What metrics do you use to determine which city to invest in?

[Jimmy Hung]

I’ve decided to start my real estate investment out of state. Wanted to see what you guys look at to determine what city you’ll be buying investments in?

[James Galla]

I would spend some time on macro considerations. One publication I enjoy reading is Emerging Real Estate Trends 2019, published by Urban Land Institute and PricewaterhouseCoopers. Since you're from California, I'd say there is a fair chance you're going to find yourself attracted to somewhere in the rust belt after reading some nice pro formas. So, I'll comment on those here.

The biggest issues you are probably going to face are going to originate from your management company and the location of the property. Effectively, these two areas of issue feed each other and can easily kill your cash flow. For instance, you may not do enough due diligence on what neighborhood you ought to invest in. So, you may purchase in an area that is not as good as you thought, and the consequence is a poor quality tenant pool. The next thing you know, your property manager is drawing unexpected fees from all the maintenance calls, lawyer's fees from evictions, instances of tenant placement, etc. Perhaps the area is not as good as you thought, and that your local property manager understands this, so they just jam whoever they can get into the property because it doesn't make a difference to them since you're out of state.

So, although the properties out there that go for $40k may seem attractive, it is critical that you give them a great amount of skepticism. If you're looking in the rust belt, you're going to want to take the more stable asset in the better neighborhood class so you don't have to deal with a full yearly rehab of your entire property.