How should I choose out of state rental investment?

Question

Hello everyone,

I currently work / live in New York City area. My goal is to purchase a duplex for rental investment in the next 12-18 months. Given the market I'm in, if I want to start rental investment I will have to invest in out-of-date properties. I wanted to seek advice before I go further down to the path.

1. What are the factors should I consider when choosing properties in a state / market I'm not living in?

2. Generally speaking, is rental investment still a good option when the property is out of state?

3. What are the challenges should I expect if I don't live in the property?

4. When I'm not very familiar with a neighborhood, what's the best way to find comps?

Thanks!

Yinglu Wang · Answer

@Nathan G.

Awesome recommendation! Thank you!

Yinglu Wang · Answer

@Trevor Ewen awesome advice. Thank you!

Yinglu Wang · Answer

@Shawn Ackerman I haven't define myself as any kind of investors yet. I'm still in the learning stage. But I would satmy very likely focus on cash flow.

Trevor Ewen · Answer

@Yinglu Wang

Meetups have typically been in-person in the past. Therefore, I have never attended ones for the markets I invest in (a notable disadvantage). However, I meet with my local partners or service providers, regularly. Since they may be virtual now, there is some sense to finding them. But I would be careful not to jump too fast. It's very likely that realtors will spot you early and get you to speculate before you really know the market.

Shawn Ackerman · Answer

@Yinglu Wang I am also from NYC and chose to invest in the Mid-West mainly for cash flow. Some of my metrics were price to rent ratio, landlord tenant laws and cost of entry. Wish you luck in identifying a market that works. What type of investor would you consider yourself to be?

Yinglu Wang · Answer

@Trevor Ewen

Great late night food for thought.

I think in general not being able to invest in a local market is my biggest concern, where I could end up overpaying service providers with all the profit.

You've got really good point on understanding "typical unit in a neighborhood" and finding "working class neighborhood". Super useful!

Do you have recommendation on local investment meet ups? With this shut down in place, i would assume there're still online meet ups happening?

Thank you so much!

Trevor Ewen · Answer

@Yinglu Wang

I started my process nearly 8 years ago in a very similar situation. I highly recommend investing out-of-state. NYC has very poor dynamics for cashflow and value capture. The regulatory environment has gotten worse over the last decade. Finally, the current crisis has shown even more weakness in the NYC market. Granted, there will be value to find if we fall into a depression. That said, valuations have been so astronomical for years, it may still be a tough sandbox to play in.

To your questions:

1) Home value for money, regulatory environment, local economy, low exogenous risk (i.e. natural disasters) and available, capable management nearby.2) Yes, but you are going to need management, good systems, and you are going to have to buy things that cashflow with some cushion. If you are too close to the edge, you'll spend every year giving your profit to service providers, since you are not in-person. You lack the edge of being in the local market. Your edge is the fact that your salary and resources are affected by a different (and often more rewarding) economic area.3) Management has a lot of control over the information flow. Bad managers will take advantage of this and realize you have little room for negotiation and awareness. Good managers will recognize an opportunity to build a long-term relationship, but you will still end up paying them early and often to get things done.4) If you're working with a realtor, they should be able to provide it. If you're working with a turnkey operator, you can find other operators that have listings to compare to. I think there is a lot to learn about the 'flavor' of a neighborhood. Being in NYC, you understand this intuitively.Some questions I would ask: Is the are on an upswing? Is the area stable? What kind of work do the people who live here do? Is the area known for a lot of crime? What are the schools like? What would attract someone to this neighborhood? What is a typical unit in this neighborhood like (for instance, 3Br 2 Bath or 4Br 2 Bath)? I would develop your thesis around the 'why' for the neighborhood. Not every place can or should be Williamsburg. Consistent, working class neighborhoods are some of the best places to find cashflow and keep from getting in a bidding war. I often find investors from the coasts have a hard time envisioning this, because they've often had solid white collar jobs and lived in cool or affluent neighborhoods.

Finally, once you identify specific neighborhoods, come back to the forum and ask people who have invested in those exact places. You will always get a few people that think every neighborhood is terrible and a few that think every neighborhood is the next Williamsburg. Learn most from the people that have a track record operating in those neighborhoods. There are no free lunches, so anyone who thinks a place is perfect and manages to cashflow is probably a realtor with a bridge to sell you. Tradeoffs are the name of the game here. You just need to decide which ones to live with.

Nathan Gesner · Answer

You should read "Long Distance Real Estate Investing" by David Greene to get a basic understanding of the process. Then you can refine your knowledge through research and jump in!

How should I choose out of state rental investment?

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