Out of State Investing for Cash Flow

18 Replies

Hi all,

A few friends and I are trying to get started in our real estate investing journey and want to focus on cash flow from rental properties. Unfortunately, we live in Southern California, and we don't have the resources to pay a 20% down payment on a house. So we are considering investing outside of California to generate stronger cash flow from Day One.

Do you have any advice? What should we consider when looking at out-of-state properties? (turnkey investing vs. traditional?) We have been doing some research and have been advised to invest in-state (more familiarity with the area, laws, etc.). However, given our resources and the California housing market, this isn’t really an option for us.

Any advice is extremely appreciated! Thanks for the help!

Best,

Michael

Updated about 1 month ago

Thank you to everyone that has been giving advice, we've decided to narrow it down to a few regions to analyze and look into. Will definitely be checking out the books and resources recommended here.

Buy "Long Distance Real Estate Investing" by David Greene. He will teach you how to investigate a market to determine where you should invest. Then he teaches you how to build a team that can do your work for you in that location.

I started investing out of state from CA and I’m so glad I did! If you want cash flowing rentals and don’t have massive amounts of capital this is 100% the way to go. I talk about it on my BP podcast and I’ll send you some suggestions via DP. 

Hello Michael. I would highly recommend that you look at close to rent ready properties in out of state markets. Many clients underestimate the cost and time to rehab properties. Have reserves and get yourself a great property management team that has more than enough hired staff to accommodate for the addition of your properties into their management portfolio. Let me know if I can help.

I started with turnkey remote rentals in 2009-2015 while working my engineering W2 job and living in a high priced are of Seattle. Then went into syndications once my net worth went over 500k. TK is good for busy people with good paying job to get started.

Metro Detroit offers many options for meeting the 1% Rule and relatively high ROI.

The two most common mistakes we see investors make, over & over again, are:

1) Not understanding and running their own ROI numbers

2) Not having a clear understanding of the type of asset a property is

In our opinion, your best team member should be your Property Management Company (PMC). They have to deal with any property you buy every month until you sell or terminate them. Everyone else on your team will be transaction-based and not really involved after a purchase.

We're in the Metro Detroit area, so you may want to follow our blog here on BP, but at least read the following posts:

Follow our "Deep Dive" series we're doing about Metro Detroit cities and City of Detroit Neighborhoods: https://www.biggerpockets.com/...

How to “Screen a PMC Better than a Tenant”: https://www.biggerpockets.com/member-blogs/3094/91877-how-to-screen-a-pmc-better-than-a-tenant-part-1-services-and-processes

@Michael Castillo it really gets down to picking up a market (I recommend Michigan and Ohio for cash-flow) an asset class (B to C depending on your risk tolerance) and building a team of Rockstar "boots the ground". 
Title company, Agents, Wholesalers, and more importantly Property manager. 

I've seen great B-class properties becoming a nightmare for Out of state landlords because they were very poorly managed locally. And I've seen OOS investors having great success in lower-class areas because they had great people in their corner. Best of luck !

Originally posted by @Michael Castillo :

Hi all,

A few friends and I are trying to get started in our real estate investing journey and want to focus on cash flow from rental properties. Unfortunately, we live in Southern California, and we don't have the resources to pay a 20% down payment on a house. So we are considering investing outside of California to generate stronger cash flow from Day One.

Do you have any advice? What should we consider when looking at out-of-state properties? (turnkey investing vs. traditional?) We have been doing some research and have been advised to invest in-state (more familiarity with the area, laws, etc.). However, given our resources and the California housing market, this isn’t really an option for us.

Any advice is extremely appreciated! Thanks for the help!

Best,

Michael

Whole bunch of markets available for Cali folks like you. Cleveland is the one I am most familiar with and it's also very popular with investors across the USA so I figured you'd get some value out of reading The Ultimate Guide to Grading Cleveland Neighborhoods. I also have similar guides that you may want to look over for Kansas City, Missouri. & Birmingham, Alabama.

Here are a bunch of other markets SoCal folks look at around BP as well. In no particular order......

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

When you're going into a new biz and a new market you'll want to mitigate your risk as much as you can. I like to give new investors the following punch list to think about while they are getting started. It's pretty applicable no matter which market you ultimately choose.

  • 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.
  • Google Clayton Morris and/or Morris Invest for a cautionary tale of what not to do when buying turnkey real estate
  • Understand you can not eliminate all risk, only mitigate it. If you are risk averse, real estate, (especially out of state) is not for you.

You should consider FHA 3.5% down loan. Having bought properties out of state with 20-25% down and properties in California. These down payments are in the same ball-park

@Michael Castillo I have a few rentals in Birmingham and doing it from SoCal, been using the BRRRR strategy and has worked fairly well. My advice, do plenty research (books, podcasts, networking) but theres no need to over do it. The biggest thing I've seen with aspiring investors is that they never take action and jump in.

-Dan

I took $100,000 and bought a 14 unit rental portfolio in Kankakee, IL - as a non-resident, foreign national (I was living in Norway at the time). So if I can do it from a different country, I think you can do it from California! :)

One thing that´s great about investing out of state (or internationally in my case), is it forces you to choose rationally depending on your strategy as an investor.

Generally speaking I´ve found slower growth, tertiary markets in the mid-west, that rank high on the affordability index, best for cash flow ROIs. And there´s less risk of boom and bust, as we often see in larger secondary cities.

I´d recommend trying to keep the property values over 67k per door, that will make re-financing with commercial lenders much, much easier when you own more than 5 units. It´s basically impossible to get commercial blanket loans for rental portfolios when the value per unit is lower than approximately 70k (that´s presuming you can get 75% LTV, which I found was the norm with commercial loans of this kind).

A mixture of commercial blanket loans and creative owner financing has worked well for me so far, keeping my cash-on-cash return high.

Great thread.  I’m based in Chicago and looking at investing out of state, turnkey route. I’ve been diving deep this past year and my goal is to obtain my first rental this year.  Great info from above.  Ray

@Michael Castillo

Hi Michael. I’m from Orange County, CA, myself, and I started investing in NC while still living there. I was so happy with the results that I moved out here to immerse myself in it.

More than happy to answer any questions in a DM.

Originally posted by @Michael Castillo :

Hi all,

A few friends and I are trying to get started in our real estate investing journey and want to focus on cash flow from rental properties. Unfortunately, we live in Southern California, and we don't have the resources to pay a 20% down payment on a house. So we are considering investing outside of California to generate stronger cash flow from Day One.

Do you have any advice? What should we consider when looking at out-of-state properties? (turnkey investing vs. traditional?) We have been doing some research and have been advised to invest in-state (more familiarity with the area, laws, etc.). However, given our resources and the California housing market, this isn’t really an option for us.

Any advice is extremely appreciated! Thanks for the help!

Best,

Michael

 Check into Las Vegas.

Check out Bigger Pockets Real Estate Podcast #472 - Here's What You SHOUDN'T Do When Long-Distance Investing

Good podcast that will answer many of your questions.

Nick Belsky

Hello @Michael Castillo ,

Great that you are doing your due diligence on an investment location. Instead of listing cities that might be good investment locations, below are some considerations that will help you evaluate locations. Remember that you will hold the property for many years so look beyond initial return.

ROI is a Snapshot in Time

Return metrics, like ROI, are only a snapshot in time. ROI estimates how the property is likely to perform on day one of a lifetime hold. ROI tells you nothing about how the property will perform in the future.

For example, suppose you are considering two properties in different markets with the same initial ROI. Property A is in a market where rents are increasing above the rate of inflation. Property B is in a market where rents are increasing below the rate of inflation. Over time, Property A's inflation-adjusted cash flow will increase while Property B's cash flow will decrease.

Another example, suppose Property A has a lower initial rate of return than Property B. If you based your decision only on the initial return, you would choose Property B. As you can see, Property A is a much better long term hold.

My point is that you must look beyond the initial return; you will be holding the property for many years, and you need the inflation-adjusted income to increase over time. After all, your living expenses will be increasing.

Location Considerations

Below are some of the more important considerations I recommend when evaluating locations.

Population Size

I would only consider metro areas with a population greater than 1 million. You want a stable economic environment, and small towns may be too dependent on a single company or commodity. Here is a list of metro areas ranked by population.

Appreciation

Appreciation is an excellent economic health indicator. When properties appreciate, demand is increasing. Demand will only increase if new jobs are being created, people are moving into the location, the government is not oppressive, and many other things have to be right. However, I would never consider any location where rents and prices are not increasing above the rate of inflation.

NOTE: I would not include data from the COVID period; which is skewed. What you want to look at is the trend from 2008 to 2020, adjusted for inflation.

Crime

While crime is everywhere, crimes occur in some locations much more frequently. Properties in cities with high rates of crime are unlikely to do well over time. Few people would choose to move to such a location and people with sufficient income will move away to a safer location. Median income in the area will fall as well rents and property prices. Also, Employers are unlikely to open new operations in high-crime areas either. Here is one list of high crime cities. I would not invest in any city that appears on this list.

Population Change

Population change tells you a lot about a location. If the population is increasing, many things have to be going well. Also, with a growing population comes rising demand which will result in increased property prices and rent.

If the population is decreasing, there are serious issues. Moving to a different state or city is an expensive proposition, both in terms of stress and expense. Things have to be pretty bad to motivate a significant number of people to move away from a location. I would not consider any location without a rising population. Here is a list of metro population changes between 2010 and 2019.

Jobs

A property is no better than the jobs around it. However, it is not just the jobs your tenant pool has today. Except for government and utilities, the average lifespan of a company is about ten years. Even companies listed on the S&P 500 only have an average lifespan of 18 years, and it is declining. So the jobs your tenants have today will vanish in the next 10 to 15 years. The location will only stay economically viable if new companies are moving into the location, creating new jobs requiring similar skills and paying a similar wage.

The best way I know to quickly assess the economic health of a location is median household income. If the median household income, adjusted for inflation, is not increasing, the location is in decline. The St Louis Federal Reserve is my go-to source for such information. As an example, here is a link to median household income for Las Vegas (Clark County).

Taxes

State taxes (income and property) are a good metric of the cost of doing business. The so-called "Blue" states are examples of where the cost of living and doing business is unreasonable. The high cost of living is why so many people are leaving these states. I would never invest in states with high income (or property) taxes.

Michael, I hope the above will help you to evaluate potential investment locations.