Buying for Cash Flow - Looking for Oppinions on Markets

24 Replies

For the longest time I always said I wouldn't invest out of state because I like to be able to touch what I buy, but the more I think about it, the more I change my mind. 4,5and 6 percent returns here in my state really don't allow me to finance the properties I want to be in without putting down 35-40% so my focus is changing to new markets that might have flat appreciation but see good returns annually. I'd like to see 8%CAP or higher... Which markets are you all in that are allowing for good cash flow.

I would be looking at anything from 5 to 25 units with a purchase price of up to $1MM.

When I had first gained an interest in real estate I was thinking the same thing to myself, that I would never invest out of state because I thought it was a foolish idea to not try your own backyard. After spending time on the forums and reading various books and blogs sometimes the market you need is out of state depending on your niche or requirements. Most states you should be able to find something at a 7% cap rate without much issue, just will be a matter of determining a city that meets the vacancy rates and cashflow you desire. Specific cities I am not sure on but some states are on fire more than others in general.

That is quite a large initial downpayment, is it a state law with lenders or a specific reason for it?

@Ryan McGlasson he needs to put down 30 to 35% just to get some positive cash flow . It is not a lender requirement . It is the same here in Sacramento . A person would need to put down 30% on a 300k house that rents for 1500 per which is common around sacramento. The only places that you can buy with 20% down are in north highlands or del paso.  A person can get good cash flow in Kansas City plus they are experiencing appreciation . 

Thanks for all the input! One of the major reasons I never wanted to invest out of state is because, well for one I like the idea of investing in my "backyard" but two, so many markets are street by street and identical properties A and B with identical cash flow can have such major differences in IRR over the long term. I like all the markets you all have mentioned... I am a broker in my state and we do a great job, that being said, I would love to be able to connect with a great broker in some of these Midwest markets if anyone has a connection or two they would be willing to share I would be very appreciative!

Got it, Yes, the Houston market is heated as are most markets. It's tougher to find good opportunities as there is increasing competition from overseas capital and out of state investors. That said, the Houston market is still a great market to enter due to the diversification of major employers, job growth, population growth and business and landlord friendly laws (State of Texas). 

I don't invest in single family, just focus on multifamily. 

@Jameson Sullivan To find entry cap rates at 8%+ you will likely need to be in the lower B/C class assets in a secondary or tertiary market. I would second the locations that @Juan Vargas recommends for those type of assets. Even though out of state means not in your backyard, you can still have boots on the ground since the flights are usually pretty easy in/out from most of the markets mentioned. 

@Bjorn Ahlblad If the markets aren't fitting your criteria than I'd suggest that you look elsewhere as well.

@Michael Plante I agree with St Pete, FL area but not too familiar with NY markets.

@Dulce Beltran The Houston market is in a good recovery cycle right now and is a great place to invest. The biggest thing I would be careful of is underestimating the flood insurance since they are in the process of redrawing the flood plain zones in Houston. In our underwriting we pretty much estimate 3x on the existing insurance to play it safe.

Finally, I definitely agree with the investing out of state. It's always a good idea to keep an eye on your own backyard but many deals can be found out of your own state.

Keep up the good work!

This is a tough question to answer because there are so many factors.  There are many neighborhoods in America where you can do much better than an 8 or even a 10 cap on multifamily deals, but the question is - would you be willing to venture into those areas?   A high cap rate is great if you have low vacancies and low expenses, and tenants aren't worried about having their units broken into or getting assaulted when they walk around their neighborhood.  I personally like to find a balance between current cap rate and demographic/r.e. development trends happening in that area.  I have properties that I would buy 100 more of if I could, and  a couple others that I would love to hit the rewind button on but am doing what I can to make them profitable going forward.  Now as my partner and I move into the realm of raising more capital for deals, we are looking for value-add deals offering strong near-mid-term cash flow and even higher upside based on improvements to those deals.  I'm happy to discuss this in more detail if you send me a message.

@Jameson Sullivan If you're interested in looking into the Cleveland market, I'd be happy to help you out, whether you want info on neighborhoods, agent referrals, or even a possible partner. Some areas are very competitive now, but there is still plenty to choose from where you can get healthy returns.

@Jameson Sullivan many of the midwest markets will allow for good cash flow. The important thing is to look at the city to understand if it is growing (and will continue) or if it is shrinking. The South east also has some good markets and of course, there is Texas. Check out the blog I wrote on markets for multi-family: https://www.biggerpockets.com/blogs/10145/68178-to...

@Jameson Sullivan LOL, and here I was thinking Tacoma might be a better market for small, multi-family. Apparently not. Western Washington and even Western Oregon are tough. I need to 1031 so I need to decide quickly. I've been thinking mid-west like Indiana.

@Jameson Sullivan couldn’t agree more about our local market. I haven’t been to any local REIA meetings yet but there’s one on the 11th (I think it’s the Tacoma REIA) that’s specifically for out-of-state investing. I’m going to make that my first meeting for all the reasons you’ve mentioned. I think between that and the BP community we’ll have zero issues finding a market elsewhere. Happy hunting.

@Jameson Sullivan , when I went shopping OKC and KC were on my radar screen along with a few other markets.  Just be ready to get on a plane and walk some properties.  Milk the brokers for information - they can usually give you a good picture of different local submarkets and neighborhoods.  Dig into the numbers - ask for at least 3 years of P&L, and two years of monthly income/expenses (T-24?)  Was there a decline in rental income?  Why?  May be a good property with sub par management.  Any odd increases/decreases in expenses?

Meet with the owner/seller if possible.  Ask everyone their opinions of local property managers.  (I flew up to OKC for a day just to interview prospective PMs.)  Keep your emotions in check.  Run some scenarios with different financing.  One buyer applying bank financing may think it's not a good deal, while it may be fine for another buyer using Freddie or Fannie financing.  Good luck!

@Jameson Sullivan Especially off market OKC hits the 1% rule, has consistent 8% rates of returns in the right areas, but multifamily is tough here. It's often overpriced. Any luck finding those numbers in multi anywhere since this post? 

@Ryan McGlasson where are you investing? 

@Bjorn Ahlblad  did you end up jumping into any markets? 

@Jameson Sullivan right there with you. I have been surveying and have eyes on the KC market. Coming from Denver I feel it is a baked market. Planning a trip out to meet agents and PMs as well.

Feel good about stability and economics of area. For me I am targeting multi-fam ($1-$1.5M) to start. Let me know if you want to connect to share insight.

@Alyssa Dyer thanks for the reach out Alyssa, I have friends who have invested in OKC and are happy. I am still digging around in my immediate area hoping to unearth another MF building. I did look at the Phoenix market a while back-seems there were a number of possibilities there. When I was younger I invested OS but not anymore. All the best!

In Binghamton, NY (near the Pennsylvania border about halfway through the state) it's not hard to find 10+ cap. Feel free to message me- I'd be happy to send you some listings!