5 Steps To Investing In Real Estate Out Of State
Many of us start our real estate investing journeys the same way. Purchase a smaller unit property, like a duplex or triplex, in our home state where we know the market. It makes sense. You’re likely familiar with the area so you can make a more informed decision on which neighborhoods are best. You can quickly get to the property in case you need to oversee a repair or do a fix yourself. There’s a sense of comfort knowing you’re only a drive away. Eventually, our eyes get opened to the plethora of investing opportunities that exist beyond our home territory. Perhaps it’s a greater selection of deals, or lower cost of initial investment, or lower operating/annual costs such as property taxes. Whatever your reason might be. If you’re thinking about investing out of state or are already doing it but are struggling, follow these five steps and you’ll be set up for success when crossing state lines.
Step 1: Do your market research on a macro level
There are two levels of depth you’ll want to go when selecting a market. When first selecting a market, it makes sense to take a look at a more macro level, such as city and state, so you can narrow your search. Macro markets go up and down (like how Phoenix is on fire right now while San Fran is not so much) - make sure you're going with the trend and not against it, especially if you’re entering new territory. The information we look for when evaluating a good market to get into are:
Median household income. Hint: You can sometimes find this on the Census site
Population growth (over the last year and anticipated growth). Hint: Check the migration patterns from Uhaul
Major employers moving to the area and employment growth over the last several years. This is especially important because when big employers such as Amazon announce they’re moving to town, it often brings a wave of growth for the local economy (think more grocery stores, services, and other employers). Plus, those workers need a place to live. Hint: Check the Bureau of Labor Statistics site for stats such as employment growth
The top industries in that metro area. You’ll want to look for diversification vs one single dominant industry. This way If one specific part of the economy takes a hit, the local economy can rely on the other industries and the city doesn’t become a ghost town. Dallas is a great example of a city with a diverse set of industries such as IT, Telecom, Food Manufacturing, and Logistics. Hint: You can usually find this on the city’s chamber of commerce website.
Find out what we think are The Top 10 Metro Areas with the Highest Employment Growth Rates over the Last 5 Years.
Step 2: Do your market research on a micro level
After you pick the city you’re going to invest in, you’ll need to get a more micro picture of the exact neighborhood you’re going to search for deals within. Just one to two blocks can impact factors such as class level of the buildings available, the type of tenants you will encounter, and the rent you can charge. These types of differences are harder to evaluate by just looking at the data online, which is why it’s important to physically go visit the city. Here’s how we become a local when we visit cities of interest:
Research the crime rates of the neighborhoods within the city. This can help you decide which areas are acceptable for you and the class of asset you’re looking for.
Check out the traffic patterns on Google Maps at peak commuter times. Is there already a lot of traffic, making it a headache for people to commute? Is there easy access to the highway? Use this in combination with the crime rates to narrow down to your top 3-5 neighborhoods to scope out.
Book an Airbnb in a couple of your top neighborhoods and drive/walk around. Look for:
The types of stores that are around (Whole Foods sets a different tone than the Dollar Store)
Any class A buildings already existing or in the process of being built. Even if the current properties in the neighborhood are currently leaning towards Class C, it indicates the area is getting investment and may be on it’s way up.
The general upkeep of the neighborhood. What kind of cars are parked on the streets, are the lawns and houses maintained, are the streets clean or dirty?
Step 3: Assemble a team of professionals both locally and nationally that operate in that area
Multifamily investing is a team sport. Many out-of-state investors make the mistake of thinking they have to go in alone, which makes the whole process quickly overwhelming. Think about each vendor/relationship as a position on your team. Each has its own skill sets and role to play in scoring a great deal.
The most important position will be your property management company. Since you’ll be a plane ride away, you need to make sure you have a great team in place to be your eyes and ears on the ground. Plus, as locals, they can help provide insight on what the best locations to invest are and keep an eye out when they see deals available just from being in the area. Then comes the brokers who help you source deals, lawyers who help with the transaction once you find a deal, lenders to help you finance the deal, insurance providers who make sure you’re covered from a liability perspective, and tax professionals such as CPA’s who support you in the local tax policies once it comes time to file.
You’ll also want to ensure you have a list of reputable vendors for items such as construction and repairs, especially if you’re doing a heavy value add strategy. Lastly, one team member that can be of huge value is having a business partner. This allows you to share some of the work of finding partnerships and forming relationships with the team members mentioned above. You may want to look for someone local who can serve as the boots on the ground and build those relationships in person, especially if you’re new to the area.
Step 4: Make the most of your local market visit by planning ahead
If you’ve ever gone on a market visit out of state, you know how hectic your schedule will be once you’re there. It’s nonstop property visits, meetings, and trying to keep tabs on your other projects if you have any. The best advice we have is to optimize your schedule by planning ahead. Have a clear agenda documented for each day of the visit. Call brokers ahead of time and set up your property visits so you can maximize how many properties you see and actually get to see the ones at the top of your list. Brokers get busy and you should not assume they will just be available at the last minute.
Be sure to also set up time with potential business partners, lenders and vendors such as property managers to build your relationship in person. We’ve found that doing those types of meetings in the evenings over dinner or drinks allows you to leave your days open when most brokers are available. If you want to make sure you have all the right tools to be at peak performance during your trip, check out our article on the Top 10 Travel Essentials to Boost Your Productivity when scouting deals.
Step 5: Scale
You may be tempted to hop from hot market to hot market, but that can actually hurt your returns instead of boosting them. When investors talk about scalability, it comes from being able to leverage people, systems, and processes that have already been built. All of that equals lowers expenses and fewer headaches over the long term. Think about it: If you have to start from ground zero every time and go back to researching a new city at the macro level, then the micro-level, then finding new partners local to that city, you’re going to do fewer deals or potentially even miss out. That’s why we suggest picking a market that has good growth potential not just now but in the future. Think about potentially picking a niche within the market and honing in on that niche, such as Class B 50-100 units in South-Eastern Phoenix as an example. You can use the same team, especially property management, to run a smooth ship by gaining expertise in that location and asset class. Do one thing well, vs 10 things mediocre.
The other component of scalability is nationalizing where possible. Yes, we just talked about finding local experts, but after you’ve reached 1K doors in one place, you can rinse and repeat in another market to diversify. For some team positions, like your property management company, it might not make sense to go national because you want them to know that market like the back of their hand. For others, such as your lawyer, insurer, CPA, cost segregation vendor, marketing vendor, and lender, the ability to negotiate better terms across many deals may be of more value than local expertise. As you select your team members in your first market, think about who you can bring with you to other markets as you branch out.
Those are truly the key steps to being a successful out-of-state investor. We could go deep into each one of these steps in an article all on their own (and we probably will) so don’t worry if you still have questions. Use these as a guiding path to get started and just take it one step at a time. Just remember, focus on a market, get to know the local trends, then create additional value through scalability. You’ll be a more profitable, less stressed, and more competent investor if you do, and who doesn’t want that.
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