How to pick a Market for Rentals

Question

I read the "Long Distance Real Estate Investing" and will be completing my first flip in 2 months.  With the profits I would want to reinvest in a rental in a more affordable market and all my research has lead me to the MidWest to South East.  The research has included the buy to rent ratios on zillow and has given me some cities to look into.  What more would you do to determine which market you would want to focus on to build your core 4 (lender, realtor, property manager, general contractor)?

Mitch Messer · Answer

Hi @Jackson Pontsler and welcome to BP! I'd recommend adding a few good local wholesalers to your ground team. I proposed this in another post today, so I'm just going to cut-and-paste.

Andrew Syrios · Answer

I would look at the poverty, crime and unemployment rate, the quality of the schools, diversification of the economy and particularly at whether the city is growing in population. A declining population would make me nervous to invest. You can find stuff like this sites like City-Data.com and others.

Lee Ripma · Answer

@Jackson Pontsler I do remote investing in Kansas City from CA. I do think that if you can find a market that you can drive to, invest there. Are there any markets near SLC that are up and coming that you can start investing in MF properties in? With all of these markets heating up the whole a good deal is made not found becomes even more true. So if Salt Lake or Logan isn't looking so hot you might need to get creative on how you do the deal. Even in KC it's very hard to just find an amazing deal on the MLS.

If you still want to find a market outside of your own, then I would really focus on markets where you have trusted ties. Who can go check on your core 4? What family or friends do you have in certain markets. Are there certain markets you want to visit? I think once you pick on just dive in and find your team. There are people making money in RE in all markets, so figuring out the "best" market doesn't make a ton of sense. You want the best market for you and your goals. For me, that is value add small MF in KC. Are there other markets I could make money in? Of course! But I have not invested the time in building relationships in those markets so I'm just focused on KC!

Ernesto Hernandez · Answer

Provo, Ogden and SLC are actually repeats on lists of cities with strong momentum with respect to price and rent increases.

If you're looking for better cash flow ratios and lower price points, the Midwest and the South are where a lot of folks are looking.

In no particular order ... Memphis, Nashville, Kansas City, Saint Louis, Jacksonville, Indy, Cleveland are all areas that come to mind.

I would advise you to be careful with wholesalers. In my experience some have been at this for a long text but many have not. It's a very fly by night industry. Even the good wholesalers with a steady flow of deals will fudge the numbers on ARV and rehab. They are not contractors and they are not realtors. Whether they do it malisci or not, they are not to be taken at face value. Nobody is actually, but you make money when you buy. There are no contingency clauses and non refundable deposits are the norm. I'm not saying they're all bad, just be careful.

Good luck.

William Hochstedler · Answer

@John P.

Our absorption rate is under 2 months, vacancy 0% and 2-4 unit multi's are selling below 6% cap rates.

There is no low hanging fruit up here in Logan.

But Tremonton and Ogden both still have room for opportunity.

James Wise · Answer

I'd also look at historical crime data, future job outlook, landlord tenant laws of the local municipalities and your ability to network in each of those markets.

When you do choose a particular market some more best practices are as follows.

• 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.

Jackson Pontsler · Answer

Warning long response coming

First of all thank you @Mitch Messer, @Ernesto Hernandez, @Lane Kawaoka, @John P, @William Hochstedler and @Lee Ripma. I appreciate such a strong response.

For Logan there is no low hanging fruit (but I guess that is true of very many places).  I understand that deals need to be made and not easily found, I would implement that same strategies from long distance real estate investing if I was buying properties in Logan, UT because an overall 4 hour commute isn't a good buisness model if you're going to DIY landlording.  With that in mind I was looking for different markets (lower entry price points) and I have friends who have pointed me to a few cities and evern turn key companies who's ROI and rent/purchase price ratios are better than what I can typically find in Utah.  i.e. in Midvale UT a duplex will sell for 350K but rent 1200 each side while a turn key in the MidWest advertises (mind you still doing homework on a couple of them) house in Tennese and Missouri for 70k is and rents around 725.

As for Utah rentals I'm actively polling the odgen/layton areas and even considering purchasing some land south of Eagle mountain 8 mins away from the active construciton of new homes in that area.

Overall I'm just trying to set some criteria to determine which cities I really want to dig deeper into and establish those realtionships.  To be able to build up the core 4 and relationships wiht good real estate investors together.  This is similar to my local flipping relationship building strategies where I actively take other investors out to lunch, learn from them, pick their brains, and even get some deals from them.

My weakness is I tend to throw my net too wide which is why I ask how do I narrow down out of state investing.  Thanks to you guys the advice I read is: look where you already have ties, does it have a robust economy, is it near another city with robust economy, and look in those cities for good wholesalers.  This is a great list of criteria and once again I appreciate anyone elses insights or a point that I missed.

John P. · Answer

Your state has some diamonds.  Look up in Logan. Low taxes, low insurance and easy tenants.

How to pick a Market for Rentals

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