How You Can Start Investing In Real Estate Outside Your Backyard

Are you having trouble finding deals in your market? Is it impossible to locate any properties that positively cash flow? You are definitely not alone in that sentiment. I live in the New York metro area, located about an hour north of New York City.

My market is notorious for properties that have very little cash flow due to the high taxes, high insurance costs and high per unit costs.

I had two choices. Change my investment strategy to fix and flips, or look outside my market to continue pursuing properties that cash flow. I did not want to become a fix and flipper (I already had a job). I wanted to build my passive income, so I decided to look to other markets. Lady luck was on my side. As I was making this monumental decision, my partner Jake was packing his bags and moving from NY to Knoxville, TN., an emerging real estate market.

What is an emerging market? Simply put, it is a market that is experiencing growth, adding jobs, increasing population and seeing a surge in construction.

How should you begin to analyze a market before you commit any capital? I have five important criteria that I evaluate:

1. Job Growth
2. Household Growth
3. Construction Permits
4. Demographics
5. Tenant Laws
6. Strong Government Leadership

Job Growth:
In real estate, everyone has heard the term “Location, location, location.” I use the term “Jobs, jobs, jobs!” when analyzing a market for potential. The demand for apartments will increase when a city is adding employment. Jobs are a driving force when it comes to people relocating to another city. Jobs have a multiplier effect; in essence, when one white collar job is created, between two and five blue collar jobs are created to service that white collar employee. We strive for at least a 2% job growth rate for at least two consecutive years.

To access data for jobs in a market, google the name of the city and “job growth”. As of this writing, Knoxville is ranked 99th in job growth with a 2.6% growth rate. You can also use the website www.bls.gov to gather employment data for a specific city. Another site to gather information on demographics is the U.S. census website. If you Google the name of the city, a treasure trove of data will appear.

Become familiar with the employers in the market, and be aware of any announcements of new companies relocating to the market. Once a company announces a move to the market, it can take up to two years before the company is established. First comes the construction jobs; then, once the factory or office building is complete, the company is ready to move into the site.

Households:
Focus on the number of households, not total population. The former will tell you how many potential groups of renters there are, while population only focuses on the number of people living in the city. If you witness a decrease in the number of households, the demand for rentals will also drop and rental rates will follow.

One statistic that I like to focus on is migration of people to a city or state. For instance, Florida has overtaken New York as the third most populated state in the country. Florida is definitely an emerging state due in part to the influx of people relocating to the state. Factors such as job growth, cost of living and quality of life have contributed to this growth.

Construction:
Go to the town hall of the city you are researching and look up the number of building permits. They are a good indicator of a city’s growth, and when a rise in construction permits is seen for 2 or 3 years, you are in the midst of an emerging market. You can also see if a city is adding too many units and is being overbuilt. In this case, supply may outpace demand, and rents will begin to decrease to absorb the excess supply.

A saturated market presents a huge problem for landlords and will allow tenants to move up to better apartments with very little increase in rent. Most new apartments built are A properties, loaded with amenities. If you own a B property next to this new apartment complex, tenants will move to the newer, shinier apartment.

Demographics:
I like to focus on people in their 20s-30s and those who are 55 and older. The demographic who is middle age tends to have families and are more prone to buying homes rather than renting. Focus in areas where population is single and where families are young and small. America is becoming a renter nation for a couple of reasons. Graduates who leave college are saddled with student loans and often can’t afford to purchase a home. Another factor is that workers are being hired as contractors, what is also referred to as 1099 employees. These employees want the luxury of being able to live wherever they want, and prefer to rent. Pride of homeownership, once a staple in American culture is definitely on the decline.

Tenant Laws:
It would be prudent to learn the tenant laws of a specific city. I can tell you from experience that New York tenant laws favor the tenant, to put it mildly. In contrast, Tennessee laws favor the landlord and eviction times are much quicker. You need to be able to remove a non-paying tenant as quickly as possible.

Strong Government Leadership:
When analyzing a market, contact the local government to see if there is an economic development committee committed to attracting businesses. Some cities develop a master plan and economic zones to attract companies to relocate to their city. A city with proactive business policies is a market you want to be investing in.

Now that you’ve started researching markets, it’s time to choose a market.

Steps on Choosing a Market:

1. Choose an emerging market based on criteria above.
2. Begin researching market for tax laws, tenant laws, quality of life.
3. Choose the type of property to invest in: A B C D, and the strategy you will employ.
4. Research properties on Loopnet to find brokers in the market
5. Use Realtor.com , Zillow.com and Trulia.com for more market info
6. Begin contacting brokers to discuss market
7. Use Biggerpockets.com to begin networking with real estate professionals in the market.
8. Choose a date to visit the market and schedule appointments with brokers and property managers.

Once you have chosen an emerging market, it’s time to visit the market and start building your portfolio. The fun has just begun.