5 TIPS TO INVESTING IN ANY OUT OF STATE MARKET
By Guest Contributor Mathew Owens, CPA
People ask me constantly how you should chose a market to invest in and what factors do you consider before investing. Real estate is very much market specific and it is very important to analyze the market you are interested investing in for a variety of factors. Investing strategically in specific markets across the country is a great strategy to create a cash flow stream to cover all of your expenses during retirement.
Here are 5 tips to investing in any out of state market:
- Start with analyzing the market. When researching any out of state market understanding the growth expectations, affordability of the market, and economic volatility or stability can be very important. Where are you in the cycle? What does the housing price index in the market tell you? What areas of the market do you want to focus on for the highest cash flow and asset quality? What about expected job growth? Review these items and gain a good understanding of the market before investing.
- Build your team. When investing in an out of state market your team is extremely important. The primary team members are property managers, contractors, attorney’s, CPA’s, Real Estate Agents, Inspectors, Insurance agents and affiliate relationships. Each team member should be vetted in detail with multiple interview questions setup. Always have backup team members in place as well.
- Do a complete neighborhood analysis. Be sure you really know your neighborhoods. Many investors make the mistake of investing in the wrong areas with the wrong tenant base. You can make some properties in lower end neighborhoods work if you have the right management company but for me it’s typically not worth the headache. Usually you get lower financially educated individuals renting from you that are judgment proof and there is a significantly increased risk of not paying or missing rent payments, tenant turnover, tenant repairs, vandalism and theft that occur on these types of properties. Understanding what the crime rates are in the areas as well as making sure you do not invest in a rural area which makes your property harder to rent are important factors also.
- Review the state laws. In every state the laws are different and it’s imperative to have a good general practice attorney, eviction attorney, real estate attorney and CPA in each market that you invest. The tenant landlord laws are extremely important when owning rental properties in any prospective market. Are the tenant landlord laws more favorable for tenants or landlords in your prospective state? How long does it take to evict a tenant if needed and how easy is it to go after them for repairs?
- Do a full renovation and property analysis. Before investing in any investment do a full preventative maintenance check and renovation bid on the property. Review all of the major systems in a property from the roof, HVAC, Furnace, plumbing, electrical, appliances, water heater, foundation and sub-floor, pool and equipment, and more. Get a full inspection report on the property from an outside licensed inspector. One of the biggest hindrances to cash flow is maintenance when things break down unexpectedly. Knowing your total all in cost on a project along with how much the investment produces after all expenses (property management costs, property taxes, insurance, repairs, vacancies, etc.) is key in determining your return on investment and future cash flow.
These are just some of the factors we considered before investing in any market. No matter what market you are investing in, do your due diligence on the market before investing. It could be the difference between having a long term positive cash flowing investment or an investment that cannot weather the storm.
Mathew Owens, CPA