Why Out of State Investing?

“Live where you want to live, but invest where the numbers make sense.”

I wholly agree with Robert Helms at The Real Estate Guys Radio Show who often says, “live where you want to live, but invest where the numbers make sense.” So technically, you don’t have to invest out of state, but you do need to find a market where you can achieve your real estate goals. Whether your goals are for cash flow, appreciation, or something else.

I invest for cash flow. While I like appreciation, my criteria for buying a rental property is cash flow. The problem? Well, I live in a market that does not cash flow. As do many others who live in densely populated and over priced markets like San Francisco, New York, Miami, and many others cities.

Do I try to force a deal to cash flow in my hometown just because I live here? Nope. Instead, I made the decision to invest in a market that actually cash flows. Even if that means hopping on a plane to get there. Luckily, we’re living in a technological age where an abundance of information is readily available, which makes real estate investing at a distance easier than any other time in history.

Getting to your Market – Car rides or plane rides?

For any new investor who lives in a market that does not cash flow, I recommend expanding your potential market incrementally at first to see if there are any cash flow deals near you. Don’t just immediately assume that you need to be investing in Dallas or Memphis because you heard those are great markets to invest in. So start analyzing deals within an hour’s car ride of your residence in all directions to see if there’s any potential. If there’s nothing that cash flows within an hour, then try searching an hour and a half from home. Still none? Then maybe try 2 hours away.

At some point, you’ll reach a distance where the time it takes to drive there could easily be spent flying somewhere else. If you’re willing to drive a few hours to your rental property, you might as well consider investing in a market that is a short plane ride away.

Once I was willing to hop on a plane, I opened myself up to traveling to nearly any region of the US. A direct flight from Los Angeles to Dallas takes just under 3 hours. Los Angeles to Cleveland, under 5 hours.

Sure a plane ticket and a hotel will cost more than driving somewhere. Though in my case the advantages of investing in a market where the numbers make sense far outweighs investing only where my car can take me.

What’s a Good Market?

Cash flow does exist in certain parts of CA that is a few hours away from LA, but they generally aren’t in markets that I’m a big fan of. A good market consists of several factors and I cover many of them here. I prefer a market that has a rising or stable population, a growing economy with diverse jobs and low unemployment, favorable landlord laws, and affordable housing with high rent to price ratios.

As a buy and hold real estate investor, I want to be in a market where no single employer or industry is responsible for the majority of the jobs. If something were to happen to that industry (like the automotive industry in Detroit), high unemployment, depressed rents, and/or vacancies can result for years to come.

Not to mention, CA is a tenant friendly state. As a landlord, an eviction is costly due to legal fees and lost rent. This situation is only made worse when the state’s laws are not set up in the landlord’s favor.

Markets with a high rent to price ratio is essential for cash flow. This means that the cost to acquire a property is rather low compared to the rents that you can charge. The 1% rule is a typical metric many investors use as a quick way to check whether a property will cash flow or not. The 1% rule states that the monthly rent should be greater than 1% of the home price. So a home that costs $100,000 should rent for at least $1000 per month. Generally, markets where you can find 1% rule properties is a positive indication that they’ll cash flow.

In many markets outside of CA, investment properties don’t just break even, but they can cash flow and see returns over 10%. Such numbers just aren’t typical in high priced markets like LA. Even in areas immediately outside LA, prices are still quite high with low rents that don’t cover the mortgage and additional expenses an owner will incur.

The one major challenge required with out of state investing is in building a local team that you can both trust and rely on. This team is essential to your success and I’ll talk about this in detail in a future post.

So Why Out of State?

While I may find cash flow within a few hours drive of LA, as a buy and hold investor for the long run, I find it more advantageous to invest in out of state markets. Within a short plane ride, I can invest in markets with much stronger economies, population growth, higher returns, and are in more landlord friendly states.

The key to successfully investing from afar is to have a trustworthy, boots on the ground team that I can rely on. It takes a lot of work, but it’s not impossible to do. In the future, my wife and I plan to live in other parts of the world so my investing strategy today needs to be adaptable to meet our long term plan.

Ultimately, the skills I’m learning now in managing my team from afar will allow me to continue to live where I want to live while investing where the numbers make sense.

2 thoughts on “Why Out of State Investing?

  1. That’s great! I came to the same conclusion myself to invest out of state. However, I am doing it turnkey for now – paying market rate for less work and hopefully less risk. I’m definitely interested in hearing how you manage to do it more hands-on from so far away.

    • Thanks for stopping by Brian! Yup, we sure live in a pricey market.

      I definitely pursued the turnkey route when I first started exploring real estate investing out of state. Turnkey investing can definitely be an attractive passive approach to holding real estate. Though after analyzing hundreds of pro-formas, meeting multiple turnkey operators in several markets, and seeing the actual properties they were pitching to me in person, I decided that turnkey just wasn’t for me. I just couldn’t come to terms with the prices that many turnkeys were selling their properties at…they were literally at the top of the market and in many cases the comps just didn’t justify such prices.

      For me, I look to lower my risk with investing out of state by having some equity from day one. This means I need to have some rehab done. So having a local team in place is absolutely necessary. I plan to write a post in the future talking about how I actually am able to do rehab from CA.

Leave a Reply