Advise for starting an out of state buy and hold investing portfolio

15 Replies

Hello everyone,

I recently found and signed up for this great site. So far I've been reading a lot of posts and figured it's time for me to get involved a little more.

I recently started my research for putting together a rental portfolio and since I live in the SF Bay Area, doing this locally isn't going to work too well for a person with my starting capital. So I will be doing what many here say is very risky (which I can certainly understand) buying out of state. 

To minimize the risk, my first step is to find a stable market with EXCELLENT property management in place. Recommendations on buy and hold markets for SFR or MFR's and property managers are appreciated. So far I'm liking Charlotte NC, Raleigh NC, Indianapolis IN, K.C. MO, Marietta GA, Nashville TN, Memphis TN and the surrounding areas of these. I'm open to other areas too, so please feel free to throw anything out there. Just please offer some real info for why you're suggesting the area.

I'll be traveling to the 2 or 3 that end up topping my list and I figure I'll only have 7 to 10 days for this trip. So I really need to get the most out of the time I'll have to see the areas in person in order to make the best decision and make A LOT of offers. Now the offers part is if I don't choose the route of a turn-key provider, which opens up a whole different debate that's been covered extensively in MANY past posts. So if you're going to go into anything regarding these companies in this thread, please keep it to your particular experiences and share the turn-key company you used. I believe there are some good ones out there that will provide a good service for fair compensation. It's just finding these ones is tough since there are a lot out there with questionable values.

A little about what I'm looking for... My top priority for starting out is cash flow to reinvest in more properties. I'm thinking 3/2's or larger with around 1.2% rent to purchase, depending on other numbers for the location of course. This is because I'm looking for the more conservative entry into this and also because I'll be financing a good portion without funds for extensive renovations. I don't care to get into this to be a slumlord by any means. I believe that there are a lot of good tenants out there that can't or don't want to buy for various reasons and this is my target renter. I think you would call it C+++ or better.

I'd also like to ask for any websites or other ways to get concrete data for researching markets. I look mostly at government data such as census information and some I get from things like Forbe's magazine. But I've also seen a lot of data on Sperling's Best Places, I just haven't found anything telling me if it's accurate.

On a final note, as I am very new to this particular area RE investing. Please let me know your opinion of what I've stated above. I fully welcome others thoughts as I create my plan and realize that there are a lot of very knowledgeable and experienced people here, that I look forward to learning from.

Thanks to everyone in advance for your thoughts, stories, and information.

Sincerely,

Max Balesteri

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Hi @Max Balesteri  . Welcome. I am also in the Bay Area and have a number of out of state properties. The short version of my experience is: It can be profitable BUT there is a learning curve and you need to reach a critical mass of properties (at least 6-10) to get more predictable returns.  You have to have tolerance for issues and problems with properties, tenants, insurance etc etc that will keep coming up. You absolutely must have the right PM, without which all of this falls apart very quickly. Getting 1.2% rental yield on good B properties turn key is possible but you may have to look hard. Most turnkey companies seem to just offer things at 1% and there seem to be no dearth of buyers at those numbers. 

@Max Balesteri  Welcome from a fellow Nor Cal investor!

I've done both in state and out of state investing. The out of state cash flow is nice when it works, but it is by far more hassle than investing locally. For the first deal, I would absolutely want to make sure I was buying right, as a bad initial experience is what sends many investors to the exits for good, unfortunately. And that's going to take a ton more due diligence and luck out of state...

If your idea is to use drip cash flow for reinvestment, that's probably going to take a lot of time to save up between deals as well...

Investing in the Bay Area is not easy by any means, but all it would take is one sharp spike in the market, and you'll be able to cash out a ton more money for any future deals. Then you can buy as many out of state properties as you want (they won't appreciate anywhere near as much or as rapidly as the Bay)... Also, the downside protection you'll get locally is unsurpassed. Almost anything on the market here is flying off the shelves... Investors (foreign and domestic), and homeowners all want property here. Too much demand, not enough supply...

Good luck!

@Max Balesteri  

  if your looking for 1% or 1.2%  why go all the way across the country you can find that in many areas within a 2 hour drive of where you live.. you can find that in Portlandia and on the west coast you have a hope of appreciation with much more stable rental pool.

YOu can find that all over WA and Idaho and Utah and Vegas and Phx.   all with stronger retail markets than what you describe

But if your bound and determined to go out east.. you may want to look at Charleston.. Its HOT.. I am building new homes there now and have financed fix and flips that have been spectacular for the contractors... far better than anything in the other markets you mentioned at least at that price point.  And they rival West coast in days on market and sales within 1% of list price..

Remember ARV in the cities you mentioned are rarely if ever captured on a resale if the property is sub 130k

@Jay Hinrichs  

1% rule available in Portland and west coast? What is the entry price for these deals?

@Martin Yung  

 125k and up in the Portland metro  go out of metro 45 minutes and it can be just like the mid west 65 to 90k... Not the best but not war zone's either..

@Max Balesteri  it sounds like your're on the right track by finding a good PM first.

Of course, I'm partial to the Indianapolis market and work with many out of State/Country buyers on a regular basis.

If you do end up coming to town, please let me know.  I host 2-3 investors per month by showing them around the neighborhoods here in Indy.

@Max Balesteri  All of those can be good markets, however, you need to be careful of comparing them on the basis of rent ratio's. Not all 1.2% rent ratio's are equal. All of these markets vary significantly from neighborhood to neighborhood and something with a 1.2 ratio in one market could be a "D" class neighborhood whereas a 1.2% ration in another market could be a "C" or even "B" class neighborhood in another market. As you know, I like Indianapolis and Kansas City a lot. Having said that, you can easily get 1.2% ratio's in B and C areas. 

You've read through all those debates? I'm impressed :)

Sounds like you are going at it the right way. I'm on the side of out-of-state buying in fine. I've always done it with no problem. But you're right, both sides can be debated. Oh well, go with what works. 

As far as the markets you mention, you are unlikely to see positive cash flow in Nashville or Marietta. Memphis, Indy, KC and MO will give you cash flow. The NC cities, Charlotte can, Raleigh is debatable. But inventory there is really low. But in thinking of all the markets you mention, they all really span a wide variety of opportunity in terms of what is offered (if anything). If I had to pick one market from your list, I would do Indy. All in preference though. Since you only have a short time for your trip, you could hit Indy, KC, and even some other good markets- Chicago, Philly (not sure how long of a trip that would be to the east)...places like that.

Not sure if that was real helpful....

Hello @Max Balesteri ,

You are way ahead of many investors in your thought process. Especially on these points:

• Cash flow is what matters
• Excellent property management is critical
• Buy where you can get good properties
• MF or SFR, it does not matter as long as they cash flow

Keep in mind that cash flow (or ROI) is really only a snapshot of market conditions today but real estate is a long term investment, at least 7 to 10 years. You need to look at longer term area trends as well as taxes and rental related legislation. I will talk about these topics later.

The criteria I recommend that you use to evaluate each potential property are:

• It is located in an area likely to appreciate over time
• It is highly likely to have sustained profitability
• Located in an area with real estate investor friendly taxes and legislation

The process I recommend is illustrated below:

Favorable Population, Employment and Crime Trends

The old adage that the three most important things in real estate are location, location, location is still true but areas change over time. Areas that are good today can decline and sometimes areas that were once bad get better. Is it possible to accurately predict what an area will be like in 15 or 20 years? No, but you can make a reasonable guess as to what an area will be like in 5 years and extrapolate from there. Three indicators I think you should evaluate are population migration, job stability and quality, and crime.

Population Migration

If people are moving out of the area, the housing prices and rental rates are likely to fall. If people are moving into an area, then there is likely to be appreciation and rising rents. Here is a website that shows population shift by area. Also, many areas have populations that are getting older. As people age they tend to want smaller properties and lower rents. If you are considering a property targeted towards families and the area is aging, you will likely find demand decreasing. So, also check the population demographics.

Job Quantity and Quality

In many parts of the US, manufacturing and similar jobs are going away and what remains are service sector jobs. Service sector jobs tend to pay less than manufacturing jobs so the families of these workers have less disposable income. Less disposable income means that they cannot afford to pay the level of rent they did in the past. Look at the major employers, what industries they are in and their future prospects. A key indicator is inflation adjusted per capita income over the past few years. If you see a declining per capita income adjusted for inflation, you need to carefully consider the long term value of the property. You have to be careful on inflation adjusted numbers. There is reality and "official" numbers. Official inflation during 2014 is 1.7%. However, “official” inflation numbers do not include energy or food. Personally, I use energy and eat so the inflation I experience is much higher than the “official” number. Depending on whose numbers you use, actual inflation is between 6% and 10% per year. Keep in mind that unless the per capita adjusted income is rising at or greater than the rate of actual inflation your potential tenants disposable income is eroding. What this means is that if you buy a property that rents at the upper end of the rent range, you will likely have increasing time-to-rent and declining rental rates over time. 

Crime

Stable or increasing property values and rents rarely occur in areas with high crime. When crime increases, people with sufficient income move to areas with lower crime. The people who cannot afford to move tend to have lower incomes thus resulting in falling rents and property values. What you need to consider is the types and frequency of crimes in the area and how it is changing. Where can you find such data? Here are some sites: crimemapping.com, homefacts.com, crimereports.com and spotcrime.com. Depending on your city/area you may have such data available from the local police department or the sheriff's department. Remember that it is not just crime in the specific neighborhood that matters, you also have to consider areas near the property where people will shop and such. For example, I was evaluating a property in an area that I did not know well so I used Google Street View to check the drive path to the property. I noticed a strip mall near the property where I anticipated tenants would shop. When I checked that location on one of the crime sites I discovered that robberies and assaults occur frequently at the strip mall and that the situation appears to have been the same for the past few years. I rejected the property based on these findings. So, check the shopping areas that tenants would use. You should also check the sex offender database. See familywatchdog.us but there are likely many others. Some states/counties/cities have their own sex offender/crime websites. 

Favorable State Income Tax, Property Tax and Legislation

State Income Taxes and Property Taxes

State taxes and property taxes are another big factor to consider since their impact on your real return can be huge. For example, suppose you are considering three identical properties that rent for the same amount (yes, this is an over simplified and contrived example!). And, one is located in Austin, one is located in Indianapolis, and one is located in Las Vegas. Which one is better? Below is a table showing approximate state personal income tax (I will assume a person filing separately with a $50,000 income) and property tax rates for all the cities. (Note, please forgive me if I am off on the values. My goal is to communicate a concept, not accurate math.) Note: Property taxes source and state income tax source.

Below is a (oversimplified) formula for estimating cashflow assuming 100% occupancy, no maintenance, etc. in order to keep the numbers simple. The property details are:

• Purchase price $150,000
• Rent: $1,000/Mo.
• Financing: 20% down, 4.5% interest, 30 year term.
• Down Amount: $30,000
• Debt Service (PI): $600/Mo

Cash Flow = Rent x 12 - DebtService x 12 - PropertyTaxRate x PurchasePrice

And, to take into account state taxes:

Net Cash Flow = (Rent x 12 - DebtService x 12 - PropertyTaxRate x PurchasePrice) x (1 - StateTaxRate)

For Austin: ($1,000 x 12 - $600 x 12 - 1.9% x $150,000)x (1 - 0%) = $1,950/Yr

For Indianapolis: ($1,000 x 12 - $600 x 12 - 1.07% x $150,000)x (1 - 3.4%) = $3,086/Yr

For Las Vegas: ($1,000 x 12 - $600 x 12 - 0.86% x $150,000)x (1 - 0%) = $3,510/Yr

In summary:

Real return is about how much money actually flows to you, not gross rent or ROI. Property taxes and state taxes have a big effect on the real return.

Legislation 

Legislation concerning tenants and rent vary by state, county or city and can have a huge impact on your return. One example is evictions. Clients have told me that in California, if the tenant knows what they are doing, it can take up to 1 year to evict and cost thousands. In Las Vegas, the time to evict is typically less than 30 days and usually costs less than $500. 

Location, Type, Configuration and Rent Range

Where can you get highly detailed information on the best rental property type, location, configuration and rent range in any area? Local property managers. Most new investors think of property managers as someone to collect the rent after they buy a property. I strongly disagree with this view. I consistently find properties for my clients that meet the dual goals of profitability and appreciation through processes and an investment team. The key member of any real estate investment team is the property manager. (I am a Realtor; I do not manage properties.) Below is a diagram showing four categories where a good property manager can help you be successful. Your initial interviews with three or four property managers will concern their local knowledge of: type, location, configuration and rent range.

Below is more detail on this four characteristics.

• Type: Condo, high rise, single family, duplex, single story, two story, etc.
• Configuration: Two bedroom, three car garage, mud room, etc.
• Location: Usually a very specific area. For example, west of 23rd St and south of the river, etc.
• Rent Range: If the majority of the population to which you want to rent are willing and able to pay $1,000/Mo to $1,300/Mo. you should only be looking at properties that you can purchase, rehab and profitably rent in the same rent range.

Start by telling each property manager that you are just starting out and are looking for a property manager to work with. You need to have a well defined list of questions before you start interviewing and ask the same questions of three or four property managers. (I have a set of property manager interview questions that I'd be happy to share.) After these interviews you will have a pretty good idea of the local market and you may even have an opinion whether any of the property managers you talked to are people you would like to deal with in the future. Once you have a reasonable idea of type, location, configuration and rent range (which I call a property profile), you are in a position to determine whether you can achieve the other goal: profitability. 

Once you know the property profile you can use Zillow (or many other sites) to determine the typical sale price of properties in that local. With a reasonable knowledge of the rent and price of typical properties, you need to determine whether you can make a profit. In my practice I am almost constantly making what I call an investigate/forget decision. I do this so often that I created an online tool which enables me to instantly estimate a break-even price (where rent equals recurring expenses). Below is a screen shot of the tool. (I'm also happy to share it. There is no charge or obligation for using the tool.)

In the example above I entered the estimated rent and other factors and tapped Estimate. The result is that if the property were purchased for $185,000, the rent ($1,200/Mo.) would equal the recurring costs (debt service + taxes + insurance + property management fees + monthly fees). This means that if I thought I could get the property for $165,000 I would investigate further. If I thought I would have to pay $185,000 or more for the property I would forget this one and look for another. Remember that this tool is only for making a quick investigate/forget decision, not a purchase decision.

If you cannot make a profit, look somewhere else. Once you find a place that looks to have good potential, get the name of a local Realtor from the property manager(s). Tell the Realtor what you are looking for (type, location, configuration) and have her/him send matching properties. This is important: many people think that Realtors know how to choose investment properties; very few do so you have to provide the criteria.

If you see a few properties you like send them to the two (or three) best property managers and get their opinion as to the property in general (will it make a good rental) and what is their estimate on the rent and time to rent. The answers from the property managers should be close. If everything looks good, I would travel to that location and meet with the property manager and the Realtor. These are the people who will be responsible for one of the more expensive assets you will own and you need to evaluate them and see some properties. 

Max, let the numbers be your guide; do not start with a pre-conceived technique, property type or location.

I wish you the best.

Great info here guys!

Aside from my investor insurance business, I focus on creating turn key rentals in the KCMO market and have done business in Indy as well.  Both good rental markets which can exceed the "1%" rule in many locations where you can buy at an average cap rate of 10%.

I just wanted to thank everyone for the great information and comments. Please keep them coming and feel free to reach out to me outside of this thread if you have information you'd rather not post here. I hope to build good working relationships with everyone I can. 

My ultimate goal here is to untether myself from the desk I'm so often stuck behind. And hopefully many of us will cross paths in the future making great deals together.

@Max Balesteri  I'm obviously going to be biased toward Raleigh, NC, but it really is just a fantastic place to own a home.  Achieving the 1% rule or better is hard to come by, but the population is growing by leaps and bounds, and employers are setting up shop here and hiring high income, highly educated people to fill their buildings.  I invest myself here, and if you decide to visit, I'd be happy to give you the grand tour! 

@Eric Fernwood - I would definitely appreciate the tools you mentioned. Since I'm very new here I don't know how you'd send them, so let me know if I need to do something.

@Dawn Brenengen - I see a lot of sub $80k properties in Raleigh on the MLS saying they're in good condition, with some even dropping in price. Any knowledge of properties in this range?

@Max Balesteri  if the home is sub $80k, it's more likely to hit that 1% rule! but it's also not likely to be in a great area. Feel free to email me any links to properties that pique your interest, and I'll give you the low down on the neighborhoods. 

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