Choosing an Out of State Market to Invest

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Choosing an Out of State Market to Invest

Eric B.
New to Real Estate · FL · Member since 2018 · 21 posts · 10 votes

How do you decide on choosing a market when your first starting out and doing long distance real estate investing?  

I'm in the military and am currently stationed overseas.  I just finished David Greene's book, "Long-Distance Real Estate Investing," and feel like it gives a good foundation for how to get started doing everything but choosing a market.  I've asked around and read the forums for specific advice on how people do this, but so far have only really found generic advice.  Even podcast guests seem to speak the same generic advice.

  • Invest where you have friends/family
  • Invest where you used to live
  • Invest in a market you know
  • Invest where jobs are growing, the economy is doing well, or where there is good growth potential.

This is the essence of the advice I've received.  The last bit of advice is the most helpful but I struggle with coming up with the information unless I go from city to city and pull local data.  How do the big time investors like David Greene, Brandon Turner, and others choose on a market to begin their search? How do they narrow down the list of cities/metropolitan areas to a manageable one to begin their due diligence?  

I've found sites like, Rent Data, City-Data, and GDP by State which all give results from data from 2017/2018 and older.  They don't help with predicting future growth.  

So far my strategy is analogous to throwing darts at a map and looking into whatever city they hit.  I don't want to get lucky, I want to figure out a repeatable process that works so I can invest across the country with confidence.  

Am I making this process too difficult?  What do you all do to choose a new out of state market?

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Scott Passman
Rental Property Investor · Batavia, IL · Member since 2018 · 452 posts · 672 votes
7y

@Eric B.  What exactly are you looking to find as a metric to determine where to invest?  All the "generalities" you listed are stated for a reason, because they're important. In all likelihood, the Brandon Turners and David Greene's of the world likely choose markets based on where opportunities arise with and from people they know as a result of networking and meeting people in the industry. They will certainly due their due diligence in the market, but likely after interest has already been initiated based on an opportunity. 

Are you making this more complicated than it should be?  Probably.  But it is something many of us are guilty of (myself included when I started) as there is a tendency to think there's a "perfect" market and we would do ourselves a disservice to invest elsewhere.  Truth is, you can make money in real estate virtually anywhere, you just have to determine what method of investing works best in each area.  Look to make sure an area is growing in population, has a diverse job economy and isn't overly reliant on one industry, strong job opportunities in tech, health care, energy, food, pharmaceuticals etc. are great because they are more recession resistant.  If you are looking for long-term buy and hold, look for solid rent:buy ratios (the lower the better) and loosely look to see if there are properties conforming to the 1% rule. This just helps you determine whether or not the area is conducive to rental property investing. 

Another strategy would be to evaluate macro trends on where people in the country seem to be migrating, and why.  Everything occurs in cycles and trends so investing in areas and regions that people are flocking to has potential upside and could be something to look into. The most important thing is to pick a location and get to work on networking with people there, learn as much as you can about the market, and commit to it and you will waste far less time bouncing around a never ending list of cities in hopes of finding the next "best" location.  Good luck my friend and thank you for serving our country. 

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  • Scott Passman
    Rental Property Investor · Batavia, IL · Member since 2018 · 452 posts · 672 votes
    7y

    @Eric B.  What exactly are you looking to find as a metric to determine where to invest?  All the "generalities" you listed are stated for a reason, because they're important. In all likelihood, the Brandon Turners and David Greene's of the world likely choose markets based on where opportunities arise with and from people they know as a result of networking and meeting people in the industry. They will certainly due their due diligence in the market, but likely after interest has already been initiated based on an opportunity. 

    Are you making this more complicated than it should be?  Probably.  But it is something many of us are guilty of (myself included when I started) as there is a tendency to think there's a "perfect" market and we would do ourselves a disservice to invest elsewhere.  Truth is, you can make money in real estate virtually anywhere, you just have to determine what method of investing works best in each area.  Look to make sure an area is growing in population, has a diverse job economy and isn't overly reliant on one industry, strong job opportunities in tech, health care, energy, food, pharmaceuticals etc. are great because they are more recession resistant.  If you are looking for long-term buy and hold, look for solid rent:buy ratios (the lower the better) and loosely look to see if there are properties conforming to the 1% rule. This just helps you determine whether or not the area is conducive to rental property investing. 

    Another strategy would be to evaluate macro trends on where people in the country seem to be migrating, and why.  Everything occurs in cycles and trends so investing in areas and regions that people are flocking to has potential upside and could be something to look into. The most important thing is to pick a location and get to work on networking with people there, learn as much as you can about the market, and commit to it and you will waste far less time bouncing around a never ending list of cities in hopes of finding the next "best" location.  Good luck my friend and thank you for serving our country. 

    1Reply
  • Costin I.
    Rental Property Investor · Round Rock, TX · Member since 2016 · 1k+ posts · 971 votes
    7y

    @Eric B. - have you read this fresh article - 8 Ways to Identify the Best Places to Buy Rental Property ? Know about https://www.housingalerts.com/?




    1Reply
  • Eric B.
    OP
    New to Real Estate · FL · Member since 2018 · 21 posts · 10 votes
    7y

    @Scott Passman

    Thank you for taking the time to reply.  I agree networking is key and I'm working on getting that ball rolling too.  In my situation the entire country is fair game and with that comes the tough task of narrowing things down.  Many of the things you mentioned in your post are super helpful especially regarding some industries to be on the look out for.  I've come across rent:buy ratios in my search and will have to pay more attention to finding that data.  @Costin I. I did see that article come out basically at the same time as my post.  Definitely book marked it to utilize going forward.

    My goal with this search is to identify 2 maybe 3 metro areas that I can begin the networking process as outlined in DG's book and see where the road takes me. I also don't plan to spend a super long time in this city level research phase.  The hope here is that the few hours I'm spending doing this research will pay off in some way going forward.

    0Reply
  • David Pere
    Rental Property Investor · Springfield, MO · Member since 2016 · 1k+ posts · 890 votes
    7y
    @Eric, look at macro/micro indicators... narrow it down to areas with solid population growth, and solid economic growth (from multiple job sectors)...Then look at rent-to-price ratio's and confirm that you can cash flow there. I have some markets that come to mind, but I don't necessarily invest there. I would like to think finding a niche market that is growing, but not over-hyped online is a good strategy...unfortunately that means going against the grain, and it will be less comfortable. Personally, I would limit most of your search to the middle of the country. Solid rent-to-price ratios, and affordable markets. I like the Arkansas/Missouri area, but part of that is because I'm familiar with them. Are you in a position where you could request orders to become a recruiter in a metro area in the Midwest? That could be a solid way to gain intimate familiarity with the local market. Not sure how specific you're wanting to get with market research, but I would say narrow it down to 5-10 places...write out a few pros and cons, and then pick one and never look back. People are successfully investing all across the nation, so don't get too hung up on this decision. Networking is a solid way to make this decision as well! Hit me up if you have any questions!
    0Reply
  • Tom Ott
    Equity Raiser and Turnkey Provider · Cleveland, OH · Member since 2016 · 4k+ posts · 1k+ votes
    7y
    Originally posted by @Eric B.:

    How do you decide on choosing a market when your first starting out and doing long distance real estate investing?  

    I'm in the military and am currently stationed overseas.  I just finished David Greene's book, "Long-Distance Real Estate Investing," and feel like it gives a good foundation for how to get started doing everything but choosing a market.  I've asked around and read the forums for specific advice on how people do this, but so far have only really found generic advice.  Even podcast guests seem to speak the same generic advice.

    • Invest where you have friends/family
    • Invest where you used to live
    • Invest in a market you know
    • Invest where jobs are growing, the economy is doing well, or where there is good growth potential.

    This is the essence of the advice I've received.  The last bit of advice is the most helpful but I struggle with coming up with the information unless I go from city to city and pull local data.  How do the big time investors like David Greene, Brandon Turner, and others choose on a market to begin their search? How do they narrow down the list of cities/metropolitan areas to a manageable one to begin their due diligence?  

    I've found sites like, Rent Data, City-Data, and GDP by State which all give results from data from 2017/2018 and older.  They don't help with predicting future growth.  

    So far my strategy is analogous to throwing darts at a map and looking into whatever city they hit.  I don't want to get lucky, I want to figure out a repeatable process that works so I can invest across the country with confidence.  

    Am I making this process too difficult?  What do you all do to choose a new out of state market?

     Many investors who go OOS tend to stick to the Midwest where prices are low. Look for a city that is pretty stable. I wouldn't mess with anything too crazy unless you are flipping. Even then, flipping is difficult to do OOS. 

    1Reply
  • Stacy Conkey
    Member since 2023 · 27 posts · 5 votes
    1mo

    You're not making it too difficult. You're being handed advice that skips the actual steps, which is a different problem.

    Here's the process I run. It's a funnel, and most of it is fast.

    Start with your exit strategy, not the city.

    Your goal drives your strategy, and your strategy drives which market makes sense. Cash flow, appreciation, and quick cash are three completely different research paths, and a market that's great for flipping is often wrong for buy and hold.

    So name the exit first. If you're buying to hold from overseas, you're a cash flow buyer, and that narrows the country immediately.

    Filter one: population trend. Fifteen seconds per market.

    Google "population in [city]" and look at the trend line. Rising, move it forward. Flat or falling, park it.

    That's it. You can burn through thirty cities in ten minutes, and Google will surface adjacent cities you'd never have thought of.

    Why it matters: a market losing people year over year is one where filling a vacancy gets harder every year you own the property.

    Filter two: unemployment trend.

    Same speed. Decreasing over time, keep it. Increasing, drop it.

    Those two filters do most of your work. Everything else people tell you to research is a rabbit hole you may not climb back out of.

    Filter three: the 1% rule, as a disqualifier.

    Monthly rent should be at least one percent of price. This won't tell you a deal is good. It tells you which markets can't cash flow at all so you stop looking at them.

    A $700,000 house renting for $3,000 means that market is dead for your purpose. A $150,000 duplex renting $1,700 total earns a closer look.

    The coasts mostly fall out here. Start in the middle of the country and you'll find more places where this is even possible.

    Now the one that separates you from everyone else doing this research: absorption rate.

    Pull six months of sold properties on Redfin. Divide by six to get monthly sales. Divide that by current homes for sale.

    Under 20 percent is a buyer's market. Over 20 percent is a seller's market. Flip the math the other way and you get months of inventory, which is how realtors talk about it.

    Six months of data rather than three, so one weird month doesn't skew you.

    And the part almost nobody does: run that at your price point, not at the metro level.

    A city's overall numbers will lie to you. I ran Oklahoma City once where the city-wide absorption looked healthy, and when I filtered to the actual band I'd buy in, it dropped to 13 percent with eight months of inventory.

    Same city. Completely different answer. Filter to the price range you'd really purchase in and run it again. That second number is the one that matters.

    Last filter: landlord-tenant law.

    Your exit on a bad tenant is part of your buy criteria. Eviction cost and timeline vary enormously by state, and some states have added requirements that quietly eat the returns your spreadsheet promised.

    Check that before you commit capital to a market, not after.

    Now the part that will actually get you moving.

    You said you want two or three metros and don't want to spend forever in the research phase. Good. Run the funnel, take the strongest candidate, and start making realtor calls.

    Some markets resonate and some feel like an uphill fight the whole way. That doesn't mean the city is bad. It might not be your first one. If you keep hitting walls, set it aside and go to the next name on the list.

    You learn a market by working it. Not by researching it.

    One thing that helps given your situation: this whole system is built for twenty and thirty minute pockets. A population check on a lunch break. One realtor call. One absorption rate calculation. It compounds, and none of it requires a free Saturday.

    0Reply
  • Nick Sansivero
    Rental Property Investor · Member since 2026 · 56 posts · 30 votes
    1mo

    I can share some great tools I use for identifying the best markets for cash flow and appreciation. Send me a message if interested!  

    0Reply
  • Drew SygitBusiness Member
    Property Manager · Royal Oak, MI · Member since 2012 · 13k+ posts · 9k+ votes
    1mo

    A common issue, so Copy & Paste info below:

    You’re ALWAYS better off investing locally, where it’s easier to:

    ·         Learn the market

    ·         Network to find deals

    ·         Network to find contractors

    ·         Be more hands-on

    ·         Driveby property to keep tabs on it

    ·         Network to find a decent Property Management Company (PMC)

    Next best location is somewhere else you lived, where you have an existing network of family & friends to help you as accomplish the above list as needed.

    If you invest OOS, your biggest challenge won't be finding properties to meet your goals on paper, it’ll be successfully building a knowledgeable & trustworthy local team.

    The biggest mistake we see OOS investors making in our market, over and over again, is not fully understanding Neighborhood/Property/Tenant Classes and how they impact your probability of success!

    They all run their ROI numbers assuming Class A results – when buying Class B, C & even D rentals.

    Then they’re shocked when their performance expectations aren't met😞

    If you choose to invest OOS, and have little to no landlord experience, we highly recommend targeting Class B Neighborhoods/Properties/Tenants. If you target Class C, you better be prepared emotionally & financially for plenty of challenges.

    You can find Class B properties in the Midwest to BRRRR, but it will take more digging and YOU will need to understand how to analyze & identify them - because a lot of agents, wholesalers, PMCs, etc. will try to sell you Class C or D misrepresented as Class B:

    ·         Many of them don't know/care what Class the properties are, so they're incompetent.

    ·         Others know exactly what they are doing, so should be labeled as crooks!
    EITHER WAY YOU LOSE!

    Why is Property Class so important for investors to understand and apply in their investing strategies?

    Because the Property Class dictates the Class of the tenant pool that the property will attract.

    The Tenant Class greatly impacts rental income stability and property maintenance/damage by tenants.

    Both Property Class and Tenant Class will affect what type of contractors, handymen and property management companies you should target and be willing to deal with a property.

    The Property Class will also impact the maintenance & renovations you do to, “Maintain to the Neighborhood/Market”.

    Why is that important?

    Well, if you buy & renovate a property in Class D area to Class A standards, what Tenant Class will actually rent it?

    Or, if you put several Class D tenants in a Class A four-plex, what do you think will happen to the property?

    What do you think will happen if you rehab a Class D rental to Class A standards?

    So, if you fail to apply the correct assumptions to a property, your expectations won’t be met, and it may even be a financial disaster.

    We use the following to rank Property Classes, in order of importance:

    • Property Tenant Pool: closely linked to location, but not always.

    • Property Location: closely linked to tenant pool, but not always.

    • Property Condition & Amenities: it’s important to, “Maintain to the Neighborhood/Market.”

    Key metrics for each Property Class:

    Class A Properties:
    Tenant Pool: Majority of FICO scores 680+, no convictions/evictions in last 7 years.
    Tenant Default: 0-5% probability of eviction or early lease termination.
    Section 8: Class A rents are too high and won’t be approved.
    Vacancies: 5-10%, depending on market conditions.
    Cashflow vs Appreciation: Typically, 3-5 years for positive cashflow, but you get highest relative rent & value appreciation.

    Class B Properties:
    Tenant Pool: Majority of FICO scores 620-680, some blemishes, no convictions/evictions in last 5 years.
    Tenant Default    : 5-10% probability of eviction or early lease termination.
    Vacancies    : 10-15%, depending on market conditions.
    Cashflow vs Appreciation: Typically, 1-3 years for positive cashflow, balanced amounts of relative rent & value appreciation.
    Section 8: Class B rents are usually too high for the Section 8 program.

    Class C Properties:
    Tenant Pool: Majority of FICO scores 560-620, many blemishes, but should have no convictions/evictions in last 3 years. Verifying recent 2-years of rental history very important! Same for 2-years of job/income stability.
    Tenant Default: 10-20% probability of eviction or early lease termination.
    Section 8: Class C rents usually meet program requirements, proper screening still recommended.
    Vacancies: 10-20%, depending on market conditions and tenant screening.
    Cashflow vs Appreciation: Should cashflow immediately, at the lower end of relative rent & value appreciation.

    Class D Properties:
    Tenant Pool: Majority of FICO scores under 560, little to no good tradelines, lots of collections & chargeoffs, but should have no convictions/evictions in last 12 months. Verifying last 2-years of rental history and income/employment extremely important to find the “best of the worst”.
    Tenant Default: 20-30% probability of eviction or early lease termination.
    Section 8: Class D rents meet program requirements, often challenges to pass Section 8 inspection.
    Vacancies: 20%+, depending on market conditions and tenant screening.
    Cashflow vs Appreciation: Typically, all cashflow with little, maybe even negative, relative rent & value appreciation.

    Where did we get our FICO credit score information from?

    Check out this chart:

    FICO Score

    Pct of Population

    Default Probability

    800 or more

    13.00%

    1.00%

    750-799

    27.00%

    1.00%

    700-749

    18.00%

    4.40%

    650-699

    15.00%

    8.90%

    600-649

    12.00%

    15.80%

    550-599

    8.00%

    22.50%

    500-549

    5.00%

    28.40%

    Less than 499

    2.00%

    41.00%

    Make sure you understand the Class of properties you are looking at and the corresponding results to expect.

    For example, Metro Detroit has 132 cities and the City of Detroit 183 Neighborhoods, which we’re analyzing and classifying to make better investing decisions.

    Horror Stories from those that did NOT Understand What they were Buying:

    [email protected]248-209-6824
    Logical Property Management4.9469 Reviews
    WebsiteView Page
    1Reply
  • Chase Busick
    Realtor · Oklahoma City · Member since 2020 · 258 posts · 139 votes
    1mo

    @Eric B. 

    Thankyou for your service, I was additionally in for 12 years. When selecting a market can come down to a decent amount of criteria. Usually investing in places you're familiar with or from is best, unless you are in a very expensive area that it doesn't make sense.

    Always properly educating yourself is also important. Luckily you can learn a lot for free but a lot will come down from learning by action. That's where relying on professionals in the area you choose is extremely important. Do they have Investment’s themselves, actively investing, have plenty of contacts, provide you to material or resources to help you analyze deals, financing contracts & ability to coach/educate is huge. Then do they have the same ethics, goals, or life stance similar to you is important on top of time to provide the best quality service you deserve.

    I hope your search goes well! If you ever want to chat about Oklahoma City let me know!

    0Reply
  • James Wise
    Real Estate Broker · Cleveland Dayton Cincinnati Toledo Columbus & Akron, OH · Member since 2013 · 31k+ posts · 20k+ votes
    1mo

    A lot of people who are investing out of state pick Cleveland because of how cheap it is. Just remember, there is a wide variety of neighborhoods and values here. Sometimes the stuff on Zillow that seems too good to be true really is. I'd check out The Ultimate Guide to Grading Cleveland Neighborhoods to give yourself a good honest risk assessment of every neighborhood here in town.

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