Out of State Newbie

[Sean Autry]

Hi All-

New here to the site, and so far I'm loving it. There's a lot of good knowledge here, and everyone seems happy to help.  Here's my situation:

I'm a first time investor from So-Cal.  I'm priced out of this market (except for some rough neighborhoods), so out of state seems like the best option.  Are there any other So Cal investors out there with out of state rentals that can comment on their experiences? What are some main points I need to consider before I pull the trigger?  And how did you find a property manager you can trust to get the job done at a fair price?

I'd like to pull the trigger in the coming months, but frankly I'm a bit paralyzed with fear about being so far from my first investment.

Thanks!

[Eric Fernwood]

Hello @Sean Autry,

Welcome to BiggerPockets. I am a realtor in Las Vegas and most of my clients live in other states or countries so I frequently have discussions with potential clients concerning how I would determine where to invest.

So we are on the same page, I believe all investment properties must meet three criteria:

Sustained profitability - The property must generate a positive cash flow today and into the foreseeable future (10+ years).

Likely to appreciate over time - You would never buy a property just for appreciation but appreciation is very desirable. Nothing in the real world is actually static. Markets are the same way. Either the market is trending up or the market is trending down. If the market is trending down you could find yourself owning a property that initially did very well but over time became a nightmare.

Investor friendly state/county/city regulations - Evictions, rent control, code compliance requirements, etc. This is a critical factor. In some states it can take more than a year and cost thousands to evict a non-paying tenant while your mortgage payments and costs continue. As a comparison, in Las Vegas it takes 28 days to evict and usually costs less than $500. Owning a property in a state with restrictive eviction laws is like cancer. It's theoretical until it happens to you, then it is a disaster.

The overall process I would follow to meet all three criteria is illustrated below.

Below is a description of each level.

Metro Level Considerations

I would only consider metro areas with:

Reasonable access (flight/drive) from where you live. Sooner or later you will want (or need to) inspect your properties.

A city where you would like to spend time. One of the many advantages of investment real estate is that travel expenses to inspect your properties are deductible. I live in Las Vegas and many of my clients (especially the ones in Canada) have an urgent need to "inspect" their properties between January and March.

A population exceeding 1M. Metro areas with large populations will have sufficient historical data so you can evaluate trends. Also, larger cities have more stability than smaller cities because they tend not to be a one-employer/industry economy.

Financially stable - Cities that are in bankruptcy or near bankruptcy are not good places to invest. 

Metro areas which do not experience hard freezes or significant moisture. Ongoing maintenance costs are significantly higher in such locations.

Stable or increasing job quantity and quality - The value of a property is no better than the jobs around it. In many parts of the US, manufacturing and similar jobs are going away and what remains are service sector jobs. Service sector jobs tend to pay much less than manufacturing jobs so the families of these workers have less disposable income. Less disposable income means that they cannot afford to pay the level of rent they did in the past so property prices and rental rates fall. A key indicator is inflation adjusted per capita income over the past few years. If you see an adjusted declining per capita income you need to carefully consider the long term value of the investment.

No or limited urban sprawl - In every metro area I've seen there are areas that were once prime areas and over time become distressed areas. The reason is that people with money will tend to move to newer areas with newer floor plans, etc. You do not want to buy in areas that are trending down. Below is an illustration showing what can happen over time  due to urban sprawl.

Location Level Considerations

Once you have filtered prospective locations through the above criteria you will likely have a relatively small number of potential metro areas to consider. Now you can focus deeper into each one remaining. To do this you need detailed location level information. Where can you get such information? Local property managers. Every day property managers deal with marketing properties, maintenance, tenants issues, rehab, local regulations, finding and screening tenants and many other rental property related issues. Local property managers know what works and what will not work. Google the name of the city plus the words "property management" and you should get a number of hits. Go through their web sites and look for mid sized property managers. Select 3 or 4 and call them. The minimum you need to know is:

Where - Specific location within the metro area that rents the best.

Type - Condo, multi-family, single family, etc.

Configuration - Singe story, two story, number of bedrooms, etc.

Rent range - If the most desirable tenant pool can only afford to pay between $800/Mo. and $1,000/Mo. you should only be looking at properties that you can purchase, rehab and profitably rent within that rent range.

Regulations - The most important will be the time and cost to evict.

Typical rehab costs and issues to avoid.

Typical time a tenant stays in such properties and typical turn costs.

Have a list of well formed questions before you call and take notes. (I created a list of property manager interview questions. If anyone would like a copy, send me an email.) If you hear the same information from multiple property managers, then it is probably true. When you finish your property manager interviews you should have a reasonable guess to the answers to each of the following:

Where to buy within the metro area

Type - what type of properties rent best

Configuration - what configurations rent best

Rent range- what rent range is most likely to attract good tenants?

Regulations (like eviction cost)

Typical rehab costs

Typical time a tenant stays

Typical turn cost

Landlord insurance cost

Property tax rate for the specific location(s)

Probable ongoing maintenance costs

Purchase price range - When you know where, type and configuration, you can easily determine the sales price range using Zillow or a similar site.

Once you combine answers to the above questions you will have what I call a property profile.

Detailed Location Investigation Considerations

With the property profile you should know exactly what you are looking for. The next step is to contact a local Realtor. Provide them with your selection criteria (where, type, configuration and purchase price range) and they will send you conforming properties and you can do further analysis. If everything still looks good it is time to go see the location yourself and start to assemble your investment team.

Your Investment Team

It is imperative that you have a trusted local team. At the minimum you need a (good) property manager and a Realtor. For more details on the investment team check out this BP post.

Sean, I hope I answered your questions. If not, please post them. You can find out more about real estate investing through the links on my profile page.

I wish you success.