Identifying a market for rehab/rental properties - Long distance

[Ryan Carter]

Hi everyone, my name is Ryan. I am a mechanical engineer in the product design business and am looking to begin my rental property investing business in the next 8-12 months. I plan to start with single family homes (ARV: >$80k) in need of $20k-30k rehabs. I will rehab, rent, and hold for long term. I also will be doing this from long distance as I live in southern California where housing prices are through the roof.

My question is: How do I identify a market to begin searching for properties in? Is there a successful strategy for this other than jumping on zillow and blindly throwing a dart on map? 

[Ross Denman]

@Ryan Carter I am an investor and work as a business developer for a property management company in Indianapolis. We have almost 150 clients and over 100 are out of state/country investors with the majority of them being from California. There are multiple markets that investors find that will meet their needs and goals. Personally, I think that building the right team is more important than finding the perfect market as the wrong team can kill a portfolio in the best of markets.

As mentioned above... Kansas City, Memphis, Columbus Ohio, Cleveland, Birmingham, and Jacksonville are very common alternatives as well. There's a lot of activity in NW Indiana right now as many people are migrating across the border from Chicago where they are still close enough to work in the big city, but live in a more affordable and less regulated environment. I've seen Pittsburgh, Grand Rapids, and some smaller Texas markets on some investors radar as well. Personally, while I love Indianapolis, I'm keeping my eye on some Michigan markets myself as I am seeing some changes in the landscape and already have several trusted contacts in the Detroit area myself. As I said... having a good team is everything.

Here are some recommendations to help your research.

1. Business friendly laws. Many of you bigger city markets have become more tenant oriented than landlord oriented. Many of them also have excessive regulatory burdens (mandatory city inspections, extra taxes on investment properties, etc.) In Indy, we can usually get a tenant through the eviction process in 4-8 weeks. In CA and NY I've heard that it can take 6-12 months to regain possession of a property. As long as your PM has followed all of the steps and operated correctly, Indiana judges are very much of the mindset of "No Pay... No Stay."
2. Understand how property tax works in your chosen markets. Some markets have exceptionally high taxes that can kill a deal that looks great otherwise.
3. Growing population and employment base. Desire has the biggest impact on your ability to succeed and if everybody is moving out of your market your home will stay vacant longer, have a less desirable tenant pool to pick from, etc.
4. Cost of living. The midwest tends to be considerably less expensive than the coastal areas. This creates better rent ratios (cost of the investment vs the ROI created by rent.) This is exactly why so many CA, CO, NY, WA investors are putting their money in these markets.

There are a lot of metrics that people will review, but I think that the above ones are some of the more important ones. I'm a big fan of understanding your risks... especially when managing out of state. Most people want to sell you the dream without educating you about all of the things that can go wrong and how to manage those potential liabilities. Just because you can pick up a home in Gary, Detroit, or Cleveland for $20k that will rent for $500/mo doesn't mean it's going to be a great deal. It's probably located between the local crack house and the abandoned home that all the squatters stay in. Probably not going to work out the way it looks on paper. It's important to build a team of knowledgeable professionals to help guide you in to the right areas and help you to understand what to expect.

Best of Luck! Feel free to reach out I can help with anything.