How to Invest in Unfamiliar Rental Markets
When I started hunting for my first income property, I quickly became disheartened. Property prices in my city were just too high and rents too low. I didn’t understand how local investors were making any money.
After chatting with a few local landlords, I learned that my math wasn’t off – properties didn’t cash flow for those of us just entering the market. New and eager landlords were forking over some of their own hard-earned cash each month, hoping their new income properties would increase in value in the long run.
Since I’m not the gambling type, I knew that wasn’t for me. I just about gave up on the idea of real estate investing until I had an “Aha moment”. It dawned on me that rents in my childhood town were almost the same, but properties cost one-third to one-half of the purchase price. Could I find a way to make that work?
Looking outside of my area allowed me to start investing in income properties that were cash flow positive. To do the same, you might need to leave your comfort zone and invest in and unfamiliar rental market.
Finding a promising city takes a bit of sleuthing.
Before anything else, you need to decide where to buy. If you have decided to look outside of your immediate area, the task can seem quite daunting. Where to start?
First, you need to find a city that has a strong economic outlook. If you’re looking to reduce your risks, you’ll want to avoid any city that has a declining population, a high unemployment rate or a floundering economy.
One helpful tool to get you started with your research is a city’s Comprehensive Annual Financial Report or CAFR. Once you’ve narrowed down your list to a few cities or states, a quick google search can pull up the CAFRs, which are available online.
A CAFR is essentially a city’s financial statement. Just like a business, each city prepares a yearly financial report. A CAFR lets you take a peek at the municipality’s balance sheet, employment statistics, property tax information and more. To ensure accuracy and credibility, CAFRs must be reviewed by external accounting firms.
By studying a city’s CAFR, you can get a feel for its future and its overall economic outlook. Is the population growing? Are there many employers to provide good jobs? Is the economy based mostly on one sector, for example oil, which can mean trouble if it declines? Is the city thriving or having trouble staying afloat?
Choose a market that lets you best meet your goals.
Once you’ve found a city that seems economically sound, you need to decide if it matches with your goals. What type of real estate investing would be most profitable in that area? Renovations? Buy and hold? Wholesaling flips? Student housing? What type of real estate are you interested in?
A market that has lots of potential for flips might not be great for buy and hold rentals. For example, buying a single family home for $350,000 and renting it out for $1,300 per month makes for a pretty terrible buy and hold rental investment. However, buying the same house, spending $25,000 on renovations and flipping it for $475,000 within three months sounds like a promising opportunity.
Investigate the local real estate market.
If your research seems promising so far, it’s time to look more carefully at different neighborhood markets, including demographics, rental rates, real estate prices, employment, etc.
Start online before spending the time and money to travel in person. Check out Trulia or Zillow for information. These websites provide an overview of the market, with stats on resale prices, foreclosures, neighborhoods and average rents. They even calculate if the current market is hot or cold.
If the online research still looks promising, the best way to truly scope neighborhoods out is in person. A drive (or better yet walk) through the various parts of town is the quickest way to learn about the style of homes, their condition and the differences between neighborhoods. You can also check out the area’s amenities – look for coffee shops, restaurants, grocery stores, green space and cultural institutions.
For the best chance at success, it’s time to make connections.
You now have a new market to invest in. You’ve done your research and you think the area has great potential. You’ve run the numbers, which also look good. Now what?
Now, it’s time to build a team of experts. Since you won’t be managing your property’s daily operations, you’ll likely need a good property manager and real estate agent.
A good property manager knows their market. They can tell you what to watch out for and which local laws you need to be aware of. They will know which types of rental properties have the best money making potential in their area, and which ones to avoid. They should also be able to recommend specific neighborhoods for properties that match up with your goals.
As for real estate agents, look for someone that understands income properties, or flips if that’s what you are interested in. You’ll want to find an agent who can scour the listings on a regular basis and send you the ones that fit your criteria. Many agents who specialize in rental properties will provide their investors with details such as potential rent, monthly and yearly expenses and ROI.
Take the time to get references and speak to other local investors. Building the right team is especially important when you’re not there to oversee your investments. You need to find the right people; ones you can count on to make good decisions on your behalf. Attend a local real estate investing club, talk to other landlords, investors, contractors and property managers.
Buying your first property in an unfamiliar rental market can seem a little unnerving. It takes more research and planning then buying in your own hometown. It also takes a leap of faith to put your trust in others. But in the end, buying income properties is all about making money. If buying in your area just doesn’t add up, it’s worth going elsewhere to get the biggest return on your investment.