NEWBIE QUESTION: Out of State MFR? Which Market? How to Manage?

[Kevin Chan]

Hi BP,

This is my first post and I'm looking forward to building a connection to the BP community. I'm new investing in MFR and RE in general. I live in the greater Seattle area and work full time in the software industry in sales.

I'm very much committed to building and growing a RE business but need to make it work by hiring property managers given I wouldn't be able to be hands on day to day. After some research, I've pretty much concluded that MFRs are the way to go to generate a scalable income stream. I do have some my own capital to invest. I need to figure out how much of my own capital I should use vs others. (but that's a separate question...).

The main question I have is: In order to figure out the right market and find the right deal, can/should I look out of state/area for properties with better cap rates or should I focus on my local area? By looking at other cities, what's the approach I should take and what systems and elements should be incorporated into my business plan?

The assumption I'm making here is that the Greater Seattle Area is relatively expensive and there might be more profitable options with better cap rates and lower acquisition cost and lower vacancy rates in other cities. (I read about Austin, Atlanta, etc).

Reading a post, @Ben Leybovich invests within 50 miles of where he lives but anything beyond requires more resources and complexity to manage.

Thanks you all in advance. I'm looking forward to becoming active in this community.

Kevin

[Joel Owens]

Hi Kevin,

The answer is how much TIME do your have in your life to dedicate to problem properties??

The reason I say this is the more yield you get the more things you will have to take on.

As an example being an investor myself and a commercial broker as well my clients typically fall into 2 buckets.

One is triple net leasing where you are buying a property with 10 to 30% down depending on what it is (bank, pharmacy, dollar store, restaurant, gas station, etc.) The primary lease that goes for 10 to 20 years has rent escalations built in of 1 to 2% annually. The tenant pays property taxes, insurance etc. so you the landlord get a check like clockwork every month by and credit rated tenant (many investment grade of BBB- or better).

The yield is around a 6 to 8 cap on purchase and debt is in the 4's to 5's. Cash on cash is typically high single digits to start. These types of income streams pay out usually much higher than bank CD's etc. and you get tax depreciation if a NNN lease. NNN is perfect for individuals making hundreds of thousands of dollars or more a year at their jobs and do not have time to think of anything else.

Apartments you can get more yield through leverage but it takes time.

If you invest farther away you want scale (typically 50 units) so you can have a full time manager and maintenance person. Every investor is different in what rules they have for investments. I am not a big fan of owning smaller properties far away as it is hard to regulate repairs and issues from a distance. Some investors I know will have to fly to their smaller properties at a considerable expense to handle issues. I also do not like smaller buildings as you are at the mercy of surrounding property owners and their duplex, tri-plex, quads. Much more intensive for return versus owning a whole development and controlling the tenant base and look and feel of your investment.

What you will do will depend on what you have to start for investing. You mentioned OPM (others people money). Do you want to partner on deals or own by yourself is a question you need to answer. If you do partner who maintains control and what are the exit strategies?? It can get messy when things go wrong.

Hope it helps.