{"id":94167,"date":"2019-11-05T12:00:28","date_gmt":"2019-11-05T19:00:28","guid":{"rendered":"https:\/\/www.biggerpockets.com\/renewsblog\/?p=94167"},"modified":"2023-08-10T13:28:50","modified_gmt":"2023-08-10T19:28:50","slug":"out-of-state-markets","status":"publish","type":"post","link":"https:\/\/www.biggerpockets.com\/blog\/out-of-state-markets","title":{"rendered":"How to Choose an Out-of-State Market for Investment (in 3 Easy Steps!)"},"content":{"rendered":"\n\n      <iframe loading=\"lazy\" frameborder=\"0\" height=\"200\" scrolling=\"no\" src=\"https:\/\/playlist.megaphone.fm\/?e=BIGPOC6515018740\" width=\"100%\"><\/iframe>\r\n  \n\n\n\n<p>You\u2019ve decided, for whatever reason, that you want to invest outside of your local area or state. Your next question is\u2014where should I invest?<\/p>\n<p>I\u2019m going to offer you a list of things that you can consider when trying to figure out what market to invest in. These things are in no particular order, and some of them may not apply to you or your particular situation. My intention with each one is to give you something to think about and hopefully some ideas on where and how to start looking for a market that suits your investment needs.<\/p>\n<p>Here we go!<\/p>\n<h2>Step #1: Narrow Down Your Market Options<\/h2>\n<p>First, if you are brand new to out-of-state investing and don\u2019t have a clue where to start, your location choices are likely going to feel extremely overwhelming. I have two things for you to think about that will hopefully at least get you moving in some kind of direction.<\/p>\n<h3>Where do you have friends and family?<\/h3>\n<p>Are there any cities where you have friends or family who might be good assets to have on your \u201cteam\u201d on the ground? I\u2019m not necessarily saying go into business with your friends or family or make them an official part of the team. But if you already have ties to any particular cities, maybe take a little time to decide if any of those cities might be good ones to get started.<\/p>\n<p>Even if your friends or family there aren\u2019t part of your team, they may be able to occasionally drive by your property once you own it and tell you if anything crazy seems to be going on. It never hurts to have an extra set of trustworthy eyes on an investment property!<\/p>\n<h3>Where are other investors buying?<\/h3>\n<p>Thanks to technology and the internet (and websites like BiggerPockets!), you can easily and quickly network with other out-of-state investors. Ask people which markets they are buying in, and if they seem friendly and interested in chatting more, find out <em>why <\/em>they are buying in those markets.<\/p>\n<p>Don\u2019t struggle to reinvent the wheel when experienced investors are already out there succeeding with out-of-state properties. I did secretly throw a keyword in there\u2014<em>experienced. <\/em>Don\u2019t take just anyone\u2019s word for what they claim to be a good city to invest in. But remember, you\u2019re just trying to get a list started. You can dig into details later as you go along.<\/p>\n<p>Start there. Make a list of the cities that come up when you consider those two things. Again, this isn\u2019t your final list, but at least your list is much shorter now than it was when it had all 19,354 U.S. cities on it as investing options.<\/p>\n<p>You may not have known you had a list of 19,354 cities on it, but if you were starting from scratch, the whole country was a possibility! That would have to be intimidating and overwhelming\u2014and almost an impossible point to start from. Now you have a less intimidating starting point.<br \/><em><br \/><strong>Related:<\/strong> <a href=\"\/renewsblog\/2016\/06\/28\/out-of-state-rentals\/\" target=\"_blank\" rel=\"noopener noreferrer\">What Moving Out of State is Teaching Me About Remotely Managing Rentals<\/a><\/em><\/p>\n<h2>Step #2: Analyze Those Markets<\/h2>\n<p>So, you are looking at your list of some number of cities or major markets, and now your question is\u2014how do I know a good city to invest in from a bad city?<\/p>\n<p>In my mind, there are only two major questions I ask to determine whether I want to invest in a particular city:<\/p>\n<ul>\n<li>Do the numbers work?<\/li>\n<li>How likely am I going to be able to sustain those numbers?<\/li>\n<\/ul>\n<p>If you don\u2019t know what numbers I\u2019m talking about, I\u2019m talking about your returns. Returns (aka profits) can be generated in two major ways: cash flow and appreciation. This is at least true for <a href=\"\/renewsblog\/2013\/01\/04\/how-to-rent-your-house\/\" target=\"_blank\" rel=\"noopener noreferrer\">rental properties<\/a>.<\/p>\n<p>If you are <a href=\"\/renewsblog\/2014\/01\/07\/flipping-houses\/\" target=\"_blank\" rel=\"noopener noreferrer\">flipping<\/a> out of state, some of this will not apply to you, and there are some slightly different considerations that you\u2019ll need to incorporate into your analyses. You\u2019re on your own, though, for those\u2014I\u2019ve never flipped, so I definitely shouldn\u2019t be the one to tell you how to rock that method out.<\/p>\n<p>Most likely, if you are wanting to invest out of state, you\u2019re probably doing so because you want cash flow. Most of the investors who invest out of state do so because the numbers locally don\u2019t pencil out. This is often the case in a lot of the bigger markets\u2014Los Angeles, San Francisco, New York, etc.<\/p>\n<p><img loading=\"lazy\" decoding=\"async\" class=\"alignnone size-full wp-image-107535\" src=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2019\/02\/calculator.jpg\" alt=\"businesswoman doing paperwork at office desk, working through finances, using calculator and making notes in her notebook with pen\" width=\"702\" height=\"336\" title=\"\" srcset=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2019\/02\/calculator.jpg 702w, https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2019\/02\/calculator-300x144.jpg 300w\" sizes=\"auto, (max-width: 702px) 100vw, 702px\" \/><\/p>\n<p>And while those markets don\u2019t usually pencil out for cash flow, they are the bigger players when it comes to appreciation. So, in thinking of anyone who lives there and wants to buy out of state, it\u2019s probably because they want cash flow. See my logic?<\/p>\n<p>Either way, let\u2019s assume you are going after cash-flowing rental properties out of state because you can\u2019t find cash flow locally. If that\u2019s the case, the numbers need to work in the market you choose to invest in. Otherwise, what\u2019s the point?<\/p>\n<p>So, let\u2019s think about the numbers. What kind of numbers do you need to understand when it comes to cash flow?<\/p>\n<p>If you are in it for cash flow, you want to be able to determine the projected cash flow on a property. To help you do that, use the easy formulas in this article:&nbsp;&#8220;<a href=\"https:\/\/www.biggerpockets.com\/blog\/real-estate-math\" target=\"_blank\" rel=\"noopener noreferrer\">Rental Property Numbers so Easy You Can Calculate Them on a Napkin<\/a>.&#8221;<\/p>\n<p>In addition to the equations in that article, a term you will want to be familiar with is \u201cprice-to-rent ratio.\u201d This term compares the price of a property to how much rent it can collect. The reason these two things matter is because they will determine whether you can cash flow on the property or not.<\/p>\n<p>As you saw in those cash flow equations, you need the rental income you collect on a property to surpass the expenses of buying and owning that property in order to have positive cash flow. If the expenses of buying and owning that property are higher than the rent you can collect from the property, you\u2019re in a negative cash flow situation and losing money (on the cash flow front at least).<\/p>\n<p>Knowing this term now, if someone asks you if you\u2019re interested in a particular market for investing, your first question might be\u2014how are the price-to-rent ratios there? What you\u2019re ultimately asking here is\u2014is there an option for cash flow in that particular city?<\/p>\n<p>For instance, I can tell you that hands-down the price-to-rent ratios in Los Angeles are not supportive of cash flow. I can tell you that the price-to-rent ratios in Indianapolis are generally favorable for cash flow. In no way does that mean every property or every location within Indianapolis will cash flow, but it does mean there is an option for it\u2014whereas in Los Angeles, there\u2019s really no option for cash flow.<\/p>\n<p>Now, let\u2019s say a particular market has generally favorable price-to-rent ratios for cash flow.<\/p>\n<p>Oh wait, I just heard you ask\u2014how do I know if a market has favorable price-to-rent ratios? Great question.<\/p>\n<p>The fastest way to find that out is to network with other investors. You can either ask other people where they are investing, which I already mentioned, or let\u2019s say you have a family member in a particular city and you\u2019re curious about whether or not you can cash flow there. <a href=\"https:\/\/www.biggerpockets.com\/forums\" target=\"_blank\" rel=\"noopener noreferrer\">Post in a BiggerPockets Forum<\/a> and ask people if they have any knowledge of cash flow potential in said market.<\/p>\n<p>Look for people investing there, and find out the best places for cash flow there. If all of that fails, start looking up properties and running those equations I taught you, and see if you\u2019re coming out ahead on cash flow.<\/p>\n<p>Let\u2019s say a particular market has generally favorable price-to-rent ratios for cash flow. This is where that second question I asked comes in\u2014how likely am I going to be able to sustain those numbers?<\/p>\n<p>The answer to this question is lengthy, so I\u2019ll just give you one basic thought to consider for now. Is the market you are looking at a growth market or a declining market? The reason this matters is because you can project cash flow numbers until the cows come home, but if certain factors come into play with your property, you may never see a single bit of that projected cash flow materialize.<\/p>\n<p>Bad tenants, for example, can cause you to not see a penny of your projected flow because they can cost so much in expenses\u2014IF they are even paying the rent.<\/p>\n<p>For details on growth versus declining markets, check out &#8220;<a href=\"\/renewsblog\/2015\/12\/12\/choose-real-estate-market-to-invest-in\/\" target=\"_blank\" rel=\"noopener noreferrer\">How to Know If Any Given Real Estate Market is Wise to Invest in (With Real Life Examples!)<\/a>.&#8221;<\/p>\n<p>To help you understand the potential consequences of investing in a declining market, check out &#8220;<a href=\"\/renewsblog\/declining-market-risks\/\" target=\"_blank\" rel=\"noopener noreferrer\">5 Risks of Buying Rental Properties in Declining Markets<\/a>.&#8221;<\/p>\n<p><img loading=\"lazy\" decoding=\"async\" class=\"wp-image-87311 size-main-full\" src=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2017\/03\/Depositphotos_24554261_original-1078x516.jpg\" alt=\"\" width=\"702\" height=\"336\" title=\"\" srcset=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2017\/03\/Depositphotos_24554261_original-1078x516.jpg 1078w, https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2017\/03\/Depositphotos_24554261_original-702x336.jpg 702w\" sizes=\"auto, (max-width: 702px) 100vw, 702px\" \/><\/p>\n<h2>Step #3: Decide on a Market<\/h2>\n<p>Your list of potential markets should be even shorter now than it was when you narrowed it down from 19,354 cities to either cities you know people in or have ties to or cities other investors recommend. It should only include markets\/cities where the numbers not only work but also where the numbers have good potential of sustaining themselves. (That last part is purely my own personal investment strategy preference\u2014it\u2019s certainly not a requirement.)<\/p>\n<p>You may have one market on your list at this point, or you may have a handful. Which one you ultimately decide on may just come down to personal preference at this point\u2014or it may depend on your situation and your resources.<\/p>\n<p>At this point, here are a few more things you can look at.<\/p>\n<h3>Budget\/Capital<\/h3>\n<p>You just might not have enough capital to invest in all of the good options out there. For instance, I know of some amazing deals in Baltimore and Philadelphia, but those particular deals require a minimum of $90,000 up front.<\/p>\n<p>You may not have $90,000. You might only have $20,000. Well, good news\u2014$20,000 can get you a great cash-flowing property in other cities!<\/p>\n<p>So, for your budget, you may stay focused on one area over another. I used to work with triplexes in both Chicago and Philadelphia. At that time, you could get a good cash-flowing triplex in Philadelphia for $130,000. The triplexes in Chicago at the time were bigger and nicer, and they were around $270,000.<\/p>\n<p>The cash flow on the Chicago properties was higher, of course, but not everyone\u2019s budget would support buying one of those triplexes. But many of those people could get one of the Philadelphia properties. So, more than anything, your available capital may further limit you on where you can invest. This isn&#8217;t always the case, but it is a consideration.<\/p>\n<h3>Property Type<\/h3>\n<p>This is simply a personal preference factor. For example, some markets like Philadelphia and Baltimore tend to have properties with more of an urban feel. They are often more of the row house-type of structure. Not everyone likes the urban feel, and not everyone likes adjoined buildings.<\/p>\n<p>The other option would be properties with a suburban feel that are free-standing. You can find lots of these in the Midwest. Additionally, some markets offer a lot of multifamily (MFR) options, and some markets only have single-family (SFR) options that will cash flow. So, if you prefer urban or suburban over another, and if you prefer SFR or MFR over another, those personal preferences will steer you toward particular cities and away from others.<br \/><em><br \/><strong>Related:<\/strong> <a href=\"\/renewsblog\/invest-out-of-area\" target=\"_blank\" rel=\"noopener noreferrer\">Forget the Demographics and Focus on Researching THIS Before Investing Out-of-Area<\/a><\/em><\/p>\n<p>Look! You\u2019re continuing to narrow down your list! Here\u2019s how to further narrow it.<\/p>\n<h3>Returns vs. Risk<\/h3>\n<p>At the end of the day, some cities and property types will be more risky than others. Even if you are looking within stable growth markets and none of the areas you are looking in are majorly dangerous, some may have significantly better schools than others, etc.<\/p>\n<p>Maybe one market is slightly more in a \u201cgentrifying\u201d stage than another more matured market. It\u2019s always fine to take on a little more risk, but make sure the proposed returns are high enough to justify it. Or if you are more risk-adverse, you may choose to accept slightly lower returns in exchange for staying with a less risky market and property. That\u2019s totally fine as well.<\/p>\n<p>So, you want to have a feel for the returns versus the risk available to you in each potential market and weigh that against where you are on your own personal scale of desire. What\u2019s more important to you: returns or playing it safer? That should help you further whittle down your list.<\/p>\n<h3>Ease of Commute<\/h3>\n<p>This one may be less significant than others, but it could play a role. If you have narrowed your list down to say, two markets, and those two markets are weighted pretty evenly against each other\u2014which one is easier to get to? If a nonstop, not-too-lengthy flight is available to one and to get to the other would require a couple stops and a longer travel time (which would also probably be more expensive), go with the one you can get to easier!<\/p>\n<p>Ultimately, the most important thing about whichever market you decide on is whether or not you will lose sleep over investing there. Maybe it\u2019s because you can\u2019t stomach your investment property being so far out of reach, maybe it\u2019s because the market is a little riskier, maybe you hate single family homes and really wanted a multifamily. Whatever the situation, go with what will put a smile on your face (and hopefully some cash flow in your pocket).<\/p>\n<p><img loading=\"lazy\" decoding=\"async\" class=\"alignnone size-full wp-image-77113\" src=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2016\/02\/marketing-strategy.jpg\" alt=\"marketing-strategy\" width=\"702\" height=\"336\" title=\"\" srcset=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2016\/02\/marketing-strategy.jpg 702w, https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2016\/02\/marketing-strategy-300x144.jpg 300w\" sizes=\"auto, (max-width: 702px) 100vw, 702px\" \/><\/p>\n<h2>Summary<\/h2>\n<p>A quick summary on the steps you can take to help you decide on a market:<\/p>\n<h3>Step 1: Narrow down your market options.<\/h3>\n<ul>\n<li>Where do you know people?<\/li>\n<li>Where are other people investing?<\/li>\n<\/ul>\n<h3>Step 2: Analyze those market options to further narrow down your list.<\/h3>\n<ul>\n<li>Is it a good market to invest in?<\/li>\n<li>Do the numbers work?<\/li>\n<li>Will you be able to sustain the numbers?<\/li>\n<\/ul>\n<h3>Step 3: Choose what you like!<\/h3>\n<ul>\n<li>Decide on your personal preferences and see which markets fit those.<\/li>\n<\/ul>\n<p>Then, once you have your market decided on, go shopping! Even if you only narrowed your list down to a couple of cities, that\u2019s fine. Two cities is easier to shop in than 19,354.<\/p>\n<p>And here\u2019s one last tidbit for you. At the very end of it, no matter how or why you chose the market(s) you did, you need to confirm one last thing. Are you ready?<\/p>\n<p><em>The last thing that matters is that you can form a good team in the market you choose.<\/em><\/p>\n<p>If you can\u2019t find good team members to help you with your property, go to another market. If you don\u2019t have a solid team as an out-of-state investor, you\u2019ll be up that famous creek without a paddle.<\/p>\n<p>If you\u2019ve narrowed your list down to a couple of cities you\u2019d be willing to invest in, choose the one that offers the best team. If you\u2019ve narrowed your list down to one city you want to invest in but then you can\u2019t form a solid team of good people there, start over and choose a new market. You <em>must<\/em> have the team!<\/p>\n<p>There you have it! Now go market shopping.<\/p>\n<p><a href=\"https:\/\/www.biggerpockets.com\/store\/long-distance-real-estate-investing-ultimate\" target=\"_blank\"><img loading=\"lazy\" decoding=\"async\" class=\"alignnone size-full wp-image-94636\" src=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2017\/12\/long-distance-book-ad.jpg\" alt=\"\" width=\"800\" height=\"130\" title=\"\" srcset=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2017\/12\/long-distance-book-ad.jpg 800w, https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2017\/12\/long-distance-book-ad-300x49.jpg 300w, https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2017\/12\/long-distance-book-ad-768x125.jpg 768w\" sizes=\"auto, (max-width: 800px) 100vw, 800px\" \/><\/a><\/p>\n<p><em>How do you choose your out-of-area markets for investment?<\/em><\/p>\n<p><strong>Leave your questions and comments below!<\/strong><\/p>","protected":false},"excerpt":{"rendered":"<p>You\u2019ve decided, for whatever reason, that you want to invest outside of your local area or state. Your next question is\u2014where should I invest? Here&#8217;s what to consider. <\/p>\n","protected":false},"author":782,"featured_media":116476,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[4252,7119],"tags":[],"class_list":["post-94167","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-deal-analysis","category-biggerpockets-daily"],"acf":[],"comment_count":0,"_links":{"self":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts\/94167","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/users\/782"}],"replies":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/comments?post=94167"}],"version-history":[{"count":0,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts\/94167\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/media\/116476"}],"wp:attachment":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/media?parent=94167"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/categories?post=94167"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/tags?post=94167"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}