Investing nationwide

[Louise Whidby-Drake]

How does one invest in property in another state other than the state in which they live when one is still bound to a 9-5?

[Eric Fernwood]

Hello @Louise Whidby-Drake ,

You are wise to not limit your investments to just where you live. Before I answer your question (as best I can), know that I believe you should only buy properties that generate a sustained positive cash flow and are located in an area likely to appreciate over time. Meeting these two goals (sustained positive cash flow and appreciation potential) is not easy. Let me explain:

Sustained positive cash flow

Sustained positive cash flow means that rent consistently exceeds the total recurring costs. What criteria must the property and the area meet in order to achieve sustained positive cash?

• A good property manager. The property manager is the key member of any investment team. Hint: collecting the rent is only one part of their value. 
• A good tenant. I define a good tenant as one who: pays all of the rent on schedule, takes care of the property, does not cause problems with neighbors, does not engage in illegal activities on the property, and stays for multiple years.
• Low maintenance cost. This is a combination of the climate, condition of the property, and the quality of the property manager.
• Stable or growing job market - Rental property profitability is dependent on a stable job market. You want a job market that is growing and not dependent on industries like manufacturing. Also, it is better to have a lot of smaller employers than a few large employers.
• Favorable property price vs. rent ratio. There are areas where it is virtually impossible to rent a property at a profit due to the high cost of the properties vs. the rent.
• Landlord friendly laws and taxes. Clients have told me that in California, if the tenant knows what they are doing, it can take up to 1 year to evict a tenant. Also, state, local and property taxes are very important. It is very difficult to have a profitable property in a high tax area.
• A property that will rent quickly at a price which will exceed recurring costs thus generating a profit.
• There are other considerations as well but I think I covered some of the more important ones.

Potential Appreciation

• Low crime. High crime and appreciation do not go together.
• Sustained population growth of people who can and will rent your type of property.
• A stable area in which people desire to live and have good schools.
• Overall state population growth.

The Process

How should you identify and evaluate an area against the above two criteria? Below is a very simplistic view of the process I would follow.

Where

• Choose a city which is experiencing sustained growth and is likely to have continued growth. See population changes by state here.
• I would limit the locations to major cities with airports so you can easily reach there.
• A rental property is no more valuable than the jobs around it. The local chamber of commerce or university will likely have the information you need. Avoid boom towns where the jobs are here today and gone in 5 years. An example would be a town fueled by a major construction project (a dam, pipeline, high speed train, etc.). Once the project is complete all the construction jobs will vanish as will your renters and you will likely have a disaster on your hands. Job growth and population increase are the basis of long term appreciation.
• Check the landlord/evictions laws. For example, in Las Vegas the typical eviction takes less than 30 days and costs less than $500. I have heard from clients that evictions in California (and some other states) can take up to a year if the tenant actively resists and costs thousands of dollars in legal and other fees (not to mention the accumulated damage over the extended eviction period). No investor initially worries about evictions, until one happens to you. So, be certain to check the appropriate laws and regulations before you buy. Your simplest option would be to talk to local property managers. They deal with such issues every day. Also, be careful investing in cities with rent control laws.• State/city/county income taxes. Most states have a personal income tax. This can significantly impact your return. For example, a property with a 5% return in Nevada, Texas, Washington or Wyoming will actually earn you 5%. If the same property was located in areas with taxes you would also have to adjust down the return due to the taxes. I would not eliminate all states with taxes but you need to take taxes and such into account when you are comparing profitability.
• A city where climate is not a major factor. For example, people rarely move during heavy snowfall seasons in the north east. Or, the population swells and contracts rapidly with the season as in south Florida where rentals tend to seasonal.
• A location where annual maintenance costs are reasonable. Higher costs are sometimes due to climate or construction issues. For example, in heavy snow country you will have to include snow removal costs and more physical damage to driveways and the structure. 

What

Now that you have a "where" (the location) that may be profitable, you need to know what to buy. You need to determine four criteria for each specific local, which are listed below.

• Type: Condo, high rise, single family, duplex, single story, two story, etc.
• Configuration: Two bedroom, three car garage, mud room, etc.
• Location: Usually a very specific area. For example, west of 23rd St and south of the river, etc.
• Rent Range: If the majority of the population to which you want to rent are willing and able to pay $1,000/Mo to $1,300/Mo. you should only be looking at properties that you can purchase, rehab and profitably rent in the same rent range.
• Property laws, taxes and regulations: This is a catch-all category of local/state issues that affect landlords: eviction process and costs, rent controls, state/local income taxes, etc.

Where can you get this information for free? Local property managers. Property managers deal every day with tenants, maintenance issues, renting vacant units, local laws, evictions, etc. In short, every thing you need to know. Talk to 4 or 5 mid-sized local property managers. Tell them that you are new to investing and are looking for a property manager to work with. Develop a list of questions and ask the same questions of each property manager. (I have a set of property manager interview questions, drop me an email if you would like a copy.) After only a couple of interviews you will begin to have a very good understanding of the local market and what type of properties rent best and how long they typically take to rent if the properties are market ready. Remember that the property manager only makes money when they collect rent so they want rentable properties too. The last thing they want is another unrentable property. This approach will work in your home city or across the country.

Profitability

Once you know specifically what type of properties you are looking for (the "What"), the next step is to determine whether you can make money with these properties. Look on Zillow (or similar sites) for recent sales of such properties. Once you know the sale price of such properties and know what they will rent for (from talking to the property managers), you can use a tool I created to determine if you can make money: Break-Even Calculator -  below is a screen shot.

Using this tool and data from Zillow, I looked at properties in three cities: Austin, TX; Cupertino, CA and Las Vegas, NV.

If the Break-Even Price is lower than the Actual Sold Price it is unlikely that properties in that city will generate a positive cash flow. As you can see in the table above the prices of properties in Cupertino (and possibly Austin) are too high relative to the rent to generate a positive cash flow. If you cannot make an acceptable level of profit, look somewhere else.

If you can make a profit, time to dig deeper. Ask the two property managers you liked the best to recommend a Realtor. You will need to interview them and select the one that you think can provide the most value for you. I would provide them with the specific property criteria you developed and have them send you matching properties. If everything looks consistent with what you learned from the property managers, time to visit. Have the Realtor arrange for you to see 5 or more properties. Also, spend some time with the property manager of your choice. The property manager is the critical team member and you need to know and trust them.

While the above is not a complete process, I hope it will get you started. My best wishes to you and if you have questions feel free to reach out.

Eric Fernwood