First-time investor: Out of state or local?

Question

Hi!

I am a first-time real estate investor looking to make my first deal by the end of the year! I am located in Northern Utah and would love to invest locally, but it does not seem feasible for my strategy and financial position. I am looking for insight on whether out of state investing is a good strategy for a first-time investor and/or a fit for me and my situation.

A little more on my situation below…

I want to do a rent ready (or close to it) buy and hold SFH. However, Northern Utah seems to me an extremely hot market right now, with deals closing before they can even hit the MLS. It is also an expensive market (for me) with the lower prices being between 200-250k though most seem to be 300k+. To reach my goal of buying my first property by the end of the year, I would have fewer options as I would be looking to buy much closer to the 200k mark. This has got me thinking if my cash would be more valuable out of state.

In my mind, out of state investing means extending the education and research phase and pushing the 1 year goal to maybe a 2 year goal. However, I could very well be 2 years waiting to invest locally as I wait to snag the right deal or raise more capital to give me more options. Also, achieving the 2 percent rule in my local market is near impossible but could be achievable elsewhere.

Thoughts?

Thanks,

Bracken

Remington Lyman · Answer

I recommend you read this article on OOS investing. It explains the importance of creating your core four. You will need to get a local, rockstar Realtor, contractor, lender, and property manager.

https://www.biggerpockets.com/blog/core-four-real-estate-team

I know a lot of out of state investors that buy in Columbus, Ohio

Account Closed · Answer

Hey Bracken,

Seattle resident here with rental property in Montana and Cleveland. As someone who has only done out of state investing because the Seattle market didn't work with my goals I would say it is totally achievable and likely in less time than you are imagining. A few things to consider if you want to go out of your market:

1) What are your investing goals and the metrics you are measuring by? For me, its cash flow. I want at least $200/month/door and an overall return of at least 25% CoC. Having a clear idea of what a good deal is for you is going to help you focus.

2) Use these metrics to go evaluate different markets. Actually sit down and evaluate deals in those markets to see if they line up to your desired metrics. Analyze as many deals as you can. BP has some good tools to get you started here.  Use census and trend data to evaluate overall markets - population growth, age, job growth, industry diversification etc. There are lots of great markets out there so don't try to boil the ocean. When you find one where the deals in the market align to your goals/metric targets stick to that.

3) I totally agree with the advice of interviewing PMs. I would also say that you need to budget time and $ to spend time in that market periodically to walk properties and meet people. This is an expense you won't have with a local property but a very necessary one in my opinion.

Best of luck!! Let us know what you decide!

Sean Nava · Answer

I have a strong feeling that our market will replicate california soon. The rental increases and equity growth makes our  market very forgiving. Which is guiding my decisions.

I looked into buying in the Midwest for cash flow but I couldn't help to notice that people are selling homes for $6,000 more than they bought the homes 8 years ago. So one major repair can wipe out a year's worth of profit. Especially with a newer investor such as myself.

This has steered me towards buying locally. I am more interested in the wealth growth from equity.

I am currently closing on a duplex that will be cash flowing only $150/mo to start but will build rapid equity. Which can be used to later to buy more properties. Or refinance for spending cash when it come time to retire.

The advantage you have living locally is that you can buy a new primary residence every few years and keep the prior home for a rental.

Good luck. Either choice you make will be a good one. Just make sure you take action.

Annchen Knodt · Answer

@Bracken Bjorn - highly recommend David Greene's long distance investing book!  It's really great for learning the fundamentals even if you aren't investing out-of-state, and of course extra relevant if you are.  Also, it sounds like you are in a great time of life to rent to roommates - I don't think you would regret figuring out a way to do some sort of house hack like that right now!  I wish I would have known to do that in college and the years afterward.  Good luck!

Brandon Sturgill · Answer

@Bracken Bjorn You will find a host of agents here that specialize in representing out-of-state investors. Our local market in Columbus has been pretty incredible with price points lower than markets like Austin or Nashville, with a better economic outlook than similar large cities of over 900k people.

Don't be afraid to go out-of-state, but you will need to do some legwork to build your team.

Best of luck

Bonnie Griffin Kaake · Answer

@Sean Nava  If you haven't considered a cost segregation study yet on any of your investment properties, you are leaving a lot of money on the table. You will usually have about 6-8% of what you purchased the property for in taxes you won't have to pay in the first year or few years. This could give you the extra cash flow you need to make repairs or upgrades to the properties you purchase or enough to buy another property. Stop paying more in taxes than you need to pay! If you have questions, I am here to help.

Bracken Bjorn · Answer

@Brandon Sturgill

Thanks for the insight. I guess the leg work and he fact of being remote scares me, but so does any investment! I understand the value of stretching our comfort zones. Though I still feel like I have lots to learn, and I may always feel this way, there has got to be a point in the near future where I am ready to invest. Staying local would make capital the limiting factor where my restrictions out of state would be additional research. The latter would be much faster to overcome.

Aside from interviewing PMs, what are some good ways of identifying markets relevant to me and my goals? Is there a method to the madness or just a shotgun approach until you find one that works?

Account Closed

Your post reminded me that I should look into further specifying my REI goals and  criteria. Currently, I think cash flow is my priority. Predicting appreciation seems like a big gamble to me. In my local market, big appreciation is almost a sure thing, but the prices reflect that. I also value cash flow with intent to fund a fix and flip as my first primary residence in the next 5 years.

I have been analyzing local deals using the BP calculators, all of which leading to me thinking there is not a current future for me in my local market haha! I will have to start analyzing in other markets.

Brandon Sturgill · Answer

@Bracken Bjorn The answer is in the local data...and the data might look differently to you than someone else...it's really about your goals, tolerance for risk, available resources, and personal preference...

Jonathan Vasquez · Answer

Hi Bracken,

I would highly recommend reading David Greene's Long Distance Real-Estate Investing if you havent done so. The first thing to do if this is the route you want to take is build a team of rockstars in the city you choose to invest in. As mentioned in the other post, deciding what your true goal is as well will help you choose a market. Are you in it for large cash flow, appreciation, or possibly a little of both. Im in the tampa market and even though its getting harder to find deals its a great market for both cash flow. Look into the Tampa market and let me know waht you think, I can always help you if its a right fit for your goals

Bracken Bjorn · Answer

@Sean Nava

Currently, being a young (19) college student, I am always on the move, never settling in one location for more than a few months. Therefore, I have a hard time committing to a house hack which contributes greatly to my problem of raising capital for a conventional mortgage with a 20%+ down payment instead of alternatives such as an FHA.

In turn, this makes me a big fan of HELCOs, but still, that initial investment is going to be a tough one. Plus, I don't like the idea of being overly reliant on HELCOs without any cash flowing properties. There's potentially a domino effect in the event of an unforeseen major expense exceeding my reserves (mainly thinking in terms of natural disasters) affecting my whole portfolio.

I do recognize the value and potential for great gains in doing a fix and flip and it is definitely on my radar. However, that presents a whole other slew of financial barriers in funding the repairs. This is why I value cash flow in my properties- to finance repairs in a future flip.

Tentatively, I think I will work hard to buy that initial property locally, valuing equity and appreciation over cash flow. I can then use that equity to leverage a second deal (HELCO), perhaps out of state, with a cash flow focus. Perhaps 5 years into the future, when I have a more stable life and future plan, I can use that cash flow that has been accumulating over the past few years to fund a flip and potentially make some serious money. This 5 year plan allows me to test multiple different strategies of REI, learning lots along the way, and help me figure out what my "niche" is.

Just thinking out loud here haha but I appreciate your comments to inspire me to further think through my real estate journey!

Best,

Bracken

First-time investor: Out of state or local?

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