Investing Outside My Market - Which Market?

Question

Newbie here...

Just like Mehran Kamari (podcast episode 72), I live in LA and would like to start investing in buy & hold rental properties, but the math simply doesn't seem to work here. I was born, raised and have family in St. Paul/Minneapolis and went to school in Milwaukee, so I have considered looking into those markets and leverage my existing networks to build a team and do my first deal, but I want to be sure I'm focusing on the right market before I go too far down the rabbit hole. Are there any good tools for finding which markets are good for different strategies or comparing different markets?

Account Closed · Answer

@Subbie Kaur you're on it lol! Just barely beat me to this post.

@Mike McNeil-Leier We're a rental property business & we tried to expand from our current market into the greater mwk area, the numbers didn't pencil out as well as our favorite market so we stopped our efforts to acquire property there. Saturation in primary markets by OOS investors is a very real thing. Secondary and tertiary markets are your best friend, but it can be hard to find ones that cash flow well and have adequate rental demand due to their less densely populated nature.

I love the state of indiana for low taxes and great laws, but rents and saturation can be an issue there too. There's a little section just outside of Chicago that has substantially higher rent:price ratio and rental demand than the rest of the state & it's been a killer for me personally, our company, and our investors.

Adam Gollatz · Answer

Hi Mike, Im not sure where you are at in your investing career so I hope this helps.

The "numbers working" (high rents, low expenses) is a product of a variety of factors, but it all boils down to perceived risk. The free market tends to seek its own level, so as changes in the market come about, they drive values up or down based on perceived risk. Areas with high wages have high demand for homes, high demand lowers supply, risk is seen as less, so prices go up. Prices exceed development costs, so developers step in, and add supply. These areas are the areas where you'll get a 4-5% overall ROI, which doesnt work if you are borrowing 80% of the money at a 4-5% IR. And probably what you end up seeing in a lot of the California market. So what ends up happening is that money finds different places to flow. Cleveland, Cincinnati, Memphis, St Louis, Milwaukee, Indianapolis, etc. Usually it starts in areas with undervalued rents but it could be any catalyst really. They come in, drive up rents, people see the returns and more money comes. As more money comes in, the perceived risk goes down, so people are willing to accept lower returns driving prices up and taking rents along with them.

Keep in mind that talking about a city is referring to it at its macro level, and to be successful you have to drill down to the micro level, either neighborhoods or sometimes even blocks. In all of these cities they have a downtown area, and then it expands out from there based on nightlife, infrastructure, parks, schools, crime, etc. Take Milwaukee for instance, lots of outside investment and cap rates in some of the best areas of the city can be down to 5-6% or lower. If you work hard for deals and are patient you might be able to get in the 6-8% in these same areas. You can move a neighborhood away from downtown, into areas that are still good and get 8-10% and work for a 10-12% deal. Move further out and the numbers go up, you get the picture.

So when I look at these "emerging markets" so to speak, I like to look at what is truly there at the city level. There are the things that cant be changed and the things that can be changed. Whats the climate like? What are the natural resources (lakes, beaches, mountains, etc)? Whats the economy like, is there population growth, what are vacancy rates like and is there a healthy growing job market, and corporate/business investment. Once I find a city I like, I have my own set of ever changing subjective parameters to find the areas within that city.

I say all of this because you said "you want to make sure you are focusing on the right market". Its important to remember that it is all subjective and nothing is guaranteed, but Im a firm believer that there is money to be made everywhere. You have to find what works within your risk tolerance and strategy or you will second guess yourself and will never be successful. If you have a network in those cities, Id say that is an ideal place to start. As for tools to accomplish this, its just good old fashion research. The statistics are easy to find on the BLS website or various other government/chamber of commerce websites. And you should definitely look into local REI groups to see what people are saying. Im local to Milwaukee and live there but spend probably about a week or so a month in the twin cities, so I have a good idea of both markets and how they compare. Feel free to reach out to chat more.

-Adam

James Wise · Answer

Tons of turnkey markets & companies are out there doing this stuff. Many are well represented by sellers & turnkey operators here on BiggerPockets. The most popular markets are

• Cleveland, Ohio
• Toledo, Ohio
• Memphis, Tennessee
• Birmingham, Alabama
• Kansas City, Missouri
• Indianapolis, Indiana
• Detroit, Michigan

Each of these markets is popular with turnkey investors because of the low barrier to entry, high rental demand & high rent to price ratio. I recommend setting up keyword alerts for each area as they are discussed in the forums daily with advertisements posted in the BiggerPockets marketplace hourly.

One thing to note when looking at the individual markets, you can make or loose money in any market. Don't think that one particular out of state market will shoot you to success or abject failure. It's not really that complicated to buy out of state. It only becomes complicated when investors try to over complicate or over think everything. Whenever you are buying a property out of state you should do a few things to ensure it's as smooth as possible.

• Don't buy in the roughest neighborhood in the urban core. Pick a solid B-Class suburban area. Perhaps a nice 1950's built bungalow.
• Always hire a 3rd party property inspector to give you an unbiased feel for the home. The reports are 40-90 pages long and go through the entire house in great detail.
• Get an appraisal. If your using financing the bank requires this. This is good. The bank isn't going to let you blow their money. They have more skin in the game then you do.
• Make sure you get clear title. If using a lender this is a non issue. They will make you do this. It's those maniacs that buy homes cash via quit claim deed off of craigslist that really get screwed.
• Make sure your property manager is a licensed real estate brokerage.
• Understand you can not eliminate all risk, only mitigate it. If you are risk adverse real estate, (especially out of state) is not for you.

Steve Rozenberg · Answer

@Mike McNeil-Leier

I think that you first want to define what your goals are as an investor. Once you can clearly define your goals then you can look for markets to help you reach those goals. That becomes your strategy which will carry you to your goal. Once you know that it makes it much easier to find out what market will get you there. I woiuld not suggest looking at a market until you know your goals. No one can tell you a good or bad market unless you have clearly defined what your goals are to get there.

We manage close to 1,000 homes here in Texas and 50-60% are from out of state and out of country. Many from the west coast. I always tell investors that until we sit down and make we can help you achieve your goals then my agents or my property management company will not be able to effectively find you the right property unless you know what that is.

Its the sharpen the axe before you take a swing, the last thing you want to do is buy something because it looked like a good deal and it turns out it was not a good deal for you.

Focus on the goal and then the strategy, then the market, and then Most importantly create your team... Then start the acquisition process...

When we help owners do this it makes it much more easier then just buying off emotions without a plan

Good luck!!

Subbie Kaur · Answer

Hey @Mike McNeil-Leier

Welcome to BP!

Good point you made... it is very important to focus on the right market based on your personal strategy.

Our company focuses on cash flow so here are some things we make sure exist in any market that we are thinking about investing in:

1. Low taxes ( this will really allow you to generate more cash flow)

2. High Rental Demand( more rental demand the easier it is for you to keep tenants and inc cases where vacancies do occur you easily re-fill units)

3. Property Management ( KEY as an out of state investor, someone who you can trust and communicates in an efficient manner. Your property manager should also be able to tell you about the market and know the markets very well!

4. Landlord friendly states( this will allow you to have a much more positive experience as an investor)

If these four things check out then you are one step closer to the right market to invest in.

Also just a little personal feedback on Milwaukee, we actually looked into that area a few months ago and were working with a professional property management team. Unfortunately,  the property prices, taxes, and the owner paid utilities were very high in the properties out there.

Mike D'Arrigo · Answer

@Mike McNeil-Leier Unfortunately there's not some source that will provide this information but most of it is pretty accessible. The main things to look at are:

1. Population trends.

2. Job growth.

3. Income

4. Property taxes/insurance

5. Landlord/tenant statutes

Personally, I like both Kansas City and Indianapolis for cash flow.

Anthony Dooley · Answer

@Mike McNeil-Leier the best market is the one that you know very well. Never buy something that you know nothing about including a house on a street in a neighborhood of a city that you don't really know.

Marcus Auerbach · Answer

If you have a market, where you have family or business that brings you into town on a regular basis, then start there. Have you lived in a good market and know the neighborhoods? Use as much of a home field advanantage as you can get.

Within every market you can make greater or lesser deals, but that does not depend as much on the market, as it does on you and your ability to navigate it.

Rob Massopust · Answer

housingalerts.com

Gives you indicators on economic indicators. I signed up but have not had time to use it. But could be interesting and breaks down exactly what you are looking for.

Sharron Morrow · Answer

Good info! Thanks James

Investing Outside My Market - Which Market?

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