New Out of state Investing what location is best??

[Lisa Talbot]

Hi there, I am new to the Bigger Pockets forums and want to buy my first Investment property, ideally a 2-4 multifamily property I would buy and hold with long term renters.  I live in Los Angeles so I wont be buying here as finding a cash flowing property here is almost impossible and I am a property manager and I already live rent free.  So I want to buy in another city and state where I can put 20% down.  From all the articles I have been reading there are several possible cities that could be good areas to look in and since I would be an out of state investor and I don't know these places well it feels overwhelming to know which one to pick.  Detroit, Cincinnati, Huston, Springfield, Philadelphia, maybe even Saint Luis.  Oh my!  I would love to hear from anyone and everyone who has invested in any of these areas and what they have to say.  If I could narrow it down to one or two of these places that would help me to decide and then I can go to them and really start looking! Thank you!  

[Eric Fernwood]

Hello @Lisa Talbot,

When choosing an investment location, it's important to consider both short-term and long-term factors. The initial return can be estimated using typical return calculations, but these only predict how the property is likely to perform on the first day under ideal conditions. They don't provide any insight into the property's likely future performance.

In my opinion, what happens in the next 10 to 30 years is more important than how it performs initially. Your financial future depends on the long-term economic growth of the city where you invest. Here are some location considerations to keep in mind.

Population Growth

Population growth or decline determines where property prices and rents will increase, stagnate, or fall. Below is a table showing population change between 2020 and 2022 for the cities you listed and I added Las Vegas, which is where I live. Source

Moving to another city can be emotionally and financially costly. Typically, people move only when things become unbearable in their current location. Detroit, Houston, Philadelphia, and St. Louis have had a decline in population. Due to this, I would not consider these locations because prices and rents are driven by population growth.

Overhead Costs

Every dollar lost to overhead is one less dollar available for living expenses. To illustrate the cost differences between cities, I compiled overhead costs for the listed cities.

Sources:

• State income tax rate
• State average insurance rate
• State property tax rate

To put this in perspective, below are the annual operating costs for a $400,000 property with a taxable $15,000 annual cash flow. I sorted the cities by overhead cost.

To have the same net cash flow, a property in Springfield would need to generate $7,051 ($10,595 - $3,544) annually than a property in Las Vegas to have the same cash flow.

Overhead costs make a huge difference when selecting a location.

Rent control and Evictions

Some states and metro areas have implemented various kinds of rent control. Rent control may prevent you from increasing the rent fast enough to keep pace with inflation. It may limit your ability to select the best tenant. It may make evictions of non-performing tenants difficult or impossible. Never invest in any location with rent control.

I researched the time it takes to evict a non-paying tenant for each city. Please note that the times shown may have changed due to court backlogs caused by the eviction moratorium.

• Springfield - “The entire process from notice to set-out can run from 4 weeks to multiple months depending on your specific situation.”
• Houston - “Evicting a tenant in Texas can take around one to three months, depending on the type of eviction. If tenants request a continuance or jury trial, the process can take longer.”
• Detroit - “On average, it would take anywhere between for a complete eviction process.”
• Cincinnati - I found no clear timeline. From what I read, 2 months to several months. If anyone has a better answer, please post it.
• Philadelphia - “…from eviction notice to removing the tenant, could take roughly 2-4 months”
• St Louis - Several months. “It takes about 30-60 days before a landlord can start filing an eviction. If the case is about failure to pay rent, then they have to wait 1 month before they can start filing an eviction lawsuit.”
• Las Vegas - One month.

I view nightmare evictions like I view cancer. The odds of getting cancer are relatively small, but if you do get it, it is devastating, and "odds" mean nothing.

Summary

The location is the most important investment decision you will make. Take the time to evaluate locations based on long-term factors such as population growth, overhead costs, and the landlord-friendliness of the city.