Out of state(or out of local) Investment Property

[Jae Bok Lee]

I currently have 3 single family home for long term rent, and they are all in Houston.  All single-family homes built in 2009~2015.  I purchased through a local realtor that I know for years and I have been managing all 3 of them by myself.  I have been watching YouTube for fix many things on those houses by myself when tenants call me.  Due to higher taxes, and higher insurance costs, profit per house is $100~200 lower per month this year.  

I see that many are doing out of state rental property purchase with property management involved.  

How do you make decision which State to start with?

Is the risk of not knowing the area worth going for?  

Is out-of-state property management worth paying for and trustworthy?

[Michael Smythe]

@Jae Bok Lee

We think the Midwest is a GREAT place for OOS investors to consider!

YES, we may be a little biased, but check out our blog here on BP comparing Detroit to other cities and Deep Dives on Metro Detroit cities & neighborhoods:

https://www.biggerpockets.com/...

(BP search feature can be problematic, so we’ve also added links @ our website under View Cities & Neighborhoods We Service)

Your biggest question shouldn't be WHERE to invest, but HOW you will invest!

Many OOS investors set themselves up for failure because they don't invest the time to ACTUALLY understand:

1) The Class of the NEIGHBORHOOD they are buying in - which is relative to the overall area.

2) The Class of the PROPERTY they are buying - which is relative to the overall area.

3) The Class of the TENANT POOL the Neighborhood & Property will attract - which is relative to the overall area.

4) The Class of the CONTRACTORS that will work on their Property, given the Neighborhood location - which is relative to the overall area.

5) The Class of the PROPERTY MANAGEMENT COMPANIES (PMC) that will manage their Property, given the Neighborhood location and the Tenants it will attract - which is relative to the overall area.

6) That a Class X NEIGHBORHOOD will have mostly Class X PROPERTIES, which will only attract Class X TENANTS, CONTRACTORS AND PMCs and deliver Class X RESULTS.

7) That OOS property Class rankings are often different than the Class ranking of the local market they live.

8) Class A is relatively easy to manage, can even be DIY remote managed from another state. Can usually allot 5-10% vacancy factor and same for maintenance.

9) Class B usually also okay, but needs more attention from owner and/or PMC. Vacancy and maintenance factors should be higher than for Class A as homes will be older, have more deferred maintenance and tenants will be harder on them.

10) Class C can be relatively successful with a great PMC (do NOT hire the cheapest!), but very difficult to DIY remote manage. Vacancy and maintenance factors should be higher than for Class A or B. Homes will have even more deferred maintenance and tenants will be even harder on them.

11) Class D pretty much requires an OWNER to be on location and at the property 3-4 times/week. Most quality PMCs will not manage these properties as they understand most owners won’t pay them enough for the time required and even then it’s too difficult successfully manage them.
***Only exception is if an owner has plan & funds to reposition Class D to Class C or higher.

https://www.biggerpockets.com/forums/776/topics/960183-what-they-dont-tell-you-about-cheap-rental-properties?highlight_post=5562799&page=3#p5562799

[Sam McCormack]

@Jae Bok Lee

Hi Jae, I completely understand what you are asking, and always encourage people to think like this. My best advice is to take a day or 2 and go to the city you are planning to invest in, meet with your realtor and go to a few potential properties. Even if you know you won't buy them, you get to see the city and know your realtor a little more. The realtor is almost the head of the team you will work with in the city because they have all the contacts that you need. It will be pretty easy to figure out if your realtor is trustworthy, as well as if that city is somewhere you want to invest. 

I am an agent in Cincinnati, known for its mix of cash flow and appreciation. I know you are looking for potential OOS investments, so let me know if you have any questions or are interested in Cincinnati as somewhere to invest!

[Ernst S Coriolan]

As with everything in real estate be sure to do your own due diligence. Be sure to do research on the areas before diving in and purchasing a property. As Sam said building up your team will be the most important step. Your agent will be the most important piece of the puzzle and having conversations with a few will aid you in your research on what neighborhoods to focus on. BP has a lot of great posts on areas to consider take a look at Kansas City, Detroit, St. Louis, Cincinnati, Columbus, Oklahoma City, and Cleveland. These cities have entry points that could suit all sorts of investors, as well as good appreciation and cashflow. 

PM isn't always great, but again doing your own due diligence will help you know who to go to. Check reviews on different platforms, call each one you're considering, and try to attend online meet and greets to ask questions about the different companies. 

[Remington Lyman]

Quote from @Jae Bok Lee:

I currently have 3 single family home for long term rent, and they are all in Houston.  All single-family homes built in 2009~2015.  I purchased through a local realtor that I know for years and I have been managing all 3 of them by myself.  I have been watching YouTube for fix many things on those houses by myself when tenants call me.  Due to higher taxes, and higher insurance costs, profit per house is $100~200 lower per month this year.  

I see that many are doing out of state rental property purchase with property management involved.  

How do you make decision which State to start with?

Is the risk of not knowing the area worth going for?  

Is out-of-state property management worth paying for and trustworthy?

It does not matter where you start as long as you develop your Core 4. The core 4 is David Greene’s long-distance investing strategy and consists of a realtor, contractor, property manager, and lender. Once you have this team in place, you should be able to invest in any market confidently.

As for picking a specific market - I would go after one with an increasing job and population growth. I invest and work in Columbus, Ohio. I am also looking to invest in Cincinnati and Cleveland.

[Anthony L Amos Jr]

Quote from @Jae Bok Lee:

I currently have 3 single family home for long term rent, and they are all in Houston.  All single-family homes built in 2009~2015.  I purchased through a local realtor that I know for years and I have been managing all 3 of them by myself.  I have been watching YouTube for fix many things on those houses by myself when tenants call me.  Due to higher taxes, and higher insurance costs, profit per house is $100~200 lower per month this year.  

I see that many are doing out of state rental property purchase with property management involved.  

How do you make decision which State to start with?

Is the risk of not knowing the area worth going for?  

Is out-of-state property management worth paying for and trustworthy?

 Start by building your team of a realtor, wholesaler, property manager, lender, contractors, lawyer, and insurance agents. Learn the local ordinances and tax laws that will affect the purchase and sell of real estate. Finally, start making multiple offers a week. I'll happily share my list of contacts in Ohio for you to begin calling.

[Jimmy Lieu]

Quote from @Jae Bok Lee:

I currently have 3 single family home for long term rent, and they are all in Houston.  All single-family homes built in 2009~2015.  I purchased through a local realtor that I know for years and I have been managing all 3 of them by myself.  I have been watching YouTube for fix many things on those houses by myself when tenants call me.  Due to higher taxes, and higher insurance costs, profit per house is $100~200 lower per month this year.  

I see that many are doing out of state rental property purchase with property management involved.  

How do you make decision which State to start with?

Is the risk of not knowing the area worth going for?  

Is out-of-state property management worth paying for and trustworthy?

Hi Jae, I recommend that you look into Columbus Ohio and as someone who works with a lot of out of state investors - there's so many catalysts for why you should invest here. Specifically, there's job growth (Intel, Honda, Amazon, Nationwide, etc) and the population is growing (unlike Cleveland or Cincy). I really see Columbus Ohio as an extremely safe bet for the next 10-20 years. Plus, there's still so many positive cash flowing and 1% deals here in Columbus Ohio. As a local investor and agent here in Columbus, let me know if you have any questions or want to connect!

[Mary Beatty]

@Jae Bok Lee OKC is a great place to invest for out of state investors.  Also it's only 8 hours from Houston so it would be a good place to invest that's not too far from home.  I work with out of state investors and am an investor myself.  If you want to connect I would be glad to answer any questions you may have. 

[Travis Biziorek]

Hey Jae, picking an out-of-state market can be tough. In my opinion you have to balance where you believe you can get the best return with where you feel comfortable.

Often, people feel comfortable with areas they have some familiarity. Friends or family that live in the area, or some other connection is usually a factor. 

The midwest is popular right now. Lots of folks are flocking to Ohio... too many for my liking. I'm personally in Detroit and I don't believe there's a better market right now when it comes to balancing cash flow and future appreciation. I own 12-doors there, live in California, and have my own team on the ground.

In terms of learning a market and building trust, it's all about talking to folks, doing some research, and potentially visiting. You can do a lot online that just wasn't possible before so it opens a lot of options.

[Kiera Underwood]

@Jae Bok Lee your name is so familiar have we connected elsewhere? I'm also happy to give you an overview of what it looks like to invest in Oklahoma City. Even here with current interest rates it's been tough to cash flow on long term rentals this year, so I and so many investors I work with are pivoting to short term. Is that something you have any interest in? If you'd like to see what it the process and returns look like just let me know. Good luck in your market exploration! 

[Jimmy Marks]

Quote from @Jae Bok Lee:

I currently have 3 single family home for long term rent, and they are all in Houston.  All single-family homes built in 2009~2015.  I purchased through a local realtor that I know for years and I have been managing all 3 of them by myself.  I have been watching YouTube for fix many things on those houses by myself when tenants call me.  Due to higher taxes, and higher insurance costs, profit per house is $100~200 lower per month this year.  

I see that many are doing out of state rental property purchase with property management involved.  

How do you make decision which State to start with?

Is the risk of not knowing the area worth going for?  

Is out-of-state property management worth paying for and trustworthy?

 Hi Jae - If you ever find yourself in need of property management services in Houston, feel free to reach out. I run a property management company in Houston and can share with you what we do and how we help investors like yourself. 

[Danny Webber]

Jae,

A great property mgt company is well worth the money. There are a few in Houston i know of. They can actually help you increase cash flow rather than decrease it over time.

Good luck!

[Joe Hammel]

Metro Detroit has what 99% of Real Estate Investors want. Couple hundred bucks a door monthly cash flow, double digit ROI, and yes the prices appreciate and you build equity.

Anyone who disagrees, is simply missing out. I cash flow $100k a year off 20 doors and have built a ton of equity in a short amount of time. Happy to send a screen shot of the portfolio to anyone who wants to see, it just won’t allow me to attach pics to a reply.

Purchase: $80k-$130k

Rent: $1100-$1500 (no rent control in MI)

1% rule: 1%-1.4% rule deals

ROI: 10-14%

Cash flow: $250-$350/door (after all expenses and budgeting for maint, capex, vacancy)

Appreciation: 3-10%+ (has been double digit for a decade)

Location: C+, B-

These numbers are based on the "sweet spot" in Metro Detroit. These are largely in the suburbs and some markets within the city. You can find higher ROI (on paper) here and probably in other cities…but the probability of actually collecting rent significantly decreases. Where these numbers are found, there is a very high rate of rent actually being paid.

We have over a dozen Fortune 500 companies just in Metro Detroit with huge Healthcare, Auto, and mortgage industry National footprints. Ford, Rocket mortgage, Beaumont hospitals and more. All complimented with Amazon fulfillment centers, google, and more tech manufacturing jobs.

The bad reputation of “Detroit” comes from OOS investors wanting sub $40,000, D class properties. We don’t buy those. We have found what works and repeat it as much as funds allow. Detroit is known as the highest rent to price ratio in the country…and we’ve found the perfect balance of price/location within the area.

[Mackaylee Beach]

Have you looked into Kansas City?! We have lots of great turnkey options and promising cash flow.

I'd be happy to connect and share more details on our market and available inventory.

[Eric Fernwood]

Hello @Jae Bok Lee,

Where you should invest depends on your long-term goals. I will assume your goal is achieving financial freedom for the rest of your life.

Financial freedom is more than just replacing your current income; it's about maintaining your current lifestyle for life. To have lifelong financial freedom, you need a passive income that meets three requirements:

• Rents must keep pace with the cost of living: Inflation consistently erodes the purchasing power of a fixed amount of money. For instance, if the inflation rate is 5%, what you can buy today for $100 will cost $155 in 10 years. If rents fail to pace with the cost of living, your financial independence will be short-lived.
• Long lasting: Your rental income must last a long time, ensuring that you do not outlive your income.
• Reliable: You must be able to depend on your income every month, even during tough economic times.

Now that we have defined the requirements for achieving lifelong financial freedom through passive income, we can determine the necessary criteria that a location must meet.

When Rents Keep Pace With the Cost of Living

In real estate, prices and rents are determined by the imbalance between the number of buyers and sellers.

• When there are more sellers than buyers, prices decline until there is a rough balance between the number of buyers and sellers.
• When the number of buyers roughly equals the number of sellers, prices are static or increase at a slow rate.
• When the number of buyers greatly exceeds the number of sellers, prices increase rapidly.

Rents follow prices.

• Higher prices reduce the number of people who can purchase, increasing demand for rental properties and increasing rents.
• Lower prices enable more people to purchase, decreasing demand for rental properties and decreasing rents.

There is a lag of 1 to 5 years between price changes and corresponding changes in rents. What is the primary reason for the lag? Leases. Leases generally last for one year or longer, meaning that changes in prices take time to affect rents. The direction of prices today is a leading indicator of changes of future rental rates.

The only market condition where prices (and rents) keep pace with the cost of living is when the number of buyers greatly exceeds the number of sellers. Under what conditions does this occur?

✅ Significant and sustained population growth.

Income Persistence

Your long-term financial freedom depends on the future economic growth of the city. The best indicator of a growing economy is job creation. What are the conditions that attract companies to establish a new facility in a particular city?

✅ Low operating costs

✅ Low crime rate

✅ Low risk of a natural disaster

✅ Sufficient population to have economic stability, major highways and a major airport.

Income Reliability

Income reliability is dependent on the tenant who occupies your property and the companies where they work. I will discuss income reliability in another post.

Location Selection Requirements

Below are the location requirements we previously determined, along with the metrics. Any city that fails to meet any of the following requirements should be eliminated from consideration.

✅ Rapid population growth

Sustained, significant, population growth. Never invest in any location with a static or declining population Wikipedia

✅ Low operating costs

It's not about how much you gross; it's about how much you net. When selecting an investment location, it's important to take into consideration all major recurring costs. Below is a comparison of overhead costs for three states that do not have a personal income tax.

Sources for insurance and property taxes: Insurance - ValuePenguin, State Property Tax Rates - Rocket Mortgage.

To show the impact of taxes and insurance, I compared overhead costs on a $400,000 property in the three states. (Remember that these are state averages, and individual cities may impose additional taxes.)

What does the difference in overhead costs mean to you as an investor?

To achieve the same level of cash flow as a property in Nevada, you would need to generate a higher cash flow in Texas and Florida to offset their higher operating costs. How much?

• To compensate for Texas' higher operating costs, a property in Texas must generate $5,700 ($9,194 - $3,494) more in cash flow annually than a property in Nevada.
• To compensate for Florida's higher operating costs, a property in Florida must generate $2,123 ($5,617 - $3,494) more in cash flow annually than a property in Nevada.

✅ Low crime rate.

Never invest in any city on Neighborhood Scout’s 100 most dangerous cities list.

✅ Low risk of a natural disaster

Natural disasters like tornadoes can destroy entire communities. The devastated community may take years to recover, or it may never fully recover. When someone loses their residence in a disaster, they immediately move to a location where they can live and work today. So, even if your insurance company rebuilds your property, there may not be anyone to rent it. However, you will still be responsible for paying the mortgage, taxes, maintenance, and insurance. To avoid this financial disaster, only invest in locations with low-cost homeowners' insurance. Insurance - ValuePenguin

✅ Sufficient population

Only invest in cities with a metro population greater than 1M**.** Small towns may rely too much on a single company or market segment. Wikipedia

Conclusion

If you select an investment city based on the above criteria, you should do well. I would add one more requirement: an experienced local investment team.

Local Investment Team

Everything you learn from podcasts, books, seminars, and websites is general knowledge. But you will buy a specific property, in a specific location, subject to local rules and regulations. The only source for the local knowledge you need is an investment team.

Working with an investment team usually does not cost more than working with any other realtor. For instance, we have delivered more than 480 properties and only charged our clients fees for four or five properties, which was due to exceptional circumstances. In all other cases, the fees were paid by the listing agent of the seller, not by our client.

Also, by working with an investment team, you also receive a master class on real estate investing at no cost to you.

[Jay Thomas]

Research is key: Choose a stable state, manage risks through careful planning, and partner with a reputable property management company offering comprehensive services and transparent fees.