How do Investors who Invest outside their area choose?

Question

Curt Smith · Answer

To start your tought process read the file I have linked off my profile 1st paragraph:  How to buy a bullet proof portfolio.

Next search for discussions on turnkeys in Memphis.

The root of all real estate working (growing) is jobs jobs JOBS and Growing good jobs.   This is why Memphis is such a dead dead dead market along with so many other rust belt zero job growth cities.

Learn how to sniff out where employers are moving, opening up new plants, divisions, hiring, then buy rentals in the path of that progress.  Then use my paper to fine tune the area in that city and house style.

This is a fast test:  use zillow rentals, uncheck all but houses, 3 bed, 2 bath on an area:  if you see a decent 3/2 house renting for under $850,  there's a big problem!   If theres a few at or under $750 even bigger problem.

If you understand screening,,, income take home must be 3x rent, then  800 x 3 = 2400/mo take home.  Go figure out what job (if 2 incomes adds up to 2400/mo) ????   You'll figure out that 2 folks working at McDonalds can afford $800 mo rent.  Which means if there's vacant houses for $800 / mo theres not enough folks making minimum wadge to fill up that inventory.

Said differently:  you want to be at $1k/mo rent but ideally >$1100/mo, working income backwards to need semi skilled workers to afford that rental.  Better tenents are on the job >2 yrs with semi skills to skilled job, dual income, a family with a dog.  I take dogs!!

Find cities / areas with zero 3/2s under $1k ideally none under $1100, then look for growing jobs.

Hassels in rental management runs inverse to the rent which follows income which is inverse to skills and education and often common sense....  IE most folks renting <$900 do not have bank accounts.   Ok this is a tip;  screen only for folks WITH bank accounts and you have filtered out the best of that income class in one step.  :)

Chris Clothier · Answer

@Jessica Santiago jones  That is a great question, but also a bit of a loaded question because there are so many moving parts.  In short, you choose to invest out fo your area for opportunity.  Sometimes it is to leverage our time and the expertise of others in those good markets.  You can live in a great area for investment and still invest far from home if you want to leverage others.

As far as where to pick, we use sites like Census.gov, Bestplaces.com, deptofnumbers.com to compile some data on quality cities.  We have grown into multiple markets far from Memphis for our company and our personal holdings.

We obviously love Memphis given our name, but we also love Dallas, Houston, Little Rock, Oklahoma City, Tulsa, St Louis, Kansas City and Knoxville.  Here is a chart that you can build in an excel spreadsheet and enter the information to each of these data points for any city that you want to explore.  The better the numbers, the more likely you are to have long-term success at the proper price points.  These are 30,000 ft. data points only used to determine markets that we would want to explore deeper.

As you can see from the chart, Memphis has net positive job growth for the past 12 months and is projected to see 37% job growth in the next 10 years.  Deptofnumbers.com shows Memphis has added on average 1,000 jobs per month each of the last 12 months.  When the total number of jobs is 637,000, this is only a small drop in the bucket, but it is a positive sign that you would look for in a market.

If you create a spreadsheet like the one above yourself, you can literally put in any data points that matter most to you and compare from there.

The biggest point to understand is that you can build a professional team in any city.  There are brokers, agents, contractors, tradesmen, management companies, etc. in every top, secondary, tertiary city.  If the data looks positive for a market, big or small, your next step is exploring the city and meeting contacts that you may use in that city.  It is never a fast process or it shouldn't be.  You should be patient and verify the data you compile with the picture on the ground with the story you hear from the people you will work with.

Feel free to ask deeper questions on here.

Chris Clothier · Answer

I'm digging into your paper for sure because I am always learning and your experience with 38 self managed properties as well as your mobile home growth are worth listening to and following.

Notable sentences that I love for those reading your comments...

- "But we developed our tactics to keep cap rate >12% (honest cap at 40% expense ratio etc)..." 40% true expense ratio is excellent and difficult to achieve on a long-term basis.  Congratulations.

- "the key is buy houses based on a strategy and target tenant type (see my paper) then become the expert in that tenant type, house style, area etc."  There is not a better strategy in any business model.  Be the expert in whatever you are focusing as your business model.  Plus, I love the idea of identifying your ideal resident and what they want and then going shopping for that exact property.

@Jessica Santiago jones, that above paragraph is very important if you are trying to figure out how to invest or help your clients invest out of the area.  If you can figure out exactly what they are looking for and help direct them towards wanting the absolute best residents for stability, the house part then becomes much easier.

Dean Harris · Answer

@Jessica Santiago jones

Its all about the team and people you meet in that location. Don't get caught up in fancy words and creative marketing when evaluating a property out of state. You will catch yourself paying way too much for a product you can obtain much cheaper. Verify the property through a trusted and recommended source in that location. Typically, a licensed agent or a current property owner with experience in the product field you are concentrating in will be the best help. A good question to ask any property source is if they own investment property in that specific area as well. That will usually tell you right away if you are dealing with a "Salesman" or a source that has in depth knowledge and experience in that specific area.

Best of Luck! You will receive plenty of helpful opinions right here on BP!

Chris Clothier · Answer

I actually like a lot of the advice that you give on here for investors.  On the surface it is good, but it also oversimplifies how investors make their decisions.

First, many of the cities in the rust belt are actually net positive in job growth since 2012.  It is cities further in the south that are struggling to stay net positive.  Job growth is very important which I think is the point of your comment.  It is important to invest in growing areas and your statement on path of progress is also important.  I think if people actually look at real data, they will see both Memphis and the rust belt are net positive.  Now, whether that market is good an individual investor is another story, but if they follow your advice on jobs, they will find a different story.

Second, what does it mean when you say "if you see a decent 3/2 house" when they are looking on Zillow.  I'm surprised anyone is giving advice to look on Zillow, but you limited it to rentals, so maybe there is a way to use that data.  I pulled it up in Memphis and to be fair, the houses look horrible and the areas are bad.  But, I know that info. going into my search.  An out of area investor will not.  So how should they define "a decent 3/2 house" if they have no reference or experience with the area?

All of the points you make about qualifying affordability are excellent.  I also think it is solid advice to stick to only properties above $1,000 in rent.  But, then you say find cities with zero 3/2 properties for rent under $1,000 and preferably no properties under $1100.

Would that advice not preclude an investor from investing in any major city in the country if they are searching on Zillow?   Because every major city is going to have those properties.  Is it your advice to only invest in rural, out lying counties?

Your profile lists some pretty small areas that you invest in.

"We buy good deals that we rehab into rentals in outer counties (not Dekalb, Fulton, Clayton) 3/2 1980 or newer for < $50k. We like Newton, Henry, Spalding, Butts, etc on the North we like Hall, Gwinnett, Banks, Clark etc."

To be fair, I couldn't even find Zillow data on most of those cities, but Newton did come up and like you said there was not a single property for rent under $1100 that was a 3/2.  In fact, there wasn't a single property for rent.

Lastly, the advice that a resident should have a bank account is good, but where did you find the data point that most people renting for under $900 don't have bank accounts?  That has not been our experience after 15 years, but that doesn't mean the advice to look for that is not correct.  So, I really do think some of your advice is solid for investors and some of it may oversimplify what they should do.

John Warren · Answer

This is an interesting question indeed. I have invested both locally in the Berwyn and Lyons neighborhoods right outside Chicago as well as out of state in South Bend, Indiana. I initially looked out of state because I was trying to acquire larger properties and couldn't find deals locally that made sense. In reality, I hadn't yet learned that the commercial brokers control 80-90% of the larger commercial deals, and I probably could have found something locally that made sense if I had figured his out earlier! Investing out of state has been profitable, but I have way less control over the property. I am fairly certain that my investments nearby will be more profitable over the long run due to the lack of control I have with my Indiana complex.

Mike D'Arrigo · Answer

@Jessica Santiago jones It's actually easier to choose a market than an area within a market. That gets trickier and in my opinion, can be more important than the market itself. There are a lot of good markets with both good and bad areas. As @Chris Clothier and @Curt Smith have pointed out, there is a lot of good data on economic and demographic trends readily available. The 3 most important things in my opinion are population growth, job growth and incomes. Researching neighborhoods is more difficult. I recommend starting off by defining what class of neighborhood fits your investment objectives and comfort level. You can then identify what the median rent is for your market. This will be the basis point for determining the class of a neighborhood. In a market like Kansas City which I know well, the typical rent for a B class 3Br 1.Ba sfr in a B class is around $1,000-$1,100. If you see rents in the $850-$900 range, it tells you that is is more of a C class area. Rents and prices are two of the biggest indicators of neighborhood class. Get to know the rents and prices in the areas you are considering.

Curt Smith · Answer

Hi Chris, btw I've been a long time follower of you and Kent, legacy member in reww.com etc etc.    Your comments are all fair and offers a balance to my post!!

Glad to hear lower income renters north of the mason dixon have bank accounts!!!!!   LOL in the south it becomes a lower and lower percent as rent goes down have bank accounts.   For one collections would empty them out!!  That says it there and also why having a bank acount with 2x rent is so telling.

It sounds like you dug into my business model and thanks!   yes an area with few rentals is not bad news, if you also study jobs and job growth (see my paper and indeed.com, put in a town, set radius to 5 mi, then compare with other towns).   IE Newton co GA is getting jobs and investment.  Facebook is putting in a zillion $$ server on 400 acres and more as Atlanta being the corp head quarters of the SE.

In an area with growing jobs, you will also see few rentals,,, make sense?  Folks come to town for jobs and poof no rentals, and rents rise each year.  This is the ideal place to buy rentals.  NOT a steady state area with little rent or price appreciation.

But we developed our tactics to keep cap rate >12% (honest cap at 40% expense ratio etc) by buying in areas before other investors where there are good jobs, thus reliable tenants.  The key is buy houses based on a strategy and target tenant type (see my paper) then become the expert in that tenant type, house style, area etc.   You will not only make better then most $$$ net net after 24+ months (not spread sheet performance) with low to no turn over and fixing expenses, but you will have low compeitition for buying good houses.

Thanks so much Chris for commenting!   Glad you balanced my Southern views out.  You're 1000x my experience.  :)

Might you offer YOUR strategy, data collection sources, how you compare areas, the metrics where you get the metrics to choose an area to buy rentals in?

Subbie Kaur · Answer

@Jessica Santiago jones

I work for a group of Investors from Sacramento who invest OOS because there are so many markets out there with high cash flow in comparison to CA. There are a few things we look at before we even think about investing in a particular market.  One of the most important things is to find markets that are high in rents and the cost of the property is low( for cash flow markets). We also make sure to invest in markets/states that have landlord-friendly laws, and low taxes. As far as managing properties we do a lot of research to find a property manager we can trust for each market. A good property manager will allow you to have a much more positive experience.

Subbie Kaur

Ace Properties, LLC

Alina Trigub · Answer

@Jessica Santiago jones I think you need to decide first on what type of assets are you going to concentrate?! Speak with your investors and ask them whether they're interested in the commercial or residential. If it's commercial, is it offices, MFH, storage, or something else? Also, keep in mind, when it comes to commercial, some (depending on the asset type) are sold as NNN leases which require very little maintenance and property management, but offer lower returns. So bottom line, you need to start with the asset class, then move on to location and so forth.

How do Investors who Invest outside their area choose?

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