I am in a bad market looking to make my first investment. Where should I invest?

Question

As the Title says, I am in a bad market, and a soon to be investor.

Where are the best cities/states to invest. I have been looking at potentially Indiana.

What are some of the key things to know when it comes to long distance investing?

What are the steps to getting a loan out of state?

If anyone can help me answer these questions, or at least give me some guidance that would be great and much appreciated!

Thank you!

Nicholas L. · Answer

Hi @Carson Tuttle

Do you have family or a network in Indiana? I strongly recommend against picking a market based solely on price point, if that's what you're doing here. Purchasing a rental and putting it into service anywhere is expensive, as you'll have thousands and thousands of dollars in costs and expenses - closing costs on the purchase, rent-ready costs, lease-up costs to get rented out, repairs, turnover, etc.

Unfortunately, returns on non value add LTRs are very, very low right now (again, everywhere). I know this is a real estate forum (and I am still buying), but I am encouraging new investors to think very carefully about where to allocate their cash (and you need cash). It's not obvious to me that a random LTR in a place you've never been to is going to do anything for you. If your immediate area is too expensive, can you go out an hour, or two? There's just no substitute for being hands on.

Hope this helps - happy to dialogue further. And here's some light reading about OOS.

Turnkey Nightmare: Property Manager Ignored My Warning About a Missing A/C…

Nightmare with my property manager - advice needed!

Feedback Needed: $8.8k Turnover Quote for 2BR Duplex (Half)Out-of-State Landlord Nightmare: 4 Months No Rent, Cleveland Escrow BattleFailed BRR in Memphis TN

A Cautionary Tale About a Property Manager in Cinncinatti

Drew Sygit · Answer

A common issue, so Copy & Paste info below:

You’re ALWAYS better off investing locally, where it’s easier to:

· Learn the market

· Network to find deals

· Network to find contractors

· Be more hands-on

· Driveby property to keep tabs on it

· Network to find a decent Property Management Company (PMC)

Next best location is somewhere else you lived, where you have an existing network of family & friends to help you as accomplish the above list as needed.

If you invest OOS, your biggest challenge won't be finding properties to meet your goals on paper, it’ll be successfully building a knowledgeable & trustworthy local team.

The biggest mistake we see OOS investors making in our market, over and over again, is not fully understanding Neighborhood/Property/Tenant Classes and how they impact your probability of success!

They all run their ROI numbers assuming Class A results – when buying Class B, C & even D rentals.

Then they’re shocked when their performance expectations aren't met😞

If you choose to invest OOS, and have little to no landlord experience, we highly recommend targeting Class B Neighborhoods/Properties/Tenants. If you target Class C, you better be prepared emotionally & financially for plenty of challenges.

You can find Class B properties in the Midwest to BRRRR, but it will take more digging and YOU will need to understand how to analyze & identify them - because a lot of agents, wholesalers, PMCs, etc. will try to sell you Class C or D misrepresented as Class B:

· Many of them don't know/care what Class the properties are, so they're incompetent.

· Others know exactly what they are doing, so should be labeled as crooks!EITHER WAY YOU LOSE!

Why is Property Class so important for investors to understand and apply in their investing strategies?

Because the Property Class dictates the Class of the tenant pool that the property will attract.

The Tenant Class greatly impacts rental income stability and property maintenance/damage by tenants.

Both Property Class and Tenant Class will affect what type of contractors, handymen and property management companies you should target and be willing to deal with a property.

The Property Class will also impact the maintenance & renovations you do to, “Maintain to the Neighborhood/Market”.

Why is that important?

Well, if you buy & renovate a property in Class D area to Class A standards, what Tenant Class will actually rent it?

Or, if you put several Class D tenants in a Class A four-plex, what do you think will happen to the property?

What do you think will happen if you rehab a Class D rental to Class A standards?

So, if you fail to apply the correct assumptions to a property, your expectations won’t be met, and it may even be a financial disaster.

We use the following to rank Property Classes, in order of importance:

• Property Tenant Pool: closely linked to location, but not always.
• Property Location: closely linked to tenant pool, but not always.
• Property Condition & Amenities: it’s important to, “Maintain to the Neighborhood/Market.”

Property Tenant Pool: closely linked to location, but not always.

Property Location: closely linked to tenant pool, but not always.

Property Condition & Amenities: it’s important to, “Maintain to the Neighborhood/Market.”

Key metrics for each Property Class:

Class A Properties:Tenant Pool: Majority of FICO scores 680+, no convictions/evictions in last 7 years.Tenant Default: 0-5% probability of eviction or early lease termination.Section 8: Class A rents are too high and won’t be approved.Vacancies: 5-10%, depending on market conditions.Cashflow vs Appreciation: Typically, 3-5 years for positive cashflow, but you get highest relative rent & value appreciation.

Class B Properties:Tenant Pool: Majority of FICO scores 620-680, some blemishes, no convictions/evictions in last 5 years.Tenant Default: 5-10% probability of eviction or early lease termination.Vacancies: 10-15%, depending on market conditions.Cashflow vs Appreciation: Typically, 1-3 years for positive cashflow, balanced amounts of relative rent & value appreciation.Section 8: Class B rents are usually too high for the Section 8 program.

Class C Properties:Tenant Pool: Majority of FICO scores 560-620, many blemishes, but should have no convictions/evictions in last 3 years. Verifying recent 2-years of rental history very important! Same for 2-years of job/income stability.Tenant Default: 10-20% probability of eviction or early lease termination.Section 8: Class C rents usually meet program requirements, proper screening still recommended.Vacancies: 10-20%, depending on market conditions and tenant screening.Cashflow vs Appreciation: Should cashflow immediately, at the lower end of relative rent & value appreciation.Class D Properties:Tenant Pool: Majority of FICO scores under 560, little to no good tradelines, lots of collections & chargeoffs, but should have no convictions/evictions in last 12 months. Verifying last 2-years of rental history and income/employment extremely important to find the “best of the worst”.Tenant Default: 20-30% probability of eviction or early lease termination.Section 8: Class D rents meet program requirements, often challenges to pass Section 8 inspection.Vacancies: 20%+, depending on market conditions and tenant screening.Cashflow vs Appreciation: Typically, all cashflow with little, maybe even negative, relative rent & value appreciation.

Where did we get our FICO credit score information from?

Check out this chart:

FICO Score

Pct of Population

Default Probability

800 or more

13.00%

1.00%

750-799

27.00%

1.00%

700-749

18.00%

4.40%

650-699

15.00%

8.90%

600-649

12.00%

15.80%

550-599

8.00%

22.50%

500-549

5.00%

28.40%

Less than 499

2.00%

41.00%

Source: Fair Isaac Company

Make sure you understand the Class of properties you are looking at and the corresponding results to expect.

For example, Metro Detroit has 132 cities and the City of Detroit 183 Neighborhoods, which we’re analyzing and classifying to make better investing decisions.

Robin Simon · Answer

Indianapolis seems to be a pretty solid market by all accounts, is that far from where you are located?

Chris Seveney · Answer

What do you consider a bad market and why is it bad / why do you think it’s bad ?

Carissa Trent · Answer

Hi! I moved to Tennessee from the Chicago area, so I know what it's like to buy in a place you can't easily drive by on a weekend.

One question first, because it changes most of the answer: are you planning to keep the property as a rental, or fix it up and resell it?

If you're keeping it as a rental, decide what you want it to do. Many people look at Indiana because rents there can cover the mortgage and still leave money each month. Here in Middle Tennessee, the monthly profit is usually slimmer, but home values have grown steadily. Before you buy, ask a local property manager or Realtor what it would really rent for, and get an insurance quote before you make an offer. For financing, a traditional investment loan usually needs 20–25% down and is based on your income. A DSCR loan is approved based on the property's rent instead of your paycheck.

If you're fixing and reselling, I'd be honest with yourself about doing your first one from a distance. The hardest part of a flip is keeping the renovation on budget and on schedule, and that's tough to manage from another state. If you go that route, have a contractor you trust, a local agent who can check in on the work, and extra money set aside for surprises. These are usually financed with short-term renovation loans that cover the purchase and repairs, and they cost more than a regular mortgage.

Either way, like Arman said find your people before you find a property: an agent who works with investors, a lender who can lend in the state where you're buying, and a good inspector. Visit at least once if you can. Two homes a few streets apart can be very different investments.

I've been helping investors evaluate deals for almost 10 years. If you'd like a second opinion on a property, or want to compare an Indiana deal against one here in Middle Tennessee, I'm happy to help. Wishing you the best as you get started!

Arman Ahmed · Answer

If your local market is tough, I’d definitely compare a few Midwest markets before making a decision. Indiana can be worth a look, but I’d also look at neighboring markets where you may find lower entry prices and deals that actually cash flow. For out-of-state investing, the biggest thing is having a solid local team, especially a lender, PM, contractor, and inspector you can trust.

James Jones · Answer

Salt Lake to Memphis is exactly the jump I see work - and fail. Here's the difference.

Pick the market by the numbers, not the hype. I buy 3BR+ single-family in Memphis ZIPs like 38109, 38111, 38114, and 38118 - all-in under $100K, Section 8 rents $1,395-$1,950, clears the 1% rule. If the math doesn't work on paper, it won't work from 1,500 miles away either.

Key things for long-distance: (1) a buy box so tight your team can underwrite without you; (2) a contractor who walks properties and gives rehab numbers in 24 hours; (3) a property manager lined up before you close, not after.

On loans: DSCR loans at 70-80% LTV are built for out-of-state investors - no personal income verification, the property qualifies itself. Have the lender picked before you make offers.

236 properties, all bought from one market I know cold. Depth beats breadth.

Austin Goetz · Answer

I'd be happy to help with the lending side. I work with investors purchasing out of state, across all states, and can walk you through the loan process, down payment/reserve requirements and answer any other questions you have.

There are definitely some important things to consider with long-distance investing beyond just finding a good looking market. Feel free to message me and I’d be happy to help you get started.

Carson Tuttle · Answer

Thank you for replying. I am going to ponder a few things you said here before replying further.

This is already more helpful than you know

I am in a bad market looking to make my first investment. Where should I invest?

I am in a bad market looking to make my first investment. Where should I invest?

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9 Replies

FICO Score	Pct of Population	Default Probability
800 or more	13.00%	1.00%
750-799	27.00%	1.00%
700-749	18.00%	4.40%
650-699	15.00%	8.90%
600-649	12.00%	15.80%
550-599	8.00%	22.50%
500-549	5.00%	28.40%
Less than 499	2.00%	41.00%