How to rationally select a long-distance market for investing?

70 Replies

I live in Long Island, NY, where hideous shacks cost half a million and only rent for $2000 a month, so I am excited about investing long distance. (My first investment duplex in NY metro is cashflow negative-I hadn't found bigger pockets yet!) Once the decision has been made to long-distance invest, and parameters have been set (SFH, buy and hold), how should one rationally select a market? Why not simply pick the #1 market, which is currently Memphis? Are there other variables that should be considered? If I select the current #1 market, does that mean it is already too late for that market? Is there a way of showing momentum in markets, i.e. finding a market that was #9 2 years ago, #5 last year, #3 this year and will be number 1 in 2 years after I am already in that market? If he first deal can work in a long-distance market, shouldn't one stick with that market? Won't there be numerous efficiencies by staying in the same long-distance market?

Hey @TJ Walker

I'd only use "#1 market" or "#5 market" as a starting point for my research. There are tons of variables that go into evaluating a market and you should not rely on anyone else's but your own. Some people like investing in a hot markets due to appreciation. Others like tapping into undervalued markets or up-and-coming markets to get in on the ground floor and competition is less, so prices are generally lower. I'm a firm believer in Warren Buffet's motto of "be fearful when others are greedy, and be greedy when others are fearful". I like to avoid the big rush of "hot" markets and try to find the warm ones with potential to become hot later.

As for variables, you can look at employment rate, median wages, employment growth, population growth, median income, crime, foreclosures, infrastructure, future construction, etc. The list goes on and on.

It's advised to stick with an out-of-state market if it works as it's cheaper to just fly to one place, and it's better to be an expert in one market as the jack of all trades tends to be the master of none.

Thanks Bob. According to the latest long-distance investing gurus, there is no reason to ever go to a market to see the houses, if one does proper due diligence with all team members. Do you agree? Regarding the other market variables, how does one rationally decide how to weight each variable if one simply has the goal of highest long term IRR for SFH Buy and hold strategy?

@TJ Walker

Selecting a great team is crucial but proper due diligence also includes going to see the market and the property. If you are doing this to build long term wealth for you and your family, it would make sense to do a complete and thorough job on your research. Start with a market that interests you, then dig deep all the way to the street and block level. Neighborhoods can vary greatly from block to block and picking the right or wrong one can make all the difference in your success. 

Best, Chris

Thanks Chris. This still raises my initial question of how and why to select a specific market. There is no one market that interests me above any others. I am looking for a rational basis for selecting a market that is best suited for highest profitability and ROI for SFH. All I know at this point is that I don't want to invest in NY-NJ metro area. Any pointers?

I would look at the top 5 or 10 markets and see where you can build your team best.  You would be splitting hairs between memphis Indy Jax etc. so find a team you like first. Also look at other factors like tax returns. Though it’s minor if one was only buying one house I would not buy in a state with state income tax as it’s just one more administrative thing to do each year. So I would be more inclined to go tn or Tx or fl or other with no state income tax. If you are buying many houses this is not an issue. or consider where would you want to visit in a tax deductible trip each year if desired. Good luck. 

Thanks John! I’d be starting a team from scratch anywhere I go but your points are well taken

The best market is the one where you can get the best cash flow and where there is an demand for renters along with nice landlord laws. Of course I have an bias on Memphis and Little Rock, but one of my best rentals is in Knoxville, TN. We don't offer Knoxville to our clients, but because I own an restaurant up . there, I buy homes when they land on my lap.  Check out Little Rock; 2 hours West of Memphis, lower property taxes, less competition for quality rental homes too.

Alex, thanks for responding. BTW, I checked out your site and watched all of your videos. Very impressive! I am also interested in turnkey investing. I see you are quite active here on BP-which makes me feel good about you. Are you (or other turnkey companies) willing to provide a BP rental property calculator analysis on your properties? As you know, the turnkey industry is often criticized (perhaps unfairly?) for not putting in sufficient capex and vacancy expenses into the equation. I am looking to buy 10 houses in the next 24 months (potentially all turnkey) with 25-30% down. Is anyone willing to compete for my business with hard number analyses? I should point out that I understand I can not get turnkey properties at any deep discount, and I am not looking for an unrealistic ROI of 25% or even 20%. I am looking for a rational way to proceed that minimizes my time involvement and risk.

Originally posted by @TJ Walker :

I live in Long Island, NY, where hideous shacks cost half a million and only rent for $2000 a month, so I am excited about investing long distance. (My first investment duplex in NY metro is cashflow negative-I hadn't found bigger pockets yet!) Once the decision has been made to long-distance invest, and parameters have been set (SFH, buy and hold), how should one rationally select a market? Why not simply pick the #1 market, which is currently Memphis? Are there other variables that should be considered? If I select the current #1 market, does that mean it is already too late for that market? Is there a way of showing momentum in markets, i.e. finding a market that was #9 2 years ago, #5 last year, #3 this year and will be number 1 in 2 years after I am already in that market? If he first deal can work in a long-distance market, shouldn't one stick with that market? Won't there be numerous efficiencies by staying in the same long-distance market?

 I would avoid the #1 market as you do not want to be the last one to the party. Maybe try to find a market where it is starting to climb, but not crawling with investors yet.

I would suggest looking at:

The Best Types of Markets for Profitable Turnkey Properties

I'd encourage you to visit the market. Full disclosure: I have bought sight unseen and done fine overall but my loser house was in a new market I didn't visit. I wound up dumping it for what was owed after putting thousands into it. 

There's something to be said for driving the neighborhood and just walking through homes. You really pick up a lot, and one plane ticket, a rental car, a hotel and meals are more than worth it if you're going to buy 10 homes. 

Hi Jason, Thanks for stopping by and commenting. You mention that I should "visit the market." As I mentioned in my initial post, I have no idea what should be "the market" for me. I'm looking for a rational reason to decide between Memphis, Little Rock, Indianapolis or any of 100 other markets. At this point, for me to pick one market over another would be as arbitrary as picking blue houses over yellow houses. Regarding picking a good house in a good neighborhood and needing to visit the market, shouldn't a top-tier turn-key company keep me out of bad or so-so neighborhoods? I understand that having a turnkey doesn't let me off the hook of ultimately being responsible for managing the house, but if I can't find a turnkey company to keep me out of bad neighborhoods, doesn't that suggest I am going to have much bigger problems in terms of them managing the property, finding and keeping good tenants, etc in the long run? 

Apologies jason, I was confusing this thread with another one i had started asking about turnkey companies. Though whether I do things myself long distance or use turnkey, I am still confused as to how to pick a market

No problem @TJ Walker . As far as picking a market there are lots of great articles and forum posts on BP about that. Population growth and job growth you want, of course. But there are a few other things to look for too. I suggest narrowing it down to 3 or 4 markets then start connecting with turnkey companies, property managers, individual investors and ask them questions. The cities you mentioned are a great place to start. See which which turnkey operation you have the best rapport with, which one gives you the best answers. Which one is quick to communicate (very important). And find the one that seems the best fit. Then visit it. 

And no, you can't rely on a turnkey company to vet the neighborhood. I thought so too, they say they do, so I trusted them and bought a turnkey home. This is so easy, I thought (I was new). It all went to hell and after talking to many investors in Memphis (should have done that first - build relationships and ask them their thoughts on a house/neighborhood when you find prospective deal) I found out it was a bad neighborhood and not getting any better. So I decided to dump it. Guess who bought it? Another turnkey company who claims they only work in the best neighborhoods. I'm not knocking turnkey, it can work. @Alex Craig runs a turnkey company and he helped me out of my mistake. I found him to be very transparent and helpful. And there are many others on here who are quick to offer to help. I'm just stressing you gotta do your due diligence up front. It'll pay off down the road. Trust, but verify. 

@TJ Walker   https://www.biggerpockets.com/search?utf8=%E2%9C%93&initial_section=&term=selecting+out+of+state+market

Pick the top ten and then do some serious leg work.  What is the crime rate in that particular area?  Unemmployment? vacancy rate? etc.   Go visit too.   I went to visit one place when I thought everything was great and the agent told me that they actually remove the AC units when they are vacant because or else they get stolen. What?  I decided to go elsewhere. 

I'm a new investor (no deals under my belt yet) but just wanted to share the way I'm doing things now. I just moved from Brooklyn, NY to Lakewood, NJ, and on the advice from others, am looking at which markets near me are close to the 1% rule (that the rental income from the houses is about 1% of the home values) and there are such properties about 20-30 minutes drive from my house. That makes it much easier for me to go look at them, and the prices seem right.

@Jason Carter to be clear, that mistake was not bought from me.  I don't think it was an mistake as time will fix most real estate issues.  Glad to have been able to help.

@TJ Walker I do not mind sharing anything about my business. We do not put up capex or expenses that are not known. We let investors figure in their own maintenance, vacancy and capex.  We will give the cost we do know such as current taxes, an firm insurance quote and the monthly property management fee. Problem with giving you projected cost is that everyone budgets something different. We have some investors figure in 5% vacancy and maintenance and some budget in 10% for both.  As an owner of 23 properties myself, I have a handful of 5 year + tenants and I have a handful that turn every 18 months.  I have had some property with little to no maintenance in an 3 year period and a few that are well above my projections. Then there is the things that no one ever thinks about such as a lighting striking an house we manage last week or an bad eviction, which happened to me 2 months ago.  I think where TK companies get the bad rap is over selling what we do or the market in which they operate. All we do is provide a well renovated home fixed up to an level that is nicer then other homes in the area that will be attractive to prospective tenants to want to live there. Then we give them great customer service to make them want to stay on the Property Mgmt side. We also fix up the homes by addressing deferred maintenance items and replacing old roofs and old AC systems. We then stand by our rents and product through an in house warranty.  Earlier this year, I ate about $2,000 after we sold a home because the front sewer line needed replacement.  There is no way we would have known until someone moved into the home as it had been vacant for over a year prior to my ownership. Another way TK providers get a bad name is overstating rents. I can count on one hand how many times a house did not rent for the rent we projected. In all of those cases, I made up the difference for the 18 month lease. I would like to think I have some uniquely talented skill or some sort of genius, but the reality is, what we do is not rocket science. . A good TK provider simply provides a good product that maximizes its opportunity to rent quick, address deferred maintenance, give excellent customer service and be an great property manager. I think we do well at all of those items. I will let the other TK providers oversell their products by plugging in their projections.  I could always put in averages (which I believe to be lower because of what we do), but there is always going to be someone on the wrong side of the average. We all know maintenace , vacancy and capex is part of the biz and there are many rules of thumb on BP of what to plug in.  I suggest entering in worst case scenario and if you are ok with that, along with liking the company and most important of all, get a good feeling from your property manager, then I suggest going with that group.

Thanks for responding. I guess I sort of rambled. :)

@TJ Walker suggestion for picking an market. Simply make a Pro/Con list of all the markets you are deciding upon or a SWOT analysis. Narrow down to 3, then travel to those markets and meet some industry professionals. You could always plan these trips at the same time these markets are having their local REIA (real estate investor assoc) meetings. Most of those guys are anti-TK, but that is an perspective you should probably listen to understand what is your best route. Just make sure you are listening to investors that are still actively buying. A lot of REIA's are filled with successful investors, but no longer actively buying. Just because something worked in 2004 does not mean it will work in 2018.

BTW, every market you are researching will have an a lot of local investors who have done well and still actively buying and being successful at it.  Find those guys.  There is no rush, real estate is not going anywhere. 3 to 4 more months of homework is not going to make or break you.

YYes sorry about that. Should have been more clear. I bought that property from a company that is not on BP. 

Thanks jason, alex, christine and Fradel!

@TJ Walker
A few of the most common secondary markets with good robust economies are

Atlanta
Indianapolis
Birmingham
Memphis
Kansas
Chicago
And a few others

Once you have this list it’s more about who you work with.

Well it all depends......I notice New York is one of those places in America where people are looking to invest in other places for real estate. The midwest is doing pretty well overall. It depends on what you want to do within real estate. If you are also considering flips, I would put Chicago on my list. Homes vary in prices all over plus there is a extensive amount of suburbs that are high dollar. 

As far as buy and hold investments, I'll put Indiana in my top 3 because there is a ton of potential there for any investor to cash flow really well. Cash on cash returns range between 12-19%!!!!!!!! let me know if you guys have any other questions.

@TJ Walker Here's what I did: I had my assistant take 10 news articles about the best cities to invest and list out the top ten that came up most consistently. Then I had her search for the following criteria on each city:

Population trends from 2010 to now (increase or decrease)

Unemployment rate

Job growth

Price to rent ratio

Crime rating

The most important criteria to me was the population trends. I did not want to be investing in a market that is decreasing in population, which is usually due to crime or lack of jobs. 

She then rated the cities in order from best to least, and several were pretty close.

Next I started searching for a team to source deals. If it proved difficult to build a team in an area then I moved on to the next city.

I was able to pin point Indianapolis, Nashville, Oklahoma City, Jacksonville and Atlanta as the best cities to invest given my criteria.

My approach was pretty data driven based on my goals and specific return criteria but you could also just take the top 10 list and apply one factor to narrow down to.

I'd be careful about Memphis, low school ratings, slight decline in population, high crime rates. 

@TJ Walker , I love @Jennifer Beadles 's idea, with one exception. A city as a whole is not representative of the entire local market. 

Take Chicago for example. We have 77 official neighborhoods and over 280 unofficial neighborhoods. This city is the 6th wealthiest city in the World, based on the companies that choose to have their headquarters there and is not on Jennifer's list. Why? Because in surveys it is reported as an amalgam of markets over a huge distance.

While Downtown appreciates at a rate of 10% a year or better, each neighborhood is different. While Chicago market as a whole is losing population, the highest income population moving in a city is in Chicago. We have the headquarters of companies like: Google, McDonald's, Uber, Glassdoor, Boeing, United Airline, etc...

I will say, choosing a market depends on your specific goal first and foremost. If you want to invest only in single-family homes that you hold long term, the question is are you looking for cash flow or equity grown? As each answer will send you in a different direction. 

If you decide cash flow is king for example, then what type of neighborhood are you choosing: A, B or C? If you decide the type, then depending on your price point, you can finally start to narrow down the markets.

I will say be very specific what you are looking for and then, after looking at statistics, you can contact investors in those markets that hold a lot of properties and ask them why they chose those markets.

You might also want to buy where you travel a lot so you get some extra tax deductions. Each large city will have one neighborhood that is the place to be! Buy for location first, and the money will come!

Good luck to you!

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