Buying in Markets Far From Home

[Caren Magill]

Hi!  New real estate investor here with a goal of investing to replace my income within the next 3 years.  I live in the SF Bay Area, which is one of the most expensive real estate markets in the country, so my goal is to invest in properties in the mid-west and southeast.  

I'm curious how I should approach this when I know nothing about these areas?   I'm interested in Ohio, Georgia, and Tennessee as starting points, but how do I zero in on specific cities?  How do I find local, trusted services?  What can I do to study the areas from afar and what should I be aware of as a distant property owner?  Also, should I zero in on one area only to maximize local services or diversity in different regions of the country?

I am learning so much from this forum and BP in general, but I'm not sure exactly how I should approach my search for properties given my distance. I've only lived in the US for 10 years, so I'm not that familiar with any areas outside of California.

Thanks!

[Clayton Mobley]

@Caren Magill Welcome to BP! You're right, you do have your work cut out for you ;) But you're in the right place to get all the information (and more) you could ever need. 

As Jeff said, you're not alone - a lot of CA investors need to look out of state, and there's absolutely nothing wrong with that, you just need to know what you're looking for and have your priorities straight. 

With regard to your questions:

*How do I find local, trusted services?* 

• Here! You can search the forums for threads on a given area like "good contractor, Birmingham AL" for example, or start your own thread. BP is the best resource you have at your disposal.

*What can I do to study the areas from afar and what should I be aware of as a distant property owner?* 

• I'll get into some of the issue for the latter part of this question below, but with regard to the first part, you can find a lot of information that will help you narrow the field online. For example, you can find property tax rates (bear in mind they will likely be double for an out of state investors, so the lower the better). You can also find purchase histories for specific properties once you get to that stage. For example, a BP member asked me to weigh in on a potential property he wanted to fix up, but I could see just on Zillow that it had been purchased just two years ago for twice what it was listed for now and the price had been reduced three times in three months - that means there's not a lot of interest in that area and his exit strategy would be difficult. 
• You can also find good information from the census bureau about the proportion of home owners vs renters in a city, but bear in mind that this number can change drastically once you drill down to specific neighborhoods. Other figures are also helpful, like population and jobs growth, but remember that these are net figures. For example, a city might have an almost stable population, but actually be experience an influx of young people while the older generations die off or retires to Florida, resulting in the same pop but a much more vibrant and lucrative tenant base (millennials are where it's at). So take big picture figures with a grain of salt. Still, census info can be useful for broader analysis. 
• Google earth is amazing for quickly weeding out lower tier areas. You can virtually walk around any area you are considering to see what it's like on an average day. If you see a lot of rundown houses, people milling about (not at work), cars in yards, untended lawns, etc. then you're in a C/D area and you should run. Long distance investing is tricky enough without taking on the headache of section 8 bureaucracy and high tenant turnover. 

  *Also, should I zero in on one area only to maximize local services or diversity in different regions of the country?*

• I'd advise you not bite off too much more than you can chew starting out. Start with one market and get comfortable with your selected investment strategy, get settled and learn the ropes. Diversifying is definitely a good long-term goal, but you don't need to juggling investments in three different cities right off the bat. The type of REI it sounds like you're going for is a long haul investment, so there's no rush to do everything all at once.

Ok, additional notes....get comfy:

You don't mention if you want to go the turnkey route or if you have interest in self-assembling a team. My persona bias aside, turnkey is the simplest option. Of course, I'm referring to full service turnkey, which means one company does everything - finds the props, rehabs, markets, tenants, manages, maintains - all under one roof. If you do look into turnkey, you'll quickly see that people throw that term around a lot and it doesn't always mean the same thing. Some 'turnkey' companies are just marketing props owned by other companies, rehabbed by a third party, and managed by who knows. If you go turnkey, the simplest and most efficient option is full service, since the company is incentivized to execute each stage of the investment efficiently, with an eye to future performance. An independent contractor isn't (outside of personal ethics, of course) incentivized to worry much about what happens after his job is done. An agent just needs to sell you a property and collect a commission - the long term rental demand in the area doesn't need to be a huge concern for them. A full service TK company needs to make sure they sell you a good property they can tenant and manage easily. They know that doing excellent rehab work will cut down on maintenance and capex costs in the long run, and make the property more attractive to good tenants, which makes the PM aspect easier and saves everyone money, including you.

However, many people want to self-assemble a team and oversee (albeit at a distance) the process from start to finish because it gives them more control. If this is you, you'll have more work on your hands simply because you'll need to vet each member of the team individually, rather than vetting one provider. That doesn't mean it doesn't work, a lot of people swear by doing it this way, but it needs to be a labor of love, because it is labor. This option also opens the door for you to get to potentially take part in/control the deal hunting/rehab design/tenant selection processes depending on how involved you want/need to be.  Of course, the other potential hiccup here is that if one member of your team misses a deadline or just falls down on the job, you're stuck trying to jerry-rig things back together at a distance (or paying for a last minute flight) in order to limit vacancy time. It's all about how much time and energy you can reasonably put into the investment over time.

I will absolutely second (or third) the comments here about visiting the market, whichever direction you go. Most people can't visit everywhere, of course, but you should definitely consider visiting your top one or two turnkey providers/ markets to meet see the area, take a look at properties, view the quality of rehab work, and just meet the people face to face. Whether you go Tk or self-assemble is irrelevant here. Either way, you're going to be entrusting the success of your investment to someone else, which means the people you choose to work with are even more important than the market you invest in. Looking someone in the eye is a great way to gain peace of mind or clock red flags that might have gone unnoticed because someone emails a good game.

There are plenty of good markets, especially in the midwest and southeast as you mentioned, so you'll be able to find good numbers several places. More important, however, is who you choose to work with, so I would advise that you focus on people first, especially if you go the turnkey route. You can have a property that looks amazing on paper turn, very quickly, into a nightmare investment if the people you choose to manage it aren't what they seem. Being in the absolute best, hottest market isn't as important as having a solid team by your side.

You'll be able to find many reviews of contractors, agents, and property managers, as well as turnkey companies here on BP, and other people will have better info on what to look for specifically when self-assembling a team from afar. With regard to turnkey, there are some questions you should ask of any provider you consider. You should get prompt, data-backed answers - the way a provider handles these kinds of detailed questions will tell you a lot about their product and their service.

1. What are your short, mid, and long-term occupancy rates? Do you track them?

2. What is your annual maintenance rate? 

3. Do you defer maintenance? 

4. How quickly does the typical maintenance issue get resolved? 

5. What do you expect your maintenance rate to do as your portfolio ages and capex items need repair or replacement? (an estimate is ok for this one, of course, but it should be based on the age of the property and the life expectancy of capex items etc)

6. Does your maintenance rate include move-out costs? 

7. What is your average net move-out cost?

8. What is your minimum lease term? 

9. What is your average lease length?

10. What is your property management fee?

11. What is your leasing fee?

12. Do you charge any other fees?

13. What is your average time to first lease on a new property? 

14. What is the average time between tenants?

15. Can I see an appraisal for the property I am considering?

16. What was done to the property during rehab? 

17. What is the expected life on new appliances/flooring etc?

18. How is your ROI calculated and what does it include? Can you walk me through the math?

19. What type of service can I expect once I've made an investment? How do I know when rents are paid, when maintenance issues are resolved? How can I see rental or PM contracts to review terms? How do I get in touch with you if I need something?

Ok sorry for the wall of text! I hope at least some of that was useful to you. If you have any questions about my comments here, the Birmingham market, or the turnkey model in general, feel free to reach out any time.

Best of luck!

Clayton