Out of State Investing

[Eric T.]

Since CA doesn't seem like a very efficient option, I've taken to exploring my options out of state. Just from browsing the forums it seems many members recommend places like TX, GA, AZ, Vegas etc. However,  I thought it might be better to invest in a state I have ties to already. I travel 2-3 times a year to Chicago and 3-5 times a year to Seattle. However, it seems Chicago/IL is very tenant friendly and there seems to be a consensus that it is more difficult to come across good cash-flowing properties on the west coast (i.e. WA). Anyone have more insight into these two states or some advice on out of state investing in general?

[Eric Fernwood]

Hello @Eric T. ,

Congratulations on making the mental leap to buy where you can make money. Too often people choose to buy in their own area just because it is physically close despite the (lack of) return. So you know my bias, I am a Realtor in Las Vegas and my practice is almost exclusively remote investors (other states or countries) so I obviously see no problem with remote investing provided you trust the team.

If financial independence is your goal then I recommend that you vet every property by the following criteria:

• Sustained profitability - With real estate your minimum horizon is at least 7 to 10 years so a buying based only on the current market situation is likely to leave you in a very bad situation in a few years.
• Located in an area likely to appreciate over time.
• Landlord friendly laws and taxes.

Combined, these three requirements are not easy to fulfill. Below is a high level view of the process:

Below are the steps I would follow:

• Choose a city that has experienced sustained growth and is likely to continue to grow. Here is a map showing growth trends of major cities.  
• I would limit the locations to major cities with airports so you can easily get there. Also, I would choose a place where you would like to visit because (check with your accountant) trips to check on your properties are probably tax deductible and you might want to check your properties as part of a vacation.
• State/city/county income taxes. Most states have a personal income tax which can significantly impact your return. Nevada, Texas, Washington and Wyoming are among the few states with no personal income taxes.
• 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. Also, older properties tend to have more maintenance.

Once you have your top 5 cities, the next thing you need to know for each of your candidate cities is the type, configuration, location and rent range of the best rental properties. How can you find this information? Talk to 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 in each city you are considering. Before you start making calls, 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 or any one else would like a copy.) Tell them that you are new to investing and are looking for a property manager to work with. 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. Remember that the property managers only make money when they collect rent so they want rentable properties too. The specific information you need includes:

• 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.

You should now have a very good idea of what properties rent best and how much they rent for. The next step is to determine what such properties cost. The property manager may be able to help you here but if not you can use Zillow. Find recently sold properties that match the type, configuration and location you learned from your property manager interviews. Once you know typical costs, it is time to determine whether you can make a profit.

In my practice I am almost constantly making what I call an investigate/forget decision. I do this so often that I created an online tool which enables me to instantly estimate a break-even price (where rent equals recurring expenses). Below is a screen shot of the tool. If you (or anyone else) are interested in using this tool, drop me an email and I will send you the link. There is no charge or obligation for using the tool.

In the example above I entered the estimated rent and other factors and tapped Estimate. The result is that if the property were purchased for $185,000, the rent ($1,200/Mo.) would equal the recurring costs (debt service + taxes + insurance + property management fees + monthly fees). This means that if I thought I could get the property for $165,000 I would investigate further. If I thought I would have to pay $185,000 or more for the property I would forget this one and look for another. Remember that this tool is only for making a quick investigate/forget decision, not a purchase decision.

At this point you will know whether you can make an acceptable profit in a certain market. If yes it is time to dig deeper and start looking for a local Realtor that you can trust. If not move onto the next city.

Eric, I hope the above will get you started. Feel free to contact me if you have questions. 

Best Wishes,