Out of state investing = paralysis by analysis

50 Replies

Hello BP,

My Question: Which cities are prime for cash flowing 1-4 unit properties and what metrics specifically do you use and from what site? Census Bureau? REIT reports? etc.  

Anyways, I'm working on selecting 2 cities to heavily pursue for out of state rentals. Once selected I'll be booking my flights and spending some time in each city hopefully meeting some quality people that I can work with and bring value too. I have reserves that I am ready to deploy but the data I am collecting from PWC, and Real Wealth Network is conflicting with some cities I hear others say they love to invest in. So I started to read through this column written by Real Wealth Network. https://www.realwealthnetwork.com/learn/best-places-to-buy-rental-property

As I was reading through the article I couldn't understand why anyone would invest in cities like Pittsburgh, Cleveland, Detroit, Cincinnati, St. Louis, etc. Mainly because they claim that those cities have a projected 5yr equity growth below the national avg, 6yr population growth below the national avg, and a 1yr job growth below the national avg. Maybe the data only pulls from the city limits and not the surrounding areas?

With that being said, my main goal right now is cash flow, cash flow, cash flow so equity growth is not the leading driver in my decision but a nice to have.  I had a good friend tell me to invest for appreciation instead but that's another argument for another day.

Other cities I am considering are Birmingham,Huntsville, Indianapolis, Boise and a few others. Really trying to narrow down my search to ONLY 2 cities but the more I read the greater my paralysis by analysis becomes.  Here is a table I have put together from some data collected by PWC. The Rent/ Cost of Ownership is the market apartment rent divided by the median mortgage payment, including estimated taxes, insurance, and maintenance.

@David Olson this is some good analysis but as you say, it can also be a hinderance.  If you want my view, there is no "perfect" market.  There are just those that fit your goals and personal situation and those that don't.  Within those that fit, it will always be difficult to find "good" deals.  

Here in Boise the market is white hot and therefore cash flow is pushed down by all-cash buyers who don't have to factor in financing, 1031 exchanges, etc..  On the plus side, the rapid growth and lack of supply is pushing up rents and pushing up prices.  This is great for appreciation (not your focus, I know).

If you want cash flow, you likely want to look to the lower-growth areas where appreciation isn't factored in by others competing for your deals.  If you want balance, places like Boise might be a fit.  The investors we work with take the approach that they want to get a minimal cash flow return as well as long-term appreciation (and mortgage pay-off from rents).

I don't know about other markets, but Boise is challenging to find deals.  The sheer number of people looking relative to the properties available makes it difficult, but people are finding deals that seem to work for them. 

@David Olson Hello David! It looks like you’ve done some great research on all of these cities.

Regarding Pittsburgh in particular, the population growth (or lack thereof) doesn’t tell the whole story as to why this is a good area to invest. Allegheny County has generally been one of the older populations in the country and we are beginning to see an influx of young, college grads staying in this area due to the growing technology, healthcare, and education industries. So while our population as a whole may be stagnant, the makeup of that population seems to be changing leading many to believe good things are in the horizon.

Pittsburgh will probably never be a city that makes you millions on appreciation, but the stability of the housing market and major employers in the area make it attractive in their own right. Add to that the boom in tech jobs and you will find countless opportunities to cash flow on 2-4 unit properties in the area

Not to say that data is bad,

But if anyone read a data point of New York in 1980s - no one would have touched it with a 10 feet pole.

Highest crime and murder capital of the world.

Look at the Prices move from 50K to 1.5 Million in just 20+years.

Statistics cannot predict the Gentrification and what City is about to take off based on past predictions or current readings.

There are variables that cannot be measured.

@David Olson Regardless of what the data says me and plenty of others are cash flowing out the wazoo here in Pittsburgh. Some good appreciation in lots of areas as well. I wouldn't dive too deep into the macro data. Real life numbers trump whatever data a report says/predicts in my opinion. The data I like to look at are on the micro level such as DOM, price trends, supply, etc. Population data is pretty far behind as well since it takes time to perform/analyze the census so the boat could have already set sail before the population statistics catch up depending on the area. 

@Matt Brookshier good point on Boise. Seems to be a market where one could risk a lower cash return in exchange for rapid appreciation.

@Max Feinberg That makes sense. I initially was looking in the Burgh and now that you mention the older population in that area I remember reading an article explaining why the % population growth is being thrown off by the older population or something to that affect. Also the numbers I am finding show that 21% of Pittsburgh's population is 65+ compared to nations avg of 16%. That same metric shows that Houston is 11%, Austin is 11%, Indianapolis is 14% etc. So I think there is some real value to what you're saying.

@Bala A. Never thought of it that way but your example of NY couldn't be better. I think I could be overthinking it on trying to predict what may or may not happen. 

@David Olson I agree with what others have stated, that over-analyzing the markets can cause a lot of confusion and paralysis. I was in the same boat earlier this year, and I finally just decided to pull the trigger and focus on the Louisville, KY market this year. My main driver for choosing a market was because I had connections there and was able to get referrals for an agent, property manager and handyman that I trust. Building a team in a particular market is most important!

My plan is to focus on Louisville and building a portfolio there for about a year. After that, I will shift my focus to another market to try to diversify in another part of the country. When I look for my next market, I will be focusing on areas that have a stable rent base, good cap rates when analyzing deals and rents, and ideally where I have some connections that can help with referrals.

Best of luck!

@David Olson In the trenches my man. Basically just being here and experiencing what is going on can't really quantify it. Rents and price points can vary from street to street. Reputations and perceptions of an area can change way before the data reflects it. I get all of that data I was referring to from the MLS being an agent it tracks all of the MLS data and gives some good useful statistics that update every month and tracks over 10+ years. I'm not sure if you could find that maybe on realtor.com or zillow

@Alyssa Weber I think that's where I'm at. The point to where I just need to make it happen. Glad things are going well for you in Louisville! Are you primarily in the 1-4 unit space or diving into the commercial field as well? 

I 120% agree building a team is most important! A bad team in a great market will make that market look dismal.

@Jeremy Taggart I plan to fly to whichever 2 cities I choose so I can have face to face meetings and drive the area. I figure doing this will help immensely and would be money well spent.

@Jordan Moorhead the rent to purchase price ratio doesn't work as well here as it does in other areas. Compared to other markets, the 2-4 unit space here is very thin. Which is why I flipped a property that sold in February. The market is great for flips though but they are becoming harder and harder to come by here. 

@David Olson I had a commercial deal (6-plex) fall through about a month ago (appraised too low), but other than that I've been focusing on the 1-4 unit properties.

Heads up, if you're interested in commercial out of state investing, make sure you do a lot of homework on finding a lender that will work with you in that market. We had a lot of issues with lenders denying us because we were new investors, and didn't have any prior experience in that market, even though our income could support the mortgage without any renters at all. We eventually found a lender that would do it on our 6th try, but it certainly would have been easier if we had started with a 1-4 unit property instead. It required a lot of persistence and patience, so wanted to pass along that lessons learned :)

@Sterling Fields no question is stupid. The entry price point vs what it will rent for are not ideal compared to other markets. The appreciation is great but the cash flow is poor in my opinion anyways. Not to mention the high property taxes as well and here in Katy there are 3 triplex properties all owned by the same investor. This according what I have been told through public record anyways. 

@David Olson , I downloaded a ton of Census Bureau data and made a huge spreadsheet of every MSA in the country with a population above 100,000. I scored each MSA on four criteria that I found correlate strongly to rent growth: supply (as measured by persons per unit), median household income growth, job growth, and population growth.

My scoring system narrowed the list of possibilities from 380 to 60. I live in Los Angeles, so next I narrowed the list to 20 by factoring in the travel logistics to get there. With those 20, I started googling and visiting government websites to get a feel for the MSA. Is there a college or university? Is there a large medical presence? Is there a nearby military base (which I don't like at all)? Is there a bustling downtown? Are there any Fortune 1000 companies headquartered there? Most importantly, does the city's development agency have a strong online presence? Some cities, even small ones, have published development plans online, and it's a great sign to find this.

After poking around for a week, I narrowed my list to two: Fayetteville-Springdale-Rogers, AR and Lexington, KY. I made a few calls -- to realtors with listing on Trulia, to property managers, and to local banks -- and told everybody I was planning to visit in a few weeks. My conversations with Arkansans with more fruitful, so I booked a flight to Fayetteville.

After five days in Fayetteville, I returned home to LA with two brokers sending me deals, three bankers interested in working with me, two property managers interested in helping me assess deals, and two local operators interested in partnering with me on bigger deals. (One of these guys is working on an opportunity zone fund idea which is just killer.)

So, do that! And if you'd like to start with my spreadsheet, message me your email and I'll happily send it your way.

All the best!

Jonathan

@Jonathan Schwartz very impressive and thanks for sharing! I'll shoot you a message shortly. How long ago did all this data collection take place and have you landed anything in AR yet? 

@David Olson , I put this information together in April and May. It's the most recent Census data, which only goes through 2017.

 I'm working on a new spreadsheet that analyzes more recent data -- specifically, monthly employment numbers from the Bureau of Labor Statistics and the Census Bureau's monthly report on issued building permits. Both of these are on the MSA level. My thinking is, if you can track where jobs are being created and where not too many buildings are being permitted in almost real time, you'll have quite an advantage in finding a great emerging market.

Nothing acquired in AR yet, and I probably won't until 2020, unfortunately. I've been simultaneously looking for a duplex in LA to house-hack, and I found it! We're in escrow now, and my capital's going to be tied up in it for the rest of the year.

You can find data on pretty much anything out there to support whatever viewpoint you want. Obviously you don’t want to pick a market that has a ton of red flags but every market has positives and negatives. Look into them, analyze them and figure out what is going to have an impact on your bottom line. You can do all the analytics you want and it might pay off. It could be totally wrong. Spots that everyone would have glanced right over 15 years ago are thriving today! Austin, Dallas, Atlanta, Boise, Vegas, Portland..... they have all boomed. I’m trying to find the next city that’s gonna take off.... just like everyone else. Good luck! Don’t over think it too much!

If you are investing to maximize your annual cash flow, then you want to focus on the Cap Rate for the market and the individual property, as well as your cash-on-cash Return on Investment (ROI). The Cap Rate is based on the Net Operating Income (NOI) divided by the property's purchase price. It is the same for a property regardless of how your finance the purchase of the property. The cash-on-cash ROI is based on how you purchase the property (all cash or financed) and the amount of leverage you use the purchase. The higher the level of leverage, the higher the ROI (and the higher the risk).

So what that being said, your level of risk should guide whether you focus on the Cap Rate or the ROI. A high level of risk will focus on the ROI of the deal/property, with the understanding that you can achieve a high ROI even with a modest or low Cap Rate. A low level of risk will focus on the Cap Rate as the driving factor given the ROI will be limited due to purchasing with all or mostly cash.

I also like to take into account the rent-to-price ratio (monthly rent x 100 / purchase price), where I like rent-to-price ratios of at least 1.3 (a property that costs $100,000 will generate at least $1,300/month in gross rent).

Here is a good article to get you started:

https://sparkrental.com/best-markets-cap-rate-rental-properties/

Originally posted by @Bala A. :

Not to say that data is bad,

But if anyone read a data point of New York in 1980s - no one would have touched it with a 10 feet pole.

Highest crime and murder capital of the world.

Look at the Prices move from 50K to 1.5 Million in just 20+years.

Statistics cannot predict the Gentrification and what City is about to take off based on past predictions or current readings.

There are variables that cannot be measured.

 to be fair and I like whats happening in Detroit compared to my experience there in the mid 2000s  but U cant compare Detroit to NYC 

NYC being the center of the universe for the capital markets.. 

Originally posted by @Jonathan Schwartz:

@David Olson , I put this information together in April and May. It's the most recent Census data, which only goes through 2017.

 I'm working on a new spreadsheet that analyzes more recent data -- specifically, monthly employment numbers from the Bureau of Labor Statistics and the Census Bureau's monthly report on issued building permits. Both of these are on the MSA level. My thinking is, if you can track where jobs are being created and where not too many buildings are being permitted in almost real time, you'll have quite an advantage in finding a great emerging market.

Nothing acquired in AR yet, and I probably won't until 2020, unfortunately. I've been simultaneously looking for a duplex in LA to house-hack, and I found it! We're in escrow now, and my capital's going to be tied up in it for the rest of the year.

 Jon  I would ad in vacant homes into your spread sheet.. and the reason in much of the mid west that you don't have building permits being pulled is exiting inventory is far cheaper there is no economic reason to build new.. so be a little cautious with that one.

I like looking at scarcity..  and were building permits are being pulled and properties sold in the 300 to 600k range.. buy the dumps in those areas.. I think that's a good play.. 

AS for the OP  maybe other areas of Texas you know you have no state income tax.. so that could offset some of the property tax.. 

property tax from what I  see Is low in Indy for instance but other cities is as high if not higher than Texas.. 

Good luck..  We chose the Carolinas.. at least for newer builds etc.. especially Charleston.. scarcity.. its surrounded by water on 3 sides and the 4th side has Boeing Volvo Mercedes and one of the largest tourist destinations on the East coast after NYC and DC.. 

@David Olson

I live in Boise and have been trying to find a perfect house hack. There isn't one. The market is just boiling liquid magma hot right now. There are a number of mature investors and out of state investment companies that are driving up property values, but as such, rental prices aren't keeping up with property prices. I'm not saying it's impossible, but a solid fixer upper multifamily on MLS if going to be at least $250,000. After repairs, you might still have difficulty creating cash flow. You will definitely find more options at auction though! Best of wishes!