“Live where you want, invest where it makes sense” – sounds familiar? I’m a huge believer in investing in multifamily properties, for a variety of reasons, and I currently own over 2,000 units across the country. There’s a high demand for rental units, as more and more Millennials are choosing to rent instead of own a single-family home. In fact, home ownership is significantly dropping in all age groups, while apartment vacancy rates are falling.
Multifamily properties are easy to finance, with many agency loans available at attractive low rates. Owning a property with 1 unit versus 100 allows you to scale and save on expenses. Finally, there are tremendous tax benefits that allow you to lower your taxable income through depreciation.
Why Invest in Out-of-State Properties?
Most people think that since I’m based in California, I’m investing out of state because California real estate prices are too expensive. That’s not the reason! It’s all because of rent control, which is becoming more pervasive in California.
Rent control allows government to place limits on how much landlords are able to raise rents on existing tenants, instead of allowing supply and demand to dictate rental rates. While it does make housing more affordable for some groups and keeps tenants in place, it reduces the number of available units. It also prevents landlords who have paid more for their buildings from collecting increased rents, which means they might not be able to afford regular maintenance and repairs.
In this article I will lay out the 5 steps I used to invest in out-of-state multifamily properties.
Step #1: Choosing the Right Market
Investing in out of state markets requires several key steps in order to be successful, and the first step is choosing the right market, which means a strong market. There are several indicators to look for, including population growth, job growth and rent growth. You want to invest in a market that has positive appreciation on the investments, and you also want a landlord-friendly state.
A landlord-friendly state means that there is positive regulation in place, one that isn’t adversarial to multifamily property owners. That means landlords are free to raise rents when the opportunity presents itself, and there are laws in place to make eviction of non-paying or troublesome tenants easy to evict. In addition, security deposits can be unlimited, and can be returned up to 30-days after a tenant moves out.
How to find information?
To find information about eviction, Google: “How to evict a non-paying tenant.” Thanks to the Internet, searching for the key indicators is a lot easier. When looking for population growth, the first stop should be www.census.gov, or you can simply Google, “City population increases.” For job growth, I use www.city-data.com, and for a look at rent growth by market I go to www.census.gov.
Sources for a look at appreciation by market include: CBRE, Millichap, and Yardi Metrix. Another great source that I use is VeroFORECAST. These are all good tools to use when doing analytics on out of state markets.