How to find a good area to invest in?

Question

Hi everyone.

I'm new to this forum and this is my first post. I would really appreciate any advice I get. My wife and I are looking to diversity our investment and getting some passive income. We have 100k in cash, looking to get a long term rental property out of state. (We currently living in Boston MA). How could we figure out where to invest? I understand there could be big difference between two towns that's close to each other. But we would like to narrow down to a specific area if possible. So we can find a agent, talk to locals, or even visit in person. Any suggestions?

Best,

Neal

Min Zhang · Answer

Hey Neal! Welcome aboard! I recommend reading “Long-Distance Real Estate Investing: How to Buy, Rehab, and Manage Out-of-State Rental Properties” - I found it to be very helpful when I got started investing 2.5 years ago.

Here is a summary of the book.

https://www.nateliason.com/notes/long-distance-real-estate-investing-david-greene

The book also mentions the importance of having a rockstar Realtor, contractor, lender, and property manager.

I also recommend you to check Columbus and Cleveland markets. I can send you a list of contacts in Ohio to help you build your team, property manager. Let me know how I can help!

Remington Lyman · Answer

Hey Neal! Welcome to BP!

I recommend you read this article on OOS investing. It explains the importance of creating your core four. You will need to get a local, rockstar Realtor, contractor, lender, and property manager.https://www.biggerpockets.com/blog/core-four-real-estate-tea...I invest locally in Columbus, Ohio

Austin McClain · Answer

With out-of-state investing, you'll need an agent, a lender, a property manager, and handy man. Building a team is the first step to get set up

Bob Stevens · Answer

Just find a market that provides 10% or so net caps, yes its that easy LOL. I used to get 30% net caps now about 15- 20% all while living out of state.

Lane Kawaoka · Answer

I posted here earlier today. Might check out the response and reach out to the OP.

Let me know if you need anything.

Michael Smythe · Answer

@Neal Zhu

Recommend you first figure out the property Class you want to invest in, THEN figure out the corresponding location to invest in.

When investing in areas they don’t really know, investors should research the different property Class submarkets. If you apply Class A assumptions to a Class B or C purchase, your expectations won’t be met and it may be a financial disaster.

Here’s our OPINION for the Metro Detroit market (always verify each area for yourself!) that we’ve learned in our 24 years, managing almost 700 doors across the Metro Detroit area, including almost 100 S8 leases.:

Class A Properties:
Cashflow vs Appreciation: Typically, 3-5 years for positive cashflow, but you get highest relative rent & value appreciation.
Vacancy Est: Historically 10%, 5% the more recent norm.
Tenant Pool: Majority will have FICO scores of 680+, zero evictions in last 7 years.

Class B Properties:
Cashflow vs Appreciation: Typically, decent amount of relative rent & value appreciation.
Vacancy Est: Historically 10%, 5% should be applied only if proper research done to support.
Tenant Pool: Majority will have FICO scores of 620-680, some blemishes, but should have no evictions in last 5 years

Class C Properties:
Cashflow vs Appreciation: Typically, high cashflow and at the lower end of relative rent & value appreciation. Can try to reposition to Class B, but neighborhood may impede these efforts.
Vacancy Est: Historically 10%, but 15-20% should be used to also cover tenant nonpayment, eviction costs & damages.
Tenant Pool: majority will have FICO scores of 560-620, many blemishes, but should have no evictions in last 2 years. Verifying last 2 years of rental history very important! Also, focus on 2 years of job/income stability.

Class D Properties:
Cashflow vs Appreciation: Typically, all cashflow with zero or negative relative rent & value appreciation
Vacancy Est: 20%+ should be used to cover nonpayment, evictions & damages.
Tenant Pool: majority will have FICO scores under 560, little to no good tradelines, lots of collections & chargeoffs, recent evictions. Verifying last 2 years of rental history and income extremely important to find the “best of the worst”.

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

What else can we assist you with?

Travis Biziorek · Answer

Hey Neal, my preferred out of state market is Detroit. The Midwest seems to be the theme when it comes to cash flow and I also believe it holds a ton of potential for appreciation if you do it right.

I now have 14-doors in Detroit and I stay extremely active in the market outside my own investing. I was just there for a week earlier this month. If you want to discuss my experience I'm happy to help. I can also shoot over some Detroit specific resources.

FWIW, I also lived on the ground in Metro Detroit from 2017-2022 so I have an intimate understanding of what's happening on the ground there.

Kiernan LaFaver · Answer

Hey Neal, welcome to the community! I’m in the Syracuse ny area. so you’re looking where to invest. It’s important to figure out your goals and objectives, and then that will ultimately give you a few areas that you can narrow it down to. Everything is highly individualistic and there isn’t a “right or wrong”, but what works best for you and your situation. 1) what is your ultimate goal for your ideal investment property? Is cash flow the main objective? Appreciation? A combination of both? It’s important to figure out what metrics are important to you. 2) what Class areas are you looking in? Each class has different tenant pools, appreciation, turnover rates, etc. I’ll attach a link to a page that describes this in detail as there’s some things to note.

https://www.realtymogul.com/knowledge-center/article/what-is...

3) who’s your ideal tenant? While you can’t completely control who applies to live in your properties, you most definitely can find areas that are popular with students, young professionals, families, etc.

4) just as important as finding the property, you need to have an exit strategy in mind for the property. Will your identified markets be an easy or difficult area to sell once it’s time? Is this a 5 year property or a 20 year property? All things to consider.

5) how do you plan on managing the property? Out of state can be difficult if you don’t have a reliable team in place. Property managers can also be expensive. Typical rates are 8-12% of income either monthly or yearly depending on manager. Obviously, this can impact your overall cash flow.  6) it’s important to find an agent that knows the area well and understands how to work with an investor, as the process is very different than buying a primary residence. these are all things to consider, and there is going to be a learning curve associated with the process. I’m happy to be a resource for any questions you may have as you start out the process!

How to find a good area to invest in?

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