Looking for new out of state markets

[Roman Ripp]

I have been investing out of state (CA is home) for several years now. I am not looking to build an empire, just a few high yield homes I can rely on in case of emergency. So far I am in CA, OH and MN. Question for the community: where do you invest and what is your buy box?  

[Eric Fernwood]

Hello @Roman Ripp,

Instead of giving you a list of investment cities, I'll share the criteria I used to identify cities that support a monthly income stream that lasts 20 to 40 years and rents that increase faster than inflation.

Rent growth is not a property feature. It is a city feature.

Think of the city as a harbor and rents and property values as boats floating in it. Population growth is the tide. When more people move into a city, housing demand increases and rents and property values tend to rise. When population growth slows or declines, rent growth often stalls or falls behind inflation.

A great property cannot overcome a declining city. An average property in a growing city can perform very well over time. The property is simply a tool used to attract a tenant segment who stays for many years and pays the rent on schedule.

When evaluating cities, I focus on six factors:

1. Strong Population Growth – Start with metro areas of at least one million people that have a long history of steady population growth. Wikipedia
2. Low Crime – High crime drives away both employers and residents, reducing long-term housing demand. CBS: The 50 Most Dangerous Cities in America
3. Low Operating Costs – Property taxes and insurance have a major impact on long-term cash flow. Insurance - ValuePenguin, Metro Property Taxes - LendingTree, Florida's average insurance cost. See below for an example comparing three no-state-income tax states.
4. No Rent Control – Rent control can limit rent increases, restrict tenant selection, and make evictions more difficult. Google "[city] rent control"
5. Rising Personal Income – Rents cannot rise long term unless local incomes rise as well. Here is a Federal Reserve chart of personal income growth in Clark County, Nevada (Las Vegas).
6. A Strong Local Investment Team – Local expertise is essential for property selection, renovation, management, and tenant placement.

Eliminate every city that fails any of these tests. What remains is a short list worth serious consideration.

Operating Costs

Operating costs vary dramatically by state. Property taxes and insurance can have a larger impact on cash flow than many investors realize.

State	Avg. Insurance	Avg. Property Tax %
Florida	$10,996	0.91%
Texas	$2,317	1.68%
Nevada	$965	0.59%

To put these numbers into perspective, below are the estimated annual insurance and property tax costs for a $400,000 property.

State	Insurance	Property Tax	Total
Florida	$10,996	$3,640	$14,636
Texas	$2,317	$6,720	$9,037
Nevada	$965	$2,360	$3,325

Compared to Nevada, a property must generate substantially more cash flow just to offset higher operating costs:

• Florida: Requires an additional $11,311 per year ($14,636 - $3,325).
• Texas: Requires an additional $5,712 per year ($9,037 - $3,325).

The takeaway is simple: operating costs have a major impact on long-term cash flow. A city with lower taxes and insurance gives you a significant advantage before you ever collect the first month's rent.