Which out of state market to invest in?

Question

My friends and I have pooled together $90000 and would like to do a BRRRR deal by spring 2020. We live in west coast where properties are expensive and ROI isn't good, and we are looking to invest out of state. Ideally we would like to do a single family cash deal for our first property, and we are in the phase of brainstorming on which market to go into. Here are some cities piqued our interest from our research:

• Cleveland, OH
• Memphis, TN
• Chapel Hills/Raleigh, NC
• Dallas/Fort Worth, TX

Since we don't know anyone in those cities, we were wondering if there's a systemic way or metrics that can help us evaluate which market would be better for our first deal? Any other cities we should look into? And we were also wondering if anyone experienced in those cities can give us some insight on how these markets are doing? Thanks in advance!

James Wise · Answer

John my dude, welcome to the forums. Saw Cleveland's on your short list so I figured you'd get some value out of reading The Ultimate Guide to Grading Cleveland Neighborhoods. In addition to Cleveland, Ohio there are many other super popular turnkey markets. Many of these markets are very well represented by sellers & turnkey operators here on BiggerPockets. In no particular order I have listed some of the most popular markets for out of state investors

• Cincinnati, Ohio
• Dayton, Ohio
• Toledo, Ohio
• Youngstown, Ohio
• Cincinnati, Ohio
• Memphis, Tennessee
• Birmingham, Alabama
• Kansas City, Missouri
• Saint Louis, Missouri
• Indianapolis, Indiana
• Detroit, Michigan
• Erie, Pennsylvania
• Louisville, Kentucky
• Milwaukee, Wisconsin
• Jackson, Mississippi

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.
• Google Clayton Morris and/or Morris Invest for a cautionary tale of what not to do when buying turnkey real estate
• 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.

Jonathan Greene · Answer

Asking for out-of-state referrals and options is only going to get you a lot of links and experts in the area, some actually very good, but do you really want to invest out of state for your first investment, coupled with the fact that you will be doing it with friends. Who is in charge? Who is going to preview all the areas? Who is responsible for property management? Why can't you work harder to find something closer to you that you can see? What can you learn from long-distance investment for your first investment?

If you want to learn how to do better in the future with REI, you have to go see properties and understand what has to be done to renovated, what turnkey looks like, what all the costs are, and none of this can be done by searching neighborhood websites and using BP calculators. Those options are better for seasoned investors who can be loose with the numbers.

In any other context besides real estate, why would someone buy something sight unseen, never having visited the area, with no known contact for oversight of the investment, and expect it to do well? If you are your friends are going in together with 90k, make sure you can learn first-hand from doing it instead of trusting some people you don't know, out of state, that it will all work out.

Ben Halabi · Answer

Hello John, Cleveland is one of the best turnkey market and the most popular for investors because of high rental demand and low cost of entry, property prices are pretty inexpensive here. With that said, don’t go for the cheapest house in the market, anything sub 50k nowadays can be a nightmare. The first thing you will want to do is check out this Cleveland Price & Neighborhood Map which will help you have a better understanding of the neighborhoods and general market in Cleveland. Good luck!

John Morgan · Answer

@John Chan

I’m in DFW and it’s super competitive out here. My last two properties I bought this year are only netting me $100/door, and I thought I got super good deals on them. Properties I bought 3 years ago average $300/door for SFRs. But now it’s tough to make much on buy n holds. And flips look like they’re averaging only 10-20k per flip. Not enough meat on the bone out here IMHO. I would look somewhere else.

Jacob Repreza · Answer

@Jonathan Greene brings up a really good point as far as the dynamic goes. It's possible you have all discussed this already but its important to get it all squared away before purchasing anything. How are you dividing cash flow? Who's making repair decisions? How are you deciding when to sell or settle disputes etc etc. Important to do that before anything is bought.

As far as choosing a market goes: Go to meetups and meet people. Talk to them and see where they invest and see if any of those markets spark your interest. You're never going to find the perfect market with super low prices but extremely high growth and rents where values are going to quadruple etc etc. Find a good cash flow market, do your research and pull the trigger. Don't get stuck in the analysis. Talk to people and if anything, try to pick a market you wouldn't mind visiting since it is highly recommended to go there at least once. Hope this helps.

Art Perkitny · Answer

@John Chan

Data sources such as the American Community Survey, also known as the annual Census, can help you judge a location by considering key market indicators. Some of the metrics that I find valuable to understand are:

- Population Total

- Population Age

- Home Values

- Household Incomes

- Rental Vacancy Rate

- Homeowner Vacancy Rate

- Poverty Rate

- Educational Attainment Rate (High School/GED & Bachelors)

- Number of Housing Unit

- Rent to Income Ratio

- Rent to Price Ratio

- Population on SNAPS (supplemental nutrition assistance program) percentage

- Property Tax Rate

- Median Age of Buildings

- Number of Structures by Units (SFR, Duplex, Triplex, Quadplex, etc...)

- Median Rents by Number of Bedrooms

- Unemployment Rate

- Employment Sectors Percentages

- Number of Building Permits Issued

- Foreclosure Rate

- School Ratings

- Crime Statistics

When you consider all the variables listed above you will be better able to judge a locations tenant quality.

Also take into consideration the direction in which each of these market indicators are trending. This will better help you get an understanding of not just where market is today, but also where it may be heading. You wouldn't want to buy into an area that is declining rapidly and where the tenant profile is decreasing along with the area.

Let me know if you have any other questions, hope this helps!

Cory S. · Answer

I’m in the Cleveland market but getting out, putting house back on the market and heading south.

Anita Winkles · Answer

Hi John,

I’m in the DFW area and I have investor contacts in all of the areas you listed.  All great markets, but the investors that I partner with in Memphis is absolutely killing it.  Property prices have increased over the past couple of years but there are plenty of deals that can be picked up on the cheap for total remodels.  For example, an investor friend of mine bought a property for $14k, put $60k remodel into the property and is selling it for $130k.  With the rental demands in Memphis, one could take the same property and do a make-ready and still cash flow it like crazy using the BRRRR method.  Not to mention much of that area is in an opportunity zone so the tax benefits could be substantial if you check all the boxes.

Much Success,

Anita

James Wise · Answer

That's a pretty handy neighborhood map you've got there Ben. I remember writing it.

Which out of state market to invest in?

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