Choosing an out-of-state location

19 Replies

Hi All - I've recently been bitten by the real estate bug; I've just finished Brandon Turner's Book on Rental Property Investing and am all-in on BiggerPockets. I'm still in the information gathering stage at this point but want to start analyzing realistic deals.

I live in the Bay Area of California which is outside of my budget, so will likely be taking on some form of David Greene's long distance property investing. I'm having trouble focusing on a handful of key metrics that will help me narrow down my analysis to a few broader markets (city / state). I'm thinking historical property appreciation, price-to-rent ratio, and maybe vacancy rates are a good place to start. Does anybody have any other ideas and/or sources of information for the metrics? Or does anyone have a method for choosing markets to enter when going the long distance route? Thanks!

Hello Coleman!  If you are going to invest out of state and keep your traveling expenses down, I would invest in a Turnkey business with a good history unless I knew someone that lives by there and can really help.  Stay away from big cities like Los Angeles, New York, Houston, Dallas, San Francisco, Etc..  Just make sure that the subject property is in an area of population growth, has job growth, amenities, and high demand.

Another option is being able to move near the subject property.  Just do what is common in that area.  Good luck to you!

@Coleman Cox I see a lot of out of state investor traffic in OKC in the last few years! 60-80k purchase prices (in c class areas where I see the best returns), 8% cap rates after factoring in property management, vacancy, maintenance and of course debt service, taxes and insurance. You're typically hitting the 1% rent to value ratio and not needing to do any rehab upfront! 

Originally posted by @Coleman Cox :

Hi All - I've recently been bitten by the real estate bug; I've just finished Brandon Turner's Book on Rental Property Investing and am all-in on BiggerPockets. I'm still in the information gathering stage at this point but want to start analyzing realistic deals.

I live in the Bay Area of California which is outside of my budget, so will likely be taking on some form of David Greene's long distance property investing. I'm having trouble focusing on a handful of key metrics that will help me narrow down my analysis to a few broader markets (city / state). I'm thinking historical property appreciation, price-to-rent ratio, and maybe vacancy rates are a good place to start. Does anybody have any other ideas and/or sources of information for the metrics? Or does anyone have a method for choosing markets to enter when going the long distance route? Thanks!

 Hello and welcome! Many investors investing OOS tend to look at mid-sized cities in the Midwest where prices are low, but the rents are good. 

Hope that helped. Good luck to you! 

Originally posted by @Coleman Cox :

Hi All - I've recently been bitten by the real estate bug; I've just finished Brandon Turner's Book on Rental Property Investing and am all-in on BiggerPockets. I'm still in the information gathering stage at this point but want to start analyzing realistic deals.

I live in the Bay Area of California which is outside of my budget, so will likely be taking on some form of David Greene's long distance property investing. I'm having trouble focusing on a handful of key metrics that will help me narrow down my analysis to a few broader markets (city / state). I'm thinking historical property appreciation, price-to-rent ratio, and maybe vacancy rates are a good place to start. Does anybody have any other ideas and/or sources of information for the metrics? Or does anyone have a method for choosing markets to enter when going the long distance route? Thanks!

 Welcome to the site Coleman. Most people in your position are going with what I like to call the turnkey markets. These are markets usually in the Midwest where prices are low and rents are high. You won't see appreciation like you do on the west coast of course but they do work from a cash flow perspective. Many of these markets are very well represented by sellers & turnkey operators here on BiggerPockets. In no particular order I have listed some of the most popular markets for out of state investors

  • Cleveland, Ohio
  • Dayton, Ohio
  • Toledo, Ohio
  • Youngstown, Ohio
  • Cincinnati, Ohio
  • Memphis, Tennessee
  • Birmingham, Alabama
  • Kansas City, Missouri
  • Saint Louis, Missouri
  • Indianapolis, Indiana
  • Detroit, Michigan
  • Erie, Pennsylvania
  • Louisville, Kentucky
  • Milwaukee, Wisconsin
  • Jackson, Mississippi

Each of these markets is popular with turnkey investors because of the low barrier to entry, high rental demand & high rent to price ratio. I recommend setting up keyword alerts for each area as they are discussed in the forums daily with advertisements posted in the BiggerPockets marketplace hourly.

One thing to note when looking at the individual markets, you can make or loose money in any market. Don't think that one particular out of state market will shoot you to success or abject failure. It's not really that complicated to buy out of state. It only becomes complicated when investors try to over complicate or over think everything. Whenever you are buying a property out of state you should do a few things to ensure it's as smooth as possible.

  • Don't buy in the roughest neighborhood in the urban core. Pick a solid B-Class suburban area. Perhaps a nice 1950's built bungalow.
  • Always hire a 3rd party property inspector to give you an unbiased feel for the home. The reports are 40-90 pages long and go through the entire house in great detail.
  • Get an appraisal. If your using financing the bank requires this. This is good. The bank isn't going to let you blow their money. They have more skin in the game then you do.
  • Make sure you get clear title. If using a lender this is a non issue. They will make you do this. It's those maniacs that buy homes cash via quit claim deed off of craigslist that really get screwed.
  • Make sure your property manager is a licensed real estate brokerage.
  • Understand you can not eliminate all risk, only mitigate it. If you are risk adverse real estate, (especially out of state) is not for you.

@Coleman Cox

First and foremost, I would define my investing goals. That is, what is my appetite for cash flow vs appreciation. Also, how risk averse/affine am I. These parameters will help decide what kind of yields you are searching for, which you can use to filter down your list of macro markets.

Then I would start by looking at the macro market's fundamentals, that is the population, job and income growth over time.

After that, I would look to see what the rents and home prices are and how those are trending as well.

I would do a similar analysis, but at the sub-market level for the metro area you are considering investing in.

Other metrics that I find valuable to understand are household income, poverty, unemployment, and educational attainment. Also, the trend for the aforementioned metrics is also very important.

Lastly, you could study permit data to get a better idea of how the relationship between supply and demand is trending in your target market.

Hope this helps!

@Coleman Cox

Hello @Art Perkitny ,

I agree with you. You need to define what you want and then look for locations that enable you to achieve your goal. Fortunately, real estate is very forgiving. As long as you buy property in a good location, all but the worst mistakes will be corrected over time through appreciation, inflation and rent increases. However, the corollary is also true. If you buy in a bad location, there is little you can do to turn things around after the fact.

I look for long term buy and hold investments, not just the current return. I look for locations where properties will appreciate and rents will increase over time. When I was first looking for such a location, I developed the following criteria:

  • Sustained profitability - The property must generate a positive cash flow today and into the foreseeable future.
  • Likely to appreciate over time - Properties appreciate in locations that have increasing demand, which is the key driver for sustained profitability.
  • Located in an area where you can make money and business risks are low. Only in such an environment can you achieve both current and long term profitability.

While the above seems simplistic, few locations can achieve all three criteria. A few comments on the criteria:

Return

Return (ROI, cash flow) is only a snapshot in time. Such calculations only predict how the property is likely to perform today; it does not tell you anything about how the property is likely to perform in 2 years, 5 years or 10 years. What happens in the future is almost more important than today. The diagram below illustrates what can happen over time, depending on the direction of the market.

The red line represents a declining market (where rents and prices are declining, constant or increasing below the rate of inflation) and the green line represents an appreciating market (rents and prices are increasing above the rate of inflation). Both have the same ROI today but the ROI in buying power will be very different in 10 years. You need to carefully consider how the location is likely to perform in the foreseeable future. The easiest indicator of market direction is how property prices have performed over the last 10 years. Rents lag property prices by 2 to 10 years so sales price trends are a good predictor of future rental rates.

Appreciation and Inflation

Static prices are not static. Official inflation is running at about 3%, which does not include food or energy. I will use 5% as a more realistic inflation rate (if you drive a car, use electricity or eat, 5% is a more realistic estimate). Suppose you are renting a property today for $1,000/Mo. and rents are not increasing. What is really happening over time?

After only 5 years, the purchasing power of $1,000 will only have the buying power of $772. This is why appreciation, at least equal to inflation, is critical.

An Area Where You Can Make Money

In some locations it is very hard to make money due to the cost of doing business. Significant cost factors include: property taxes, insurance costs, state income taxes, property age and construction, climate and eviction time and cost.

As an example, we own properties in both Las Vegas and Austin. Below is a comparison of just three cost items:

The $/SqFt of rent between Las Vegas and Austin are not that different. So, property taxes and insurance cost alone make Austin properties very difficult to cash flow.

Location Selection Criteria

Below are some of my criteria for selecting a buy and hold investment location:

  • Appreciation - I covered the importance of appreciation. Make sure to check the property price trends for the location.
  • Population size - I would focus on cities with a population of 1M or more. Small cities tend to be reliant upon a single industry, which makes them vulnerable to economic changes.
  • Population growth - If people are moving into a location, it is probably a good location for jobs and a desirable place to live. If people are moving away, demand will drop and prices will be static or declining.
  • Per capita income growth - It is not just the quantity of jobs, it is also the quality. Per capita income growth is a good indicator of the number and quality of jobs in a location. For example, if businesses are moving away from a location people will have no choice but to take service sector jobs, which usually pay less than office or manufacturing jobs. If this is happening, then you will likely see static or declining per capita income. And, rents will follow per capita income. There are many sites where you can get this information. Here is one such site.
  • Urban sprawl - Not talked about much but you have only to look at any major city and you will see locations that were once the best in town and are now distressed. This is usually the result of urban sprawl. You need to be very aware of which way the city is expanding and buy in newer areas. See this site for time lapses. Look at cities like Memphis, Atlanta, Austin and Las Vegas.
  • Crime - High crime and long term profitability do not go together. I would not consider any city on the top 100 most dangerous cities list. You might know one of these cities well enough to know that there is a great location near the city. The problem is that companies looking to open new locations will not choose high crime cities. Also, people with sufficient funds will leave these areas and the area will go into decline.
  • Climate - Properties in areas with hard freezes and excessive moisture will tend to require more maintenance than in milder and dryer climates.
  • Property cost - There is a tendency for new investors to choose locations with very inexpensive properties. Remember that price is a function of demand. No demand, low price. High demand, high price. Of course, you need to hit a balance. If your budget allows a maximum of $250,000, do not consider coastal California.
  • Taxes - Both income tax and property taxes are a direct hit on profitability.
  • Insurance cost - Insurance cost is a good barometer of the likelihood of damage, usually due to climatic or seismic events. Be certain to take the cost of landlord insurance into account when comparing locations.

Summary

Choosing the right location is critical. Consider what the market is like today and what it is likely to be in the foreseeable future.

Hope this is helpful.

@Coleman Cox I'm sure you've found already that you're not the only one in CA looking elsewhere lol As @James Wise said, most turnkey markets are in the south and midwest. But it's also really important to remember that the term 'turnkey' is used in a few different ways by different types of companies. So make sure you understand the difference between a co that sells 'turnkey properties' (ie rent ready) and a 'full-service turnkey company' (one company that buys, rehabs, sells and manages rentals in their market, all in-house). I'm naturally biased towards turnkey investing for folks who need to go OOS, but it's definitely not the passive, no-homework investment some people imply.

Whether you’re investing out of state or one street over, the number one priority is data - statistical data- on vacancies, maintenance costs, average length of stay, eviction rates and average move out costs, the list goes on. don’t put your money into a new market without getting a firm handle on the data first. Just because you're going the full-service route doesn't mean you get to just take everyone at their word.

Run your own numbers! Every turnkey company will provide you with ROI information, but all math is NOT created equal. Double-check that they have included insurance, vacancy and maintenance taxes, etc. whatever assumptions the company makes in their pro formas, you need to get the data that backs those up - what are they based on?. Confirm that you understand the math. If you don't understand it, tell the company that you need them to walk you through the information. If the no one's able to do so or communication dries up, that's not the company for you.

Do research on the areas the properties are in. Yes, get info from the turnkey company, but you also need to do some research on your own. Ideally, the research you do will just back up what the company is saying. BUT some companies will advertise a property as being maybe an A- when any local would tell you that area is a C. 

A good first step is just looking at the property/neighborhood onGoogle Earth and seeing how the property looks, is the house unkempt, how appealing is the neighborhood, etc. if you don’t think the property class is correct, then the company may be inflating the property class so they charge more. If the prop is listed as an A- but a quick Google Earth shows tire-less cars in lawns and peeling paint, it’s time to walk away.

As James mentioned, there are plenty of great investment markets around the country, it's the team you work with (either turnkey, or an assembled team that you find and vet individually) that will make or break your investment. Focus on people first.

Good luck!

@Clayton Mobley I just posted a similar post and will follow this as well. I’m analyzing OOS markets as well as CA doesn’t make sense from a numbers standpoint.

I’m seeking $175,000 and below

- turn key / little maintenance

- good neighborhoods w upside growth, typical stuff

- newer year built ideally

- balance cash flow w future appreciation. I’ll use some technique to leverage for more props.

- numbers fit - Cap rate, ROE etc.

I’ll be patient and If market looks great but numbers off - I’ll wait and /or seekout a deal when markets slow a bit.

I just started exploring northern Arkansas from somebody I know who leaves there and will seek to compare many markets to get stronger feel.

Any tips or any knowledge of areas to explore - appreciated!

@Bryan Lynch Of course I'm biased but I wouldn't have started a company in Birmingham AL if I didn't think the market supported turnkey investments at scale. We're now also in Huntsville and really excited about what we're seeing there, so even if you're looking to do it more DIY (like BRRRR rather than turnkey provider) I'd recommend looking at both cities. They're tertiary markets, which means much less volatile highs and lows, so as we near the top of this cycle, we should maintain our values better than over-inflated markets like Seattle, CA, HI, etc.

We're all for appreciation but we prefer slow and steady to fast and volatile (because timing the market never works), so cash flow is the name of the game for us. Solid B class properties come in around $90-$120k or so in both markets, rents right around 1%. Obviously you'll need management either way if you're OOS so focus on people first, even before market. But that being said, AL is definitely worth a look no matter what strategy you're looking to use.

Good luck!

I like to combine location selection criteria into a full analysis that will tell me where I can get the highest rental yields at the lowest possible risk as a passive investor. Rent can be modeled using machine learning based on comps, location, and local economic factors. From there I take out holding costs specific to each location -- expenses for everything from taxes to insurance to vacancy. I model this down to the block level and then filter out everything but "B" neighborhoods, which I have defined using my own risk criteria. Here's what I get for the Dallas-Fort Worth area. It gives me a pretty good idea of that middle ground between too expensive and too risky. The areas the light up in orange tend to be the areas where risks are manageable but yields still high.

Love hearing others on their start of the RE journey. Once you nailed down the place of interest, take a trip out there and get a good feel for the lay of the land. See if it really is the place you want to invest in. Also, use that opportunity to connect with a PM and brokers you will be working with. At the end of the day, its the relationships that help you build your portfolio and couple that with your will to build wealth plus comfort with the location. Relationships, will and comfort. 

Happy investing!

@Coleman Cox some great advice and tools here. I think turnkey is a great place to start. Even if you don’t go turnkey, evaluating them will tell you a lot about areas and if you really want to do your own value add, etc.

I have a slightly contrarian view on picking a market. I think the three most common reasons for new investor failure (other than lack of grit and determination) are as follows - in order.

1. People/team failures - some combination of communication, expectations shortfalls and/or failing to manage contractors and/or property managers

2. Planning is too optimistic and cash reserves are too low (this is catastrophic as it is nearly the only way people lose a property)

3. Picking the wrong neighborhood, block or address - this can happen in EVERY market. I.e. if you spend 10 hours picking a market, you should spend 100 picking the neighborhood/street/block and finally address.

I don’t know anyone who failed because they chose the wrong market. If it is your first investment, the best way you can get to long term success is to avoid failure. Focus on the 3 above in my opinion. Hopefully that helps.

@Coleman Cox I'm right there with you. I live in NYC but looking into OOS markets (Greenville SC, FL & OH). Right now I'm doing my due diligence to network with people in those markets. As you can tell this business is all about who you know. Best of luck to you as you narrow down you search. Keep us posted on what you decide.