Analyzing location for out of state deals

[Sreeram Kosaraju]

Hello all,

How do you get confidence on the deal when you are looking at out of state deals? I came across a property which I felt was good when i ran the numbers but not sure if the location is great and will be rented out easily? I am looking at the close proximity to major interstates, employment, schools etc but still unable to figure this out. Any help is appreciated.

[Eric Fernwood]

Hello @Sreeram Kosaraju,

The problem is that there is no online source for analyzing specific properties. Zillow, Rentometer, and others all use area averages. Area averages have no relevance to any specific property. What you need is property-specific information. The only source of such information is a local investment team. I can post about how to vet investment teams if you are interested.

The process I recommend is illustrated below. Each block lists the key selection criteria.

In this post, I will only focus on location selection. If anyone wants, let me know, and I will post information on the tenant pool and property selection process.

Location Selection

Choosing a location for investment should not involve personal opinions, luck, or feelings. It should be based on metrics. The key is eliminating locations that do not meet the three established criteria for reliable income. The remaining locations are then worthy of further examination. The process and necessary information sources are listed below.

1. Metro Population >1M - There are thousands of locations to consider; too many to evaluate. So, start with metro areas with a population >1M. Small towns may rely too much on a single business or market segment. Wikipedia - https://en.wikipedia.org/wiki/...
2. Both state and metro populations are increasing - Do not consider investing if the state or metro populations are static or decreasing. Wikipedia - https://en.wikipedia.org/wiki/...
3. Low crime - Cities with high crime levels and long-term profitability are incompatible. People and businesses avoid areas with high crime. The result is a lack of job opportunities and investment. Never invest in any city on Neighborhood Scouts' list of the 100 most dangerous US cities - https://www.neighborhoodscout....
4. Low operating costs - High operating costs can turn what appears to be a profitable property into a money pit. The two most apparent overhead costs are property taxes and insurance. Look for stats with low taxes and insurance. Insurance - ValuePenguin (https://www.valuepenguin.com/a...), Metro Property Taxes - LendingTree (https://www.lendingtree.com/ho...).
5. Limited urban sprawl - Many cities in the US, including Phoenix, Memphis, and Indianapolis, have large open areas surrounding them, enabling unlimited expansion through urban sprawl. This leads to a slow or stagnant increase in property prices and rents in established areas as people move further out and rent or buy newer homes.
6. Natural disaster risk - Natural disasters such as tornadoes, hurricanes, and earthquakes destroy communities. While insurance might rebuild your property, the bigger issue is the loss of jobs, local businesses, and essential amenities. Until the community is rebuilt, you will have an empty property, but mortgage payments, taxes, insurance, and other expenses will continue, with no income to offset these costs. The cost of homeowners insurance is the best indicator of the likelihood of a natural disaster in an area. Insurance - ValuePenguin (https://www.valuepenguin.com/a...)
7. Metro rent and price growth rate - To have the additional dollars you need to pay for inflated prices, rents must rise faster than inflation. Therefore, a critical location selection metric is that rents and prices are rising faster than inflation. If historical rental data is unavailable, you can use the rate of appreciation in the area as a proxy, as rents tend to follow prices. However, COVID-19 distorted markets, so only consider data from 2013 to 2020. Zillow research data - https://www.zillow.com/researc...
8. Landlord/tenant rules and regulations - Some locations have laws that limit how much you can raise rents, making it nearly impossible to keep pace with inflation. Similar regulations can also make it difficult to choose reliable tenants and evict non-performing ones. Don't invest in places with these restrictions. To find out if a place has these laws, talk to a local investment team.

The metro areas that remain are the ones to investigate further.

The next step is to select a tenant segment that has a high concentration of reliable tenants. Once you’ve identified a specific segment, buy properties similar to where and what they rent today. When you select conforming properties, most applicants will be from the target tenant pool segment.

There are additional criteria in addition to matching the target segment, as illustrated below.

I hope this helps Sreeram. Post questions if I can help.