How You Should (& How You Definitely Shouldn’t) Invest in a New Area

by | BiggerPockets.com

There’s a big debate amongst real estate investors regarding whether it’s best to invest in your home market (even if it’s very pricey) or to buy in less expensive markets out-of-state. I generally lean toward the former, but I certainly understand the latter. It’s almost impossible to find a buy-and-hold rental in San Francisco or New York that will actually cash flow. But if you intend to buy out-of-state, or even if you are looking to buy in a city you just moved to, there are several important steps to take. But first, let’s talk about the steps not to take.

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How Not to Invest in a New Area

When I first came to Kansas City, we ended up buying a 29-unit apartment complex that didn’t go well at all. The reasons were simple:

  1. We took lessons from the market we left to this new market.
  2. We didn’t do sufficient due diligence on the area.

1. Taking What You Know From One Market to Another

This is a mistake that is extremely common. Indeed, while there are plenty of good turnkey companies out there, the unscrupulous among them almost always take advantage of the price differential of the market they are selling in and the market the buyer lives in to make it look like they’re selling properties at a good price when really it’s a highly inflated one.

I am from Eugene, Oregon, where we had been flipping houses for some time before we came out to Kansas City to get back into buy-and-hold. In Eugene, the cheapest house you were going to find then (2010) was about $125,000. In Kansas City, we were seeing houses sell for $20,000!

Now, we weren’t stupid enough to think these were equivalent. But like many other investors, our eyes lit up, and we assumed that at such a ridiculously low price, this had to be a good deal!

Somewhere, Ben Leybovich shook his head in disgust.

It’s critical to remember that each market is local. The exact same house could sell for $2,000,000 in Los Angeles and $20,000 in Detroit. Furthermore, as I like to say, “A roof costs the same per square foot on a $30,000 house and a $300,000 house.” In some areas, the fixed costs to maintain a home will be higher than the rent. This is especially true since worse areas are more likely to have tenants that will smash up a property.

Related: BiggerPockets Podcast 257: “But My Market is Too Expensive!” (How to Become a Long-Distance Real Estate Investor) with David Greene

2. Insufficient Due Diligence on the Area

While we didn’t really do sufficient due diligence on the apartment either (see here for a guide), the more common problem for investors who are new to an area or from out of state is doing insufficient due diligence on the area. And this is where we really failed on that 29-unit apartment.

This falls hand-in-hand with the first problem, but it plays into a different psychological temptation. The first problem had to do with applying old lessons to new situations, this one has to do with taking the wrong lesson from what you see.

You absolutely should visit any city you plan to invest in and any property you plan to buy. But that’s not enough in and of itself. A lot of areas look decent when you go by them during the day. They especially look good on Google Earth. There’s something about a still frame that makes an area look better. You don’t hear the sounds, smell the trash, or see junk blowing in the wind. For example, the intersection of Independence Avenue and Prospect Avenue was named one of the “20 Worst Streets in America” by Hously. The article notes, “The zip code 64106 that lies at the intersection of the Independence Avenue and Prospect Avenue, Kansas City, Missouri, is one of the worst in the nation. As per the latest statistics, the area experiences 82 violent crimes in a typical year with the official crime rate being 81.97 per 1,000 people.” Yet, here’s a Google Earth image of that intersection:

Doesn’t look that bad to me.

And while visiting is far better than just looking at pictures online, it can still give you a false impression.

What You Should Do

The steps you should take to evaluate a potential market and area are as follows:

  1. Use online tools to evaluate the city and area
  2. Visit the area and property
  3. Ask professionals and locals
  4. Find and vet a team
  5. Keep checking back in

1. Use online tools to evaluate the city and area.

The first step to take when evaluating any market you’re just moving to or looking to invest in from out of state is to evaluate it online. You want to evaluate both the city as well as the local areas you’re interested in. A few good, free websites for demographics include City-DataCLRSearch, and HomeFair. For determining property values (if you can’t get access to the MLS), check out Zillow, EAppraisal, Trulia and Realtor.com.

There are many other websites with more specific data, such as school ratings and walkability scores. There are also paid sites that offer even more detailed information. For more on this, see this article.

Overall though, you want to make sure that the crime isn’t too high, the poverty is relatively low, there isn’t a high rate of vacancy or unemployment and the schools are decent. You want to make sure you are buying a neighborhood that people will want to live. For those buying out of state, I would always recommend you buy at least one class higher than the lowest you would consider where you live. So if a C+ property is the worst you would consider where you are, don’t go below B- or even B if it’s out of state.

Related: 13 Items to Check When Performing Due Diligence on Multifamily Properties

2. Visit the area and property.

Make sure to visit the property and understand that, as discussed earlier, looks can be deceiving. Look for things like boarded up or burnt out houses nearby, trash on the street, overgrown lawns, graffiti, lots of people loitering about during normal working hours, etc. Even small things, like very few wooden privacy fences and a lot of chain link fences at least imply the neighborhood is mediocre if not worse. You can also drive by at night. This will very often give you a good idea of how nice the neighborhood is.

And of course, make sure to inspect the property itself closely as well.

3. Ask professionals and locals.

I would always recommend you talk to the tenants (if the seller allows you to), neighbors, and passersby in any area you are unfamiliar with, even if you’ve lived in that city for a long time. Ask open-ended questions, for example, “How do you like living here?” “Have you had any crime issues?” and “What’s the biggest problem you’ve had living here?” Most people will be honest with you and will help paint a picture of the area’s quality.

You can also talk to professionals such as real estate agents, other investors, and lenders. They should have some valuable feedback as well.

4. Find and vet a team.

Vetting your team is too large a topic to go into in here. But if you are looking to buy out-of-state, this article should help with that.

5. Keep checking back in.

Don’t think that just because you’ve bought a property and put it with a management company that the issue is done. You will constantly need to evaluate how well a property is doing financially and how well your staff or the management company you hired is doing. If you live out-of-state, you should visit from time to time to make sure everything is on the up and up (and keep your team on their toes). And don’t be afraid to fire someone or switch management companies. People usually wait too long to do what they know they need to do. If you know the management company you’re using isn’t working out, make the switch.

Overall, the key to investing in a new area is to do your research and NOT go with your gut… at least at first. Your gut is attuned to a different market. You need to tune it to the one your looking at before relying on it. (And you should always verify your gut feeling as best as possible before making decisions based off it.)

Come in with an open mind, do your research and then make the best decision you can from there.

Do you have experience investing out-of-state? What tips do you have to share?

Tell us below!

About Author

Andrew Syrios

Andrew Syrios is a real estate investor in Kansas City and a partner in Stewardship Properties along with his brother and father. Their company owns just over 500 units in four states.

6 Comments

  1. Curt Smith

    Hi Andrew, tnx for cracking this topic. You mention city-data.com, but you don’t mention what criteria, what statistics we should be looking to compare between cities or sub-areas within a city?? Might you admit you really didn’t help with actionable steps?

    Yes we all agree same house in different cities costs are different, and more importantly the cap rate will vary widely since $NOI/$all in varies per area rents and renter quality (vacancy and damage etc). To choose a new area one needs to get to reliable numbers re rent (zillow.com rentals offered are real vacancies thus reliable rent numbers, plus you can look inside the houses via their pictures). What can’t be gleaned from zillow or any data source that I know if is the expense ratio typical of the $900 rental, $1200 rental, $1600 rental. Which is key to calculating NOI. You can guess approx $all in from zillow forsale, in the area of each rent rate band [low, medium, higher rents]. One can generalize expense ratios for low, medium, high $$ rents [ 60%, 50%, 40%] to arrive at NOI, this cap rate. Now just from zillow you can ball park cap rate, to me an important metric for where to invest.

    BUT we have left out rental population quality, hassel to manage, turn over, eviction rate that is typical for each area and rent amount.

    I’m not pitching anything, just helping folks with my paper how to buy a bullet proof rental portfolio, has helps that dove tail with this article. If I mangled this URL is off my profile 1st paragraph.

    https://www.biggerpockets.com/files/user/sweetgumga/file/how-to-buy-a-bullet-proof-rental-portfolio

    Andrew do you agree that what makes real estate successful is jobs? In my city / area ranking I look for GROWING jobs. I’ve found that rentals staying rented, and appreciation being good is driven by finding areas with growing good jobs. Stagnant areas are stagnent because there’s no new employers!!! Find where employers are siting new plants. An indirect measure are new Amazon distribution centers (google mapable). Used to be Walmarts. Too bad, walmarts today are in weak areas as well as ok. Not a good indicator of growing good jobs in my view today. Find the NEW Amazon distribution centers, find the new employers building a new plant.

    My paper above, uses Chattanooga as an example of an exploding smallish town, eating up rentals, pushing up selling prices, growing cute restaurants and brew pubs… Ok maybe find the areas with NEW brew pubs. LOL! It still is useful to find the new Wholefoods / health food locations. Works in your cell phone map: search health food. Around those locations are probably good appreciation and rental demand areas but besure there’s news of growing jobs. I’ve learned the hard way, as you infered, that cheap price does not make a deal. In my rules book; value is based on cap rate, all in price, lack of rentals (no need to add one more), and growing good jobs. There’s more, but this is a good start! Add in buy in the best school area that you can afford (cash flow, cap rate, all in etc).

    Since 2015, we moved our buying out of Atlanta, due to competition and prices gotten too high, to 2ndary and a few tertiary markets. We learned how to choose the city/area and what to look for to make our rentals work (ease to rent, keep rented, good to great cap rate, good appreciation). We Learned the hard lesson to verify good jobs in a county / city before buying. So I’m speaking from experience. 🙂

    There needs to be an ebook on this topic but only if it goes to the effort to give _specific_ search criteria, websites, etc.

    OBTW this is a decent site, better then city-data.com which now is difficult to find rental, unemployment etc data.

    https://www.deptofnumbers.com/employment/georgia/

  2. Madeline Lamour

    Thank you, good article. I will check out those data websites you mentioned, it will be useful to have those. I was just doing research on a neighborhood yesterday but did not know where to start looking and used the links people mentioned in forums, which was not very useful.
    I will also check out more of your articles as I will be investing in a new area next year. A year for due diligence and research. Thanks.

  3. Christopher Smith

    I’m a bay area guy who shifted my rental property buying to the Midwest. By the end of 2013, prices in the East Bay had increased dramatically which is great for what I already owned, but was a total deal killer for further acquisitions.

    I resumed my buying in a red hot suburban area between Cincinnati and Dayton. I lived there before moving to CA so I knew it very well (actually had one rental already there) and it continues to be probably the best area in Ohio for families. Great upscale growth that just keeps hitting on all cylinders.

    One cautionary tale, use reliable folks that you know and trust, because when you live at a distance there are quite a number of local folks that will see sucker on your forehead and will take advantage of you because you live so far away.

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