always go towards cashflow. And I think at certain times in history, that is true. Just like at certain times in the football game, you might want to run the ball instead of throw the ball. That would make sense. There’s some less risk inherent with running instead of passing. But at the same time, you don’t get yards as easy. And so if you’re losing, that might be the worst strategy ever. I’m just using this as an example to highlight that. Chasing cashflow is not always the best investment strategy for everybody that’s out there.

Dave:
Yeah. I totally agree with that sentiment. I mean, just to continue the football analogy, I really believe in sort of like taking what the market is giving you. And in football, you call it like taking what the defense is giving you, right? And so sometimes if the other team has 11 people on defense and they’re putting 10 people in the box to stop the run and you just keep running and running and running, it doesn’t make sense. And that is in some ways, not everywhere, but I feel about cashflow right now. Like people are saying like, “I need a 1% rule deal.” That doesn’t exist in the vast majority of the places in the US.

Finding any sort of positive cashflow is tricky right now. But that does not mean that there aren’t opportunities. You could throw the ball. Like you could go look for appreciation. Like you said, there’s this whole other side of the spectrum that is available to people. And I hope people start to understand that and appreciation. That was quite fun. But I hope people do start to recognize that it is a really good way to make money, because that is something that I was hoping to talk about today because I see it the same way as you do.

David:
That might be the best way of describing this that we could have possibly come up. But that is exactly right, that feeling of the defensive stack the box, but I am going to stubbornly keep running the ball and if I just run it enough times, eventually something will happen is the same feeling you get when you’re chasing cashflow and there’s not a lot of solid investment properties that will cashflow. All right. Now I want to give a caveat. What we’re not saying is be reckless. What we’re not saying is, well, if they’re stack in the box, just throw a Hail Mary every single time and hope it works out. We’re not telling you to buy bad properties because you can’t find cashflow. What we’re saying is like you said, look for ways, can you pass the ball for short yardage? That is very similar to a run with a similar risk profile, but you’re throwing it away from the defense.

So what I see right now, part of the reason there’s not a lot of cash flowing properties, I think there’s a couple reasons that we should get into. The first is that private equity groups and hedge funds are buying a lot of those properties that cashflow. They’re borrowing money from other people at a cheaper interest rate than you probably can get, Dave, because they’re doing it in such huge amounts. And then they’re going and buying cashflow in properties that use difference of payback their investors. And then they’re just making money off the loan pay down and maybe a little bit of cash leftover and then the appreciation that they get from the property. So your competitors are bigger and better and stronger than you are when it comes to that space chasing these cashflow properties.
Another thing is that there has been so much appreciation in so many markets that you get a lot of investors sort of at like my profile, they’re selling properties and 1031ing into bigger ones. And so if I’ve got a property that I’m going to make, say $500,000 on, and I’m going to pay capital gains taxes on that, if I can 1031 into something smaller that doesn’t cashflow as well, but avoid paying taxes on $500,000, if I just get a 3% return or a 2% return, that’s a win because I saved all that tax. But you on the other hand who have no tax savings, a 3% return looks horrible. And this is something I see a lot of people beating their head into the wall, why would somebody pay that much for that house? This is just crazy. It’s only crazy because you’re looking at it from your very narrow lens of where you are in life and you’re not seeing that they’re in a different situation than you.

So a lot of these properties that used to be very solid cashflow, the price has gone up because the demand for them has gone up because of people 1031ing up in some bigger properties. And so that’s just, you’re running into a stack box when you’re going after those types of deals.
Another thing is that what we tend to find, and I’ve talked about this before, is that rents that are low tend to go with properties that are priced low. And as the value of the property rises, what you can charge for rent rises too, but they do not rise equally. They’re uneven. At a certain point, the value of the property continues to increase while the rent levels out or sort of inches forward. And the reason is if you were able to keep pace with the rent forever, the rent and the price, then the person paying the rent could just buy the house for cheaper than what they’re paying for rent. And most people that are renting are doing so because they can’t buy houses.
But if you were able to pay like $7,000 a month in rent, you’re probably going to be able to buy a house, right? Like the things that keep someone from buying a house aren’t present in a person who can pay $7,000 a month for a $700,000 property. And then their mortgage drops down to like 4,000. And so it was cheaper to own instead of renting. And that’s something that just people don’t realize, as the prices of this real estate has continued to increase, rents cannot keep up. So the amount of properties that are left over that will cash flow are smaller because a lot of them have graduated out of that. Does that make sense so I’m describing it?

Dave:
Absolutely. That is a perfect point because I actually have some data that I was just talking to someone about the other day that backs this up. So there’s this popular metric. People have probably heard it called the rent-to-price ratio. You’ve probably heard of the 1% rule. And it’s basically, you just take a month of rent, you divide by the sales price. And it’s like an excellent way to estimate cashflow. And that metric, the rent-to-price ratio, has been declining since 2011. And so people think like this hot market where cashflow is hard to find was brought on by the pandemic and everything associated with that. And that has accelerated it for sure. But since 2011, home prices have been rising faster than rent just like you said to the point where it just squeezes cashflow, like you are going to be able to earn less and less in that scenario. But on the other hand, it’s great for the people who own the property, even if they weren’t making that much cashflow because their property value is just going through the roof.

David:
Yes. Now that is what we should expect to see at a point in the market cycle or the economy where we have a very strong, healthy. Maybe I don’t know if healthy is right word because we flushed a lot of cash into it, sort of like we put a lot of methamphetamine into this body of our country. So maybe it’s not the best thing, but you definitely feel the energy, right? So that’s kind of what’s going on right now. If you rewind back to 2010, what we found was the opposite, okay? It was not a good economy, the value of homes was lower and the rent was higher. So rent stayed high because all these people lost their homes, they needed somewhere to live. So landlords never had to decrease the rent. And you couldn’t buy a house. You had to rent for a lot of people because they lost their home and they had no credit. So rents were very solid, but the price of homes, the value of them was low because not as many people could buy them, the economy was bad, there weren’t a lot of people that had solid jobs.

So here’s what I noticed. A lot of people like me that got in around 2009, 2010, or maybe just got interested in real estate investing, that’s when you got into the BiggerPockets world, your baseline was set for what is normal, what was actually one of the strongest cashflow markets that you ever could possibly see. The first house I bought, I didn’t know what cashflow was. I literally just knew the rent is higher than what my bills are, but I didn’t understand ROI, I didn’t know it was supposed to work that way. I didn’t know anything. And I bought a house that was three years old, maybe two years old. All I had to do was run a vacuum over the carpet and it cash-flowed $300 a month. It was like a 2,600 square foot, almost brand new home. That never happens. You cannot find that in today’s market. But that was normal. They were everywhere at that time.

So I was going into a market where cashflow was in my favor, like the rules of the game dictated that running the ball was much easier to be successful. So everybody was running the ball, you took it for granted. We’ve now come full circle. We’re in an opposite market. There’s tons of money out there. When we go through a pandemic, the government is pushing more money into the economy, people are getting money from the government to pay their rent. There’s a lot of factors like wind at our back that’s making things go better. And that means the value of these assets are going up.

Now you throw into that. We haven’t been building them for the last 10 or 11 years, hardly at all. And so there’s a lack of supply while demand stays steady or goes up as population continues to grow, we have a shortage of inventory. All these things together make real estate much more valuable. But the element of real estate that cash flows gets harder and harder to find. So you kind of have this dichotomy going on where it’s better to own real estate, it’s going up in value, you want it, but it’s not going to provide cashflow like it used to. And you got to make peace with that.

Dave:
Yeah. That’s sort of what I’m trying to deal with because on one hand, I’m like, I could pick anywhere to invest in the entire United States right now, because I have to. I can’t be close to my deals. And so my option is like, there are markets out there that’s still cashflow. There definitely are. So I’m trying to figure out like, should I go and do that? Because I think cashflow might even get harder to come by in the next couple of years. So like, should I lock in some cashflow now while I can or should I just ride the appreciation wave that’s been going up and probably will continue at least in my mind is probably at least over the long run, I’m going to keep on a pretty solid trajectory?

David:
So let’s have like a philosophical conversation about the nature of cashflow. This go like what was the Oracle in the Matrix, where Neo goes and talks to him. If you own a property, Dave, for 30 years, do you think that you would be able to remember or even tell what the cashflow was on year one?

Dave:
No way. I’ve owned properties for two or three years and I can’t even remember that.

David:
There you go. And if you looked at the money that was made over the 30 years, from 30 years of potential cashflow plus appreciation, plus loan pay down, plus if you refinance it and buy more properties, it starts to get more complicated all the way as you’re building wealth. How much does that year one cashflow even impact what goes on over the full 30 years?

Dave:
Very low.

David:
There you go. It’s similar to having a football team that’s going to play a full 16 games or whatever we play now, 18 games or whatever. The first play of the game is the only thing everyone’s thinking about for the full preseason, but it ends up having a very small impact on your entire team’s success, that very first play. That’s kind of what year one cashflow is like, we’re all looking for it right out of the gate, we want that cash flow right away. But if we look at how much impact that actually has on our financial success, it’s tiny compared to what it’s going to be in three to five years.

So one of the things I like to do is zoom out and say, all right, if I’m buying this property right now, what is the rent going to be in three years, in five years, in 10 years, based on what we’ve seen? And if that looks super healthy and I don’t make money or much money, or even let’s say I lose money for the first year and the second year, the third year, I break even, the fourth and the fifth year, I start making money. If I’m going to hold it over 30 years, the only question left for me to ask myself is can I afford to hold the house for the two years that it’s losing money? That’s where the no cashflow thing was really getting people in trouble, because in 2005, 2006, 2004, they were buying houses assuming they would appreciate, they could not afford to hold them long-term. It was like a hot potato game. They had no way to get that potato out of their hands and it burned them.

Well, cashflow is king, you got to have cashflow because then you won’t lose your house. But what if the rest of your life cashflow is really strong? What if you’re saving 10 grand a month because you have a great job? Does a property that loses $200 a month, is that risky when you’re saving $10,000 a month? I’ve often explained to people like if worst case scenario, you go get a job as a barista somewhere once a week and in a month, you can probably make the 200 bucks that you’re so worried about that property losing so you won’t pull the trigger on buying the property. It is a much smaller risk in many cases than what we want to look at.
So what I like to do is look at all the ways that real estate makes me money. So the first thing I’ll say is there’s five main ways that I see real estate earning wealth. One of them is cashflow. That’s the difference between what you make every month and what you spent. The next is appreciation. And that would be the property going up in value over time naturally with inflation. However, there’s an appreciation element to cashflow that no one talks about. And that’s really big, right? These properties that I bought in 2010 or so, the rent was 1100, 1200. Now it’s like 2,400. It’s a very big jump for what they make now versus before. Then there’s depreciation. And that’s going to be the money that I do make from cashflow is shielded by the value of the property, not the value of the property going down, but it’s like a tax term, an accounting term that the usefulness of the property is slowly going away. So the money that I do make is taxed at a much lower rate or not taxed at all because the depreciation of the property brings.
Then there’s loan pay-down, which a lot of people don’t realize, but it’s like a forced savings account in a lot of ways. If you can delay gratification, you’re actually making a return on your money just from paying off your loan. And then there’s forced equity. That’s where I can make the property worth more, not by waiting for naturally occurring things like inflation to happen, but elbow grease and a rehab or doing something to improve the value of the property. So when you consider that there’s five ways you can build wealth from real estate, the one way cashflow takes on a new context that it’s not the end-all be-all of real estate investing.

Dave:
Yeah. That makes a lot of sense. And I think that there’s this like interesting dynamic between all of those and I have a pretty good sense of what matters to me right now in terms of that. But if you were new and just getting into real estate investing, it’s kind of like overwhelming to think about these five different variables and do I care more about appreciation? Do I care more about loan paydown? Do I care about cashflow? And cashflow is easy to think about because it’s like getting another paycheck. It sounds really exciting where the other ones are delayed gratification. So how would you balance these things better? Is there a better way to think about than just like cashflow first, everything else later? What would you recommend to people in terms of like how to balance these five different ways of making-

David:
That’s such a good question. And in sticking with our football analogy, there are times where a team will run the ball to try to get the defense to stack the box to open up the passing game, okay? There are times with investing where you will start off with one strategy to open up doors for you and other areas to adapt to a different strategy. And that is where you have to start when you’re trying to figure out where should I invest, what type of property should I invest in, don’t ask yourself, what’s the best? Ask yourself, what’s the best for me? So we know that there’s a spectrum of cashflow versus appreciation. What we want to try to figure out is like, alright, what market am I going to invest in? And what are the strengths and weaknesses of that specific market?

Dave:
That makes a lot of sense. So for me, I have been investing for a while and I have a thesis, like what I want to invest in is really that like appreciation, I think is going to be really strong for the next couple of years. But at the same time, I want to come close to even with cashflow. Like you said, like if it’s slightly under, I don’t really care, I’d love to make a couple bucks a year just as a cushion in case anything goes wrong. And that’s sort of like how I’m balancing these things. So I guess once I know that, like I know that that’s my ideal goal that suits my part of life, I’m not trying to retire right now. So I don’t care that much about cashflow, like is now the time, should I be looking to pick a market at this point?

David:
You just said something very insightful that we should make sure we highlight. And it’s in general, cashflow is most necessary when you’re in retirement. When you’re of working age and you have a career and you don’t hate it and you’re okay to work that job, for that person, cashflow is much less important. You don’t need it as badly. You will need it later in life or you’re going to want it later in life. Okay. And what I’ve found is the concept of delayed gratification is very applicable to real estate.

So most of the time, if you look at what creates the most wealth, it’s appreciation. And I know that’s a bad word to a lot of people, because it sounds like you can’t guarantee appreciation, but I just want to challenge that a little bit. Okay. You can’t guarantee appreciation. Can you guarantee cashflow? Okay. People will say, well, I don’t know if the value of the property is going to keep going up and might go down. I don’t know if the rents are going to keep going up. What if they don’t? Well, how do you know that they’re not going to go down? If you don’t know that they’re going to go up, can you be sure that they’re going to stay the same? None of this is guaranteed. There is no safe place that if you just go after cashflow, you know you’re going to be all right.

And what I’ve found is if you can delay when you cash out on that property, you’ll make more money in the longterm. So what I like to say is on one end of the spectrum, you’ve got cashflow. On the other end, you’ve got appreciation, long-term wealth building. How close to the appreciation part of that spectrum can you get without extending yourself so far that it’s a risky financial situation for you?
So what you said, Dave, was very clear, like I want to be breaking even or making a couple bucks, I’ll push it all the way to appreciation, but I don’t want to get into negative. So now we can kind of figure out, well, which markets work for what you’re describing there? Where can you get a property that have strong appreciation potential, but also not like Beverly Hills, you’d be losing a lot of money? I think your appreciation will be great, but you’re going to go buy a mansion that’s going to cost you 20 grand a month, you’re going to rent it out for 12 grand a month, you’re going to be coming out of pocket quite a bit. But over 20 years, what’s that mansion going to do for you? It’s just, are you at a point where you have $8,000 a month to throw away a real estate? No, you don’t. So that on the far end of that spectrum, we start moving back towards the cashflow side.

So what I would say is, if you want to figure out which market you should be investing in, the first thing you look at is what is making markets appreciate? All right. One of the things that makes the market appreciate is supply and demand. So we want to look for areas that have a limited supply naturally or by any other means. So some of the things that I look for, and I talked about in Long-Distance Investing would be like geographic barriers. Okay. So Austin, Texas is sort of like has a river on one end of it that stops them. They can’t build any more houses past the other side of that river. And all the properties within the downtown side appreciate much more than the properties outside the river, because people have to sit to commute and across the bridge.

Sometimes you’ll see barriers that are political. Grant Cardone mentioned on the BiggerPockets Podcast that he invested liberal areas because they are much less likely to approve new building permits, which means that the supply stays limited by political influences. So an area like maybe Kansas, I would not expect to be appreciating a whole lot because there’s so much land, they could just build more houses. The supply and demand never gets out of whack versus like Berkeley, California, where it’s very difficult to build anything, it’s very liberal, it doesn’t have a whole lot of light available to it. There’s some geographical limitations because it’s sort of in the hills. That property is going to appreciate a ton, if I’m making sense with that so far.

Dave:
Oh totally. Yeah. It’s like, there’s just constraining half of the equation of supply and demand. I grew up in right outside New York City. And when you said that, I thought instantly of Manhattan, like it’s this tiny little island and all of the land is already taken up. So the only way you build more in Manhattan is by knocking down that something already exists and building something bigger on it, which is super expensive, it takes forever. And that’s why homes appreciate. For 10 years before I moved to Amsterdam, I lived in Denver and you may have heard of, it’s a smaller town, but Boulder, Colorado, they have some of the strictest building rules in the entire country. They have moratoriums on growth. And so think about that. A lot of people want to live there, they’re desirable places to live for a lot of people. And you just aren’t that many houses that is like the perfect recipe for things to go out. So got that. Number one is like barriers to supply essentially, like places where they can’t just build their way out of rapid appreciation.

David:
Those are perfect examples. And I liked the way you phrased that. You’ve taken out half of the equation by barriers to supply. Just like if you’re a defense in a football game, if I stopped you from being able to run the ball and you have to pass it, much easier to defend, right?
So the other half of that equation on this line would be demand. Now, if you have lack of supplies, like Manhattan could end up not appreciating if nobody wanted to live in New York. So if the government over there runs their economy into the ground, they chase everyone away, businesses don’t want to be there, people don’t want to work there, then Manhattan real estate becomes less desirable. What made it desirable is the combination of the lack of supply with the amount of money that you can make in Manhattan, because that’s where some of the best jobs were, similar to like the Bay Area in California, where I live. The reason that real estate is so expensive here is because you make so much money here, the wages are really high. A lot of people don’t realize, nurses in this area make a $100 an hour. So they can afford that higher priced home.

So what we want to look at are what factors would limit the demand for an area? So the first one to me is always going to be employment. Obviously people want to live in a place with fun stuff to do, they like nice weather, but even more important than that, they want to live near where they work. So is this an area that is drawing business? Is this an area that has seen wage growth? What type of industry is moving here? Okay. So if there’s a certain city that is growing, but it’s growing entire manufacturing, I wouldn’t expect to see rampant wage growth from an industry like that. And the opposite might be the tech industry. So some of the hottest markets in the country, if we were to look at the last five years and say, what’s appreciated the most? Austin, Seattle, San Francisco, San Diego, Huntsville, what else? What am I missing here?

Dave:
Denver, Boise.

David:
Yeah, Miami, they’re all tech hubs. And that’s because tech companies moved there and it doesn’t matter that they’re tech companies, it matters that they pay a lot of money. Tech companies can raise a lot of money from private investors, then they can pay really high salaries, they’re attracting the smartest talent. And so wages go up. And when wages go up, you can afford to pay more for a house. So if you can afford to pay it and you want it and there’s not very much of it, the price of it is going to go up. So we want to look for cities that we have a stable or a growing economy. That actually matters.
So one of the reasons Detroit has just been struggling for so long was that their economy was based on the automobile industry. And when that fell apart, they got hurt really bad. Hollywood has typically done really, really well, but a lot of that is because movie stars live there, people that work in the entertainment industry that make really good money, executives for these companies live in Hollywood. Well, a lot of that is moving to Atlanta. They’re actually filming movies in the Atlanta area instead. And if that continues, I would expect to see some of the demand for Hollywood could go down a little bit and the demand in Atlanta would start to go up. So that first factor on the demand side that I would look for would be what is the job market? What’s the economy doing in that area?

Dave:
Nice. That’s great. So it’s funny because for BiggerPockets Insights and a lot of the content I write for BP in YouTube, I use statistical methods to predict appreciation and rent growth and these kinds of things. And all the stuff that I’ve found from a math perspective really aligns really closely to what you’re saying, like wage growth, employment growth. And the one thing I did want to add is just population growth, just like places that are growing and more people are one of the things that really, at least from a mathematical standpoint, tends to drive up appreciation. So I’m glad that we see these the same way, because I think that these are people always say that appreciation isn’t predictable. Like you said, they’re not, it’s not guaranteed. Of course, it’s not guaranteed, but that doesn’t mean there aren’t factors and indicators that you can look at to try and figure out where it’s going to. And I think the list you just gave is a perfect example of that.

David:
And the other part of the demand spectrum after the jobs you just mentioned, it’s population growth, where are human beings moving to? Because as more people go there, demand will naturally go up. So I don’t know if I don’t have any data to support this and I don’t know if anybody does, but the three things that I look for in the area, the first is climate, because you could get a $60,000 house somewhere, but if it’s miserably cold or something, not many people want to live there. So warmer areas, I think over time tend to draw more of the population to them. The second piece would be the tax laws. And right now, this is huge. So you see a lot of Californians that are fleeing California, because we keep hearing about, we already have the highest state income taxes in the country. They’re wanting to raise it even more. So I think they would try to bump it up to 18% this last go round and it was voted down. But the next time, they’ll get closer. The next time, they’ll get closer. Eventually, that’s going to happen.

So if you’re being taxed 40, 45% on your federal tax and then you’re also paying 18% on that, you’re now looking at more than half of your income is being taken in taxes. So you’re making all this great money in California, but you don’t keep any of it. A lot of Californians are moving to states that have no or low state income tax. So Texas, Florida, and Tennessee are some of the biggest ways we’ve seen appreciation happening. And it’s not any surprise that those are all states with no state income tax and positive climates.

Dave:
That’s a really good point. The climate thing is like something I can never put my finger on, but you always see the Sun Belt. Whenever I do these analysis and looking at the most popular places, it’s like Arizona, obviously Southern California, but Texas, Idaho. I mean, Colorado, people think it’s freezing, but it’s beautiful weather pretty much year round. That’s a really interesting point that I’ve never really considered.

David:
You don’t hear a lot about North Dakota, South Dakota, Minnesota, Michigan, right? You’re just not hearing about rampant appreciation in those areas.

Dave:
No. No. You said call that I thought, I went to school at the University of Rochester in Upstate New York and it’s like, basically right next to Buffalo. And I mean, those are actually really good cashflow markets, they tend to be, but they are freezing. I just can’t imagine people all of a sudden deciding that they want to live in a freezing climate.

David:
Well, and the people who are living there probably are there for some purpose other than leisure, they’re going to school, there’s a business there, it’s cheaper. There’s some reason that they’re there, but if you’re trying to find appreciation, you’re trying to track the money. And the money’s not going somewhere that they don’t have to be, they’re going to places where they can afford to go and for leisure reasons.

Dave:
Totally. So we’ve talked about this appreciation, that’s my main goal, but for a second, because I know there are people out there who do want to focus on cash flow. If you were looking for a cash flow market, I have some things written down, but I’m curious, what do you look for if you’re looking for a cash flow market? Is there anything that can predict cashflow prospects?

David:
Your first and best metric is your price-to-rent ratio. So the closer I get to the 1% rule, the more likely they are that they’re going to cashflow. And rather than trying to track where has the highest rents, because you’re going to see Beverly Hills show for highest rents. It just also has $50 million properties that they’re getting those. What you should look for are the lower priced homes. So if you find the area that has houses in that, like 70 to $130,000 range, odds are the rents in those areas are going to be very close to the 1% rule.

Dave:
I honestly, I think it’s a great proxy, it’s super easy to figure out too, like you just look at the median rent and look at the median home price. And then like you said, like taxes seem to be pretty important, like if you’re getting taxed, less cashflow can be better. I also think similar stuff that you said to appreciation is like income growth and wage growth. Like if people are making more money, then rent is naturally going to go up. And so I think that they overlap. And that’s probably a good segue because these metrics, like wage growth, employment growth, supply and demand is sort of how I’ve been looking at markets. And so I’ve been seeing, I’ll just list off a few. Like when I look at the spectrum and I’m like, “Oh, maybe I should go to more on the cashflow side.” I do see things more in the Midwest, sort of I guess Upstate New York is like Rochester, Buffalo, Detroit. When I look at the other end of the spectrum, it tends to be the West Coast, like you were saying California.

But then the ones that I think show positive aspects for both are places like Tampa, for example, that seems to be like a good market to me. So I’m wondering like, I don’t know if I’m really going to invest in Tampa, but let’s just say that I’ve looked at these metrics, I figured out, because I do think it is good stuff, what do I do from there? That’s what I really am confused, because like I like looking at the markets, I like doing this mathematical analysis, but where I keep getting stuck is like, all right, let’s say I picked Tampa, what do I do now?

David:
Well, Tampa is a funny market, because I’m looking to start investing there myself. That’s when I’ve actually identified as a place I want to get into. So the first thing I have to ask myself is what is my goal? So for me personally, my goal investing in Tampa Bay is going to be to get the best dirt I can, the best area that I can and then find a property that will work for what I want. I feel like a lot of people do it backwards is they say, well, I want a property that will cash flow. So what market can I get cash flowing? I’d rather say, all right, I want to be in Tampa, how do I find a property that will cash flow there? It’s going to be harder. They’re not everywhere, okay?

So a couple of strategies that I’ve used for clients out here that will work for me out there, buy a really big house with a lot of square footage that has a floor plan that’s easily split up into different units. Rent out by the room. That’s another thing you could do. So that means you have to find a place with quite a bit of demand, something near a hospital, something near a college, something near where people are going to want to go. Another one could be a short-term rental. Short-term rentals bring in more income than a traditional model typically would, but you got to make sure you’re buying it in a place where people are going to want to visit or they’re going to want to stay there. So you see how this becomes a little bit more complicated and that’s what scares people away because you have to think about it a little bit more.

Once I’ve identified what type, those are my three strategies that I’d be using right there, it’d be a property with a lot of square footage, a property I could rent out by the room or a short-term rental. Now I want to find a person who knows that area who can help me avoid buying into the bad neighborhoods or bad properties and can save me time so I’m not spending my whole day looking at every property available in Tampa Bay and trying to figure out that market myself. So usually your real estate agent is going to be the first person you want to contact when it comes to someone who can make this process much more likely for you to be successful.

Dave:
Well, that makes a lot of sense. Yeah. I want to get back to the agent thing in a second, but you said something that just sort of like made a light bulb go off in my head. You said that like you want to find the best dirt and then find a strategy that works. And that is definitely what I would do if I was investing in Denver, I would never just be like, oh, I want to find cashflow. And then I’ll go to any market. I know Denver well. When I invest in it, I know the neighborhoods I want to buy in. And I find something that works. And I don’t know why up until you just said that, I was thinking about it totally different for out-of-state investing, I was like, “I got to find the right zip code. Then I’ll invest in that.” But what you just said makes so much sense. So thank you for saying that.
Then finding an agent, I’ll just be honest. My agent is, he’s a great agent, but I fell into that because he’s one of my best friends and it just worked out really well that we’re both into real estate, but how do I find a good agent? And you’re obviously an agent and know this really well, but like, what do I do?

David:
All right. So here’s the bad news. You got to look at finding an agent the same way you look at finding a property. You got to assume most of them are the wrong fit and you got to find the right one, okay? A lot of people assume every agent’s the same, I just want to find the one that is most convenient or easiest or will lower their commission or something similar to, hey, every property is the same, you just got to find the one that you can write under list price that you can get it for the most under list. Expect to put some work into finding the right agent. Now this doesn’t mean like interviewing a 100 of them and grilling them. It’s more do I know what I’m looking for in that agent? So when I’m looking for rental property, I know what I want. And when I find what I want, I am happy to pay over asking price.

I just put one under contract two weeks ago in the East Bay, California, that was listed at 1.8, I believe. And I wrote it closer to 1.9. And it had been on the market for two weeks. So it had just dropped, started at above 2 million and dropped down. Well, the appraisal came back at more than what I paid, even though I paid over asking price.

And the reason that I was able to move on that property that quickly is I knew to me, this property is very valuable, it’s got a ton of parking and I’m going to need that for all the people that I’m going to put in there, it’s got a very high walking score. So tenants are going to want to live in it. It’s not that far away from an apartment complex. So if I have a lot of tenants in there, the neighbors aren’t going to be irritated by that because they’re used to an apartment complex being somewhat next to it. It’s super close to the freeway. There’s all these things that’s very hard to find in a property that I recognize and boom, set, I’ll go for it. And not only will I go for it, I will go for it aggressively.

There’s like an aggressive patience you have to develop. I will be patient for the right property. When I find it, I will go after it with everything I have. Your agent is like that too. They got to know, I want a person who has knowledge of the things that I’ll need to make this work, they have rehab and contractor referrals, they have lender referrals, they know how to talk to other agents, they can get to the bottom of if you can get this property or not, they’re not like, “Well, let’s just throw our offer in and we’ll figure it out.” And you have to know what you’re looking for in that person. And when you find it, you have to be very intentional about honoring their time and making them motivated to want to work with you. I think a lot of investors make the mistake of like, well, I’m the person that they should be chasing me. But to the agent who doesn’t know you, you’re just another of the 20 leads that came to them that month that wants information from them that isn’t going to buy a house.

Dave:
Yeah. That’s such an interesting thing you learn about, it’s like, you assume that an agent wants to work with everyone, but an agent like yourself has so many people probably coming to you that you can choose to work with the people who know what they’re doing and think about and are going to actually act on a property instead of just kicking the tires a little bit. And I have worked with an agent and I know that on BiggerPockets, you can find pretty good agents. I should mention that there is an agent finder, it’s biggerpockets.com/agents. There’s tons of good agents there. But I’m just trying to figure out, like, do you have examples of like two or three questions I could ask to get to the bottom of what you were just talking about?

David:
So first off, I love going to BiggerPockets to find your agent because they’re probably listening to this same podcast that you are right now.

Dave:
That’s so true.

David:
They’re hearing the same things that you’re hearing and they want these properties also. Now there’s this myth that goes around that, well, are we competing over the same properties? If your agent has like $10 billion, sure, they’re going to buy all of them. They’re not going to find one for you. But if that’s the case, they’re not working as an agent. So no, even me, I buy a lot of rental properties. It pales in comparison to how many I find for our clients. There’s always another one I can get for myself. In fact, I bought a couple, like I’m trying to get one right now in Maui that our client has it in contract. It appraised for less than what it’s worth or what, sorry, it appraised for less than what he has under contract for it. And he doesn’t want to pay the difference. And I’m grabbing that thing if he decides to back out of the deal, right?

So I could have bought it, but I would rather get it for the client get his repeat business, make him more money, get referrals coming in than I would just grab every single deal offer myself. There’s plenty that will come around and there’s plenty I can grab. So don’t worry about your agent competing with you. What you want is an agent who is interested in viewing real estate from the same lens that you do. They know this property is worth, the list price is less than what it could be listed for or this is an amazing cashflow property. The reason I want to buy this one in Maui is it’s in the same complex where Brandon’s is. And it’s a very unique floor plan where basically you can take a two bathroom and turn it into two different units, a studio with a bathroom and a one-on-one. So your rent isn’t double, but it’s close to double because of that. The right agent knows those opportunities and sees those angles and says, “Look, you should buy this property. And here is why.”

So one of the things you should ask is when you’re finding like, hey, you’re trying to figure out this is a good fit for you, what are some of the ways you recommend for investors to win in this market? So if you asked me that question, I could be like, “Boom, boom, boom, boom, boom. Here’s exactly what you’re looking for.” If you go to one of the agents in my office that doesn’t know this that is really eager to work with you, they’re going to give you a, well, a very general roundabout non-specific answer because they don’t know. So that’s one of the things that I like to start off right away.

What strategy would you recommend? Another thing I always like to say is, do you have contacts that can help me with the rehab, with estimates on the rehab? Because if they’ve worked with investors before and they know this, they have had to come across these same problems you’re going to have and they’ve had to solve them. So if you ask them, they’re like, “No, I don’t really have any construction referrals. No, I don’t really know any lenders that do non-qualified mortgages that could help you. No, I’ve never talked to property manager.” They don’t know what you’re trying to accomplish just right off the bat. It doesn’t matter if they tell me that they know. If they don’t have any of those contacts, they don’t know. You can also ask them, can you walk me through how you would analyze a property? Can we grab one on Zillow real quick on the phone and you show me how you would analyze this?
So if you ask me that, I could tell you right off the bat, well, I look at the neighborhood and then this is a good neighborhood. And I can tell you right now that if the property costs this much, I can run it through my mortgage calculator, your payment would be this. That means rents need to be right around here. BiggerPockets has a rental estimator that I can go look up really quick and see what the rents are. Nope, this isn’t going to work. You’re not close enough. And I don’t know everything about everything in real estate, but just based on that conversation, you can tell, I probably have a pretty good idea of how to advise you. If they don’t even know how to calculate numbers on one, then they’re not somebody that’s worked with investors before.

Dave:
Wow. That was really helpful. So just to recap, I think the three sort of questions are, once you find an agent you’re interested in talking to, again, you can look on biggerpockets.com/agents to check that out. But the three questions were like, what strategy would you use to win in this market? You would ask for contacts, which I want to come back to, because I think that’s a super important thing. And the third one was like, can you analyze a deal at least as well as I can? And like, can we have the conversation about the numbers I’m looking at? And you can weigh in on it intelligently and we can actually have a good conversation about that.

David:
That’s exactly right. And I throw a bonus one in there is a question I like to ask agents when I’m going to work with them is I’ll say, like in Tampa Bay, tell me what most people do for work in this neighborhood.

Dave:
That’s a good one.

David:
If they can tell me right off the bat, oh, they work over here, they’re all software engineers or whatever, they know that market. They’re familiar with it, they’ve sold houses in it, they know the demographic of people. If I get a, well, you know, they weren’t, that they don’t know what that will look like.

Dave:
That would be a nightmare. I can’t imagine like being a real estate agent being interviewed by you to be your real estate agent, you would ask the hardest questions. That would be very uncomfortable.

David:
Well, what you’re looking for is like, they can’t be SU, right? If I say, well, tell me why I should work with you, you can be asked me with a bunch of reasons. Okay. But if I ask specific questions that the only way you could know them as if you have done this before, then I’m saving both of us time.

Dave:
That’s a great point. And so do you take the same approach with the other people on your team? Because I feel good that I can go in BiggerPockets, find a list of good agents, interview them, talk to them. But like property managers, I feel less confident about for some reason. And I mean, lenders, I think I can find one, but like, how do you build out the rest of your team? Because like the management and day-to-day stuff is kind of what really is the hardest thing for me to wrap my head around.

David:
Yeah. It’s also the piece that people pay the least attention to. It’s a big mistake. Everybody, do you remember playing the Oregon Trail? Dave, are you old enough to have played that game?

Dave:
Absolutely played the Oregon Trail. You’d go shoot the animals and they’d go up like this with all four of their legs.

David:
So you remember the most fun part of the game was shooting the animals, right? Your little pellet moves across the screen really slow. So I would go out there and I would just do that the whole time. And I’d kill like three Buffalo and two deer and a rabbit. And it would say, David has 9,000 pounds of meat. He can carry 15 pounds back.

Dave:
You can’t carry it home. Yeah. It’s so disappointing. You snag yourself a bear and then you can’t even carry it home.

David:
That’s exactly right. The carrying it home is the property management aspect of rental investing. Everyone can go out there and take down a deal at some point, they can shoot the bear if they fire enough bullets. But once you’ve got it, how do you manage it? How do you keep it profitable? That is the hard part of investing. And we never think about it because it’s fun to just go out there and hit space bar and shoot bears. And so that’s one of the things that I just want to highlight is we tend to focus on podcasts like this on analyzation and finding the deal and creative ways to put it in contract. It’s all like lining your sites up with the bear and timing the shot. But once it’s down, there’s like way more work. That’s just the tip of the iceberg is the part we’re talking about.

And when you buy a property in a really bad area, there’s no way you’re getting all that meat home. You can’t change that. You’re always going to be struggling with that property. And what I find is most people are looking for a property manager that can rescue them because they bought in a bad area. And it’s just not going to happen. They may be able to help you carry another 15 pounds of meat home, but you’re still leaving 8,500 pounds or whatever on that bear. So the first thing that I do to avoid bad experiences with property managers is I just don’t buy in areas where they have an uphill battle. It just isn’t worth it. If you have to do that to get your foot in the door, you get in, you make some money and then you get out and you get into a better area, that would be a strategy that works, but you don’t want to, just like you don’t want to on-site kick all the time in football, there’s times where you might have to do that, but that’s not a thing you want to be doing all the time.

So when I’m interviewing them, I want a property manager that I will say, listen, I’m going to run this deal by you before I buy it. And I’m just putting you at risk, like assured, you will be the one who is my property manager, I’m not going to say, well, if you say no, I’ll use somebody else. I want you to tell me, honestly, do you want to manage this property?

Dave:
Wow. That’s an interesting approach. Yeah.

David:
Right. It’s kind of like introducing your friends to your girlfriend. And you’re like, “Hey, what do you think about this person?” Because they’re going to shoot straight, like, we got to be around her all the time if she’s going to be your girlfriend. I want my property manager being very honest with me about, no, I don’t want to manage that property. You want to be on the other side of the train tracks. We want to be looking over there. So that’s the first thing I do is I just let them know, you will be involved in this process because you will be my partner once I take this bear down, is this a thing that we want to be cleaning all the time? Is this meat we want to be eating?

Another thing that I’ll do when I’m talking to them is I’ll find out how did they build their business? Now this is very few people talk about this, but there’s two basic models that people get into with property management. The first would be like a franchise model where their goal is to make money in the company. So what they’re going to do there is they’re going to try to get as many doors under management as they can with as minimal amount of employees as possible. And they’re probably going to have to nickel and dime you for a lot of different features they offer to make money. That’s not what you want.

What you want is someone who owned a bunch of properties themselves, managed it themselves, hired people to leverage out their own work and said, “Hey, I got a business model here where I got this thing down pretty good. I should start taking on other people’s stuff.” And they grew organically. So now they’re more likely to treat your properties like they treated theirs. And the system was developed for their own property and they’re not trying to make money out of this business. They’re trying to build relationships with landlords so that they can get rental property that they will buy too. That property manager is going to have a lot more safe procedures to protect you and they’re going to care more about the properties because they have their own.

Dave:
Wow. That was awesome. Honestly, I had no idea what I would even ask these people. And I want to just touch on the first thing you said, which is so true, it’s like, we focus so much on deal analysis because it’s important, you got to find a good deal. But so much once you’ve become a landlord, once you’ve been investing for a while, you realize like so much of investing is running the day-to-day of the property or hiring people who could run the day-to-day of the property. And in many ways, it is as important as the analysis and upfront purchase or maybe even more important depending on how long you run the property. So this is really what’s bothering me.

But now I feel like I have some good questions to ask. I never would have thought of just picking one overhead and getting them involved, so like they are bought in. I love that, because they’re on the hook now, they said that they can manage this property. And I don’t think a good property manager would say they can manage a property that they don’t want to. So you know that they’re bought in and they’re going to go do a good job for you.

David:
Yeah, it’s sort of like, if you talk to your bookkeeper, like my CPA, every time I buy a deal, I run it by him first and we talk about, would this work for the tax savings that I’m looking for? Would I be able to shelter my income this way legally? Like, do I need to start a new corporation to take title of this one? Or can I put it in one that I already have? We have that conversation and we make it all even and straight and nice and clean before I buy it. And then he is able to keep the books for it very easily, he’s able to track the numbers. And when tax season comes, it’s already taken care of.

What everyone else does is they just go buy a bunch of stuff and then they go dump on their CPA, here’s the big mess that I made, can you clean it up? And then they’re always frustrated with their CPA because everything’s taking longer than it should. We treat our property managers like that too. It’s like kind of like my chiropractor, I go to jujitsu and I get twisted into pretzels and I show up and I’m like, “I need you to fix me.” And I’m always showing up saying, I need you to fix me. Don’t do that to your property manager. Let them be a part of that process.

Dave:
Yeah. So that is awesome. I mean, I feel honestly almost better now already. I still need to think about what market, but now I feel armed with the right question. So just to summarize what we’ve talked about, because I think I’m at the end of the questions I brought to ask you, which is basically like talking about looking at your own where you are in life and deciding like, do you need cashflow? Do you need appreciation? Once you get there and you figure out what’s important to you right now, then you can go on and pick a market. We talked about some of the metrics there. Then next step, find an agent. There are some good questions you asked. Next on property management. Great questions to ask there. What am I missing? Those are the questions I had. Are there questions I should be asking that I have not asked you yet?

David:
As far as what to look for in the area that you’re wanting to buy in.

Dave:
Well, just like to buy out of state. I’m feeling excited now and I’m going to pick a market and I find an agent, find a property manager, but like, are there other factors that I’m not thinking about? Are those the main things?

David:
It’s understanding why that market, what works in that market and what that market is designed to do. It’d be like if you drafted a running back with a 4.2 40, just can fly, but then you’re pissed off all the time because they don’t block. They’re not meant to block it. And it’s not their fault that they’re not blocking. It’s when you decide, hey, I think that Miami, like that’s an area that I think is going to be appreciating massively.

I think a lot of businesses from New York are moving into Miami. They’re tired of what’s kind of how that state’s been managed with COVID. They want to be in a better climate. The technology increases we’ve had have made it so you can work from home. There’s this perfect storm of you don’t have to live in a freezing cold place anymore. It’d be miserable. And Miami is definitely not freezing cold. And so a lot of businesses are going there. But because of that, you’ve got guys with millions and millions of dollars that will go buy a condo there for 2 million and don’t care if it cashflows or not, they just know in 10 years, it’ll be worth 5 million. That’s as far as their sophistication goes. They make their money in the stock market, they make their money in other areas. So real estate is just like a diversification of their portfolio. They’re not listening to podcasts like this. They don’t care about all the things that we’re looking at.
If you’re going to buy in Miami, don’t expect it to cashflow super great. That’s what we’re getting at. So make your strategy tailored to that purpose. If you know we’re going to Tampa and I might break even, make a little bit of money in the beginning, understand that in five or six years, you should have X amount of equity and X amount of cashflow and have a strategy put in place that if I hit more equity than cashflow, I’m going to take that equity and 1031 into a different market that maybe is more cashflow strong at that point. And so if you know, hey, we’re going to run the ball this many times and we’re going to open up the defense and we’re going to pass it. And then if we get to this point, we’re kicking a field goal, but if not, we’re going to go for a touchdown, you’re way more likely to win than if you just have one strategy and you just say, I’m just going to keep pounding this one thing over and over and over and they get frustrated all the time.
So I know that’s somewhat of a general answer, but when you’re saying like, hey, what more should I be looking for? Ask yourself, is there a ton of land that can be built on top of this already that’s going to limit my appreciation? Does that matter to me? Or maybe I don’t care if it limits appreciation because it’s cash flowing really strong. Is this an area where I’m going to be competing with other landlords for tenants? That’s the downside of the Midwest market a lot of people don’t think about. A lot of those turnkey companies operate out of the Midwest because they can get cash flow much easier to the investors. But when you have a vacancy and it sits forever and you’re lowering your rent to try to draw people to be in your unit, that’s a lot worse five years from now than when, hey, it was a little expensive and tough to get into that market. But every time I have a vacancy, I jack up the rent and people pay me even more than that to get in there.

Dave:
Awesome. And now I’m excited. I feel like I need to come back in a couple of weeks and see if I can pull the trigger on something.

David:
All right. Well, this has been fantastic, Dave. I really like being interviewed by you. It’s nice to be able to sit on the other side of this thing and answer their questions instead of ask them. And we will be here all day, but we, go ahead.

Dave:
No, sorry. I was going to just say that this has been a lot of fun. I’ve learned a lot. I hope everyone at home was learning along with me, because I feel like I hijacked the podcast for my own purposes, but I think this is just, it’s a hugely important topic right now. It’s a really good time to consider this kind of stuff. So thank you for indulging me and teaching me all this stuff.

David:
I don’t think anyone minds that you hijacked it because that’s what Brandon Turner has done for eight years. And that’s how he’s built his real estate empire. So you’re just falling right in line with what we are used to.

Dave:
Well, he’s not here today. He’s not here today. So we get to do a lot.

David:
That’s exactly right. So that we’re not here all day, we’re going to move this thing on. We’re going to get into the furious four. And Dave and I are going to ask each other four questions that we think are most applicable to the plight of the real estate investor today. So I will start with number one, Dave, what is one metric investors should pay attention to when making decisions they often overlook?

Dave:
One of my personal favorites right now is wage growth. I think it’s really interesting to see what’s going to happen, especially with inflation right now and all the stuff that’s going on in the economy. It’s a really good predictor of both appreciation and cashflow and it’s sort of in flux right now. It’s growing faster than it has in years. If that’s going to keep up, I’m not quite sure. So that’s something I’ll be keeping an eye on for sure.

David:
That’s profound. I love your answer. And another I’ll add onto what you’re saying. Money is flowing into the economy, but it’s not flowing equally into every part of the economy, like some streams are much thicker and heavier than others. So wage growth is often dependent on the type of industry. And certain industries are having wage growth that is in much higher proportion to others. So paying attention to specifically what type of industry is in that area will help you figure out what wage growth to be aware of. I think that’s a very great piece of insight.
What I would say is investors need to pay more attention to how many days properties are on market. If you really break down what makes real estate work, you get to an understanding and I’m writing about this in my next book for BiggerPockets, which is for agents. It’s that buyers drive markets. The number of buyers in the market is the most important metric that me as a real estate agent or an investor can possibly know, but there’s no way that buyers don’t register to tell you that they’re in the market. It’s not like a listing where you can look and see how many sellers are in a market. So I have to try to figure out based on how many loan applications went out and pre-approvals were issued because that number is tracked, how many showings may be happen. You’re always trying to figure it out.
But the number one metric that I can use that will tell me how many buyers in the market is how many days on market houses are sitting for. So when houses are sitting on the market very low day on market, you should expect to write over asking price offers. You will see appreciation because there’s a lot of demand for it. It will be harder to get into that market. That doesn’t necessarily mean it’s bad, but it does mean it will be more difficult. When days on market starts to get higher, there’s less competition, you’ll typically see less appreciation going on in a market like that. And you probably need to be a little pickier about which properties that you go after. And so most people don’t look at that metric, but I recommend that they should.

Dave:
Nice. I completely agree. And it is crazy right now. So it is something you definitely need to keep an eye on because it is pretty much at all time lows. I think it’s bounced back a little bit, but it is pretty much as low as it’s ever been. Okay. So question number two. What is one habit investors fall into, they avoid if possible?

David:
I think it’s the fact that investors get that I’m going to shove this square peg into a round hole mentality and they just keep doing the same thing. So we talked about how that applies with cashflow because that’s one of the things that people are just trying to force, whereas I’ve taken what the defense gives me, hey, I can cash flow really strong after five years of rent increases and I’ll be very glad I bought this property and it will have gone up and I’ll probably refine and get my money out, but that’s not happening for five years. So can I delay gratification and be okay with that result versus continuing to look for that one diamond in the rough that all the other 1000 buyers in my market are all looking for?

Dave:
It’s like using someone else’s game plan is the way I would think of it. It’s like, everyone’s, you listen to this podcast to get advice and to listen and learn some really applicable skills that you can use in your own investing, but everyone’s financial situation, everyone’s strategy has to be different. Everyone’s, the amount of money you have to invest your own personal risk tolerance when you want to retire matters so much. And so you need to look at what you have and make your own decisions about what’s right for you. We’ve talked a lot about that on this show, but I think that’s the habit I see most from people is trying to apply their situation to a strategy that just doesn’t work for them. And I think people really need to start getting away from that.

David:
That’s a great point. It makes me think of sort of in sports, you can take inspiration from other players, but you can never copy their game completely because you don’t have their body and you don’t have their skills. And so in this podcast, I talk a lot about what I’m doing in my own personal portfolio and I’m hoping that that inspires the listeners who hear, ooh, that could work for me or that wouldn’t work for me, but that might work for me in five years after I hit these numbers. So don’t try, like you said, Dave, it’s not good to try to copy somebody else’s game plan, but take inspiration from their game plan, take the pieces out of it that do work for you and then apply it.

Dave:
Absolutely.

David:
All right. So next question. What is one resource BiggerPockets offers that many members are not aware of?

Dave:
Well, I’ll just go back to the one I said, because I’m excited about to use it now, which is the agent finder. And you can find that on biggerpockets.com/agents. And it’s just a good place where investor-friendly agents, people who genuinely know what they’re doing are and hanging out. So if you are looking to invest out of state, I would recommend looking there as a good place to start. And don’t forget to ask those three questions David outlined earlier in the show.

David:
Yeah. And I’m one of those agents on there, by the way. So we’re not just saying to use it. I’m one of the people that you can go in there and find and I can represent you in the areas that I work in.

Dave:
Perfect. And what is one BP resource that you would?

David:
I think people need to go check out BiggerPockets Insights. So this is the area where a lot of the information that Dave and his team have compiled data and not only do you provide the data, but you also write articles that summarize and help people process what this data means and how it can be applied. So there’s information about which areas are expected to see the most wage growth or the most rent growth or where you’ll get the biggest bang for your buck or where people are leaving. They’ll take all this information and then they’ll put it in an article that you can read that will save you a ton of time and you don’t have to figure it all out. So not enough people talk about that, but I think that that’s a very valuable resource.

Dave:
Sweet. Thanks, man. Appreciate the vote of confidence. All right. So our last question, what is a market you’re interested in? Why? And you can’t say Tampa, because we all both already said that.

David:
What I’m looking at right now outside of Tampa is, and this is a strategy I recommend that everybody should use is you go to the spot where everybody’s already going to. So we mentioned like Huntsville, Alabama, that would be a spot everyone’s already going to. Nashville, Tennessee, people have been going there for a long time. And instead of trying to jump into Nashville, I would ask myself if somebody wanted to buy a house in Nashville and they just couldn’t and they got discouraged, what city would their agent recommend that they go look at instead? Okay. It’s often a secondary market. It might be the part of Nashville that’s not as popular or a suburb outside of Nashville. And when I get there, I look at the days on market. If the days on market are six days, seven days is just as hot as Nashville. I’m probably not going to find something. But if I see days on market 20, 30, 40 days, I know, hey, this hasn’t heated up to the point that Nashville has, but it probably will. And I want to get there first.
So one market that I’m looking at would be something outside of Nashville, which I haven’t identified yet, but where people who want to live or work there would go. And if they couldn’t find anything in Nashville proper or in I think Franklin is really close, this is where they would spill over into.

Dave:
I think I would say I don’t have a city picked out yet, but I’m very interested in both Florida and Texas. And I would say Texas more specifically. You said earlier about no income tax, which is really important. The population is exploding. A lot of really big companies are relocating, like you said, out of California, out of New York to both of these areas. And I need to do some more analysis and figure out the specific cities. But I think those two states are really interesting opportunities right now.

David:
Texas hits almost every single metric that we mentioned outside of geographic barriers. So there’s plenty of room to build in Texas. That’s one thing to be careful of.

Dave:
That’s true.

David:
But businesses are leaving California and going there, population is leaving California and going there, the state income taxes are very favorable, the climate is very, it’s hard not to find something in Texas that you would say that’s not good for long-term investing.

Dave:
Yeah. That’s a really good point. And it’s so funny, because when I do this analysis for BPInsights and I do all this data crunching and it comes out with like top five lists, top and bottom, and Florida is always both the top and the bottom. It’s like everything else is in between. It’s like the best cashflow cities, in Florida, worst cashflow cities, also Florida. So it’s like very polarizing. So you got to find the right place, but I think there’s a lot of opportunity there as well.

David:
That’s a great reason that people should be checking out BPInsights, because you might just hear Florida and say, oh, I’ll go invest there and end up in one of the worst parts that you could be in and you missed out on one of the best.

Dave:
Totally. Absolutely.

David:
All right. Well, thank you very much, Dave. This has been a blast. If you guys have liked this show, please go to YouTube and comment there and let us know what you liked, what you learned, what you wished that we had talked about so we can maybe cover it there. You could also go to biggerpockets.com/show515, and you can leave a comment there and get a discussion going with other BiggerPockets members about this show, what you’re thinking about, where you might want to invest, what questions you might want to ask, just basically improve your game. Dave, it’s been a blast. Thanks you very much. We will have to do this again and I’m going to get us out of here. This is David Greene for Dave, 80% Luke Skywalker, 20% C-3PO Meyer signing off.

Speaker 3:
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In This Episode We Cover:

  • Cash flow vs. appreciation and which one matters most to you
  • Developing your investment strategy and picking markets where it works
  • Balancing the benefits of real estate investing and the investing “spectrum”
  • What makes a market appreciate and cause rents to rise?
  • What to do once you’ve found a great market to invest in
  • Questions you should ask every out-of-state agent and property manager
  • Where Dave and David are both looking to invest
  • And So Much More!

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