Many syndicators and investors tend to buy multifamily properties in areas that they’re familiar with, which is usually where they live. Unfortunately, by doing this they are limiting their opportunities to make money from both operating income and appreciation. Here’s why: some markets are either high-priced or they’re not “landlord friendly.” That simply means there are laws or regulations in place that favor tenants instead of landlords, which makes it hard to evict non-paying tenants, for example.
I happen to live in southern California, but I invest in out-of-state markets that include Texas, Georgia, and Florida. Those markets are high-growth markets that are landlord friendly and offer opportunities to implement value-add deals, which can result in additional income and appreciation. The other reason I prefer out-of-state markets is cost: the average cost in Southern California for each unit is $500K - $800K, while the average cost per unit in Florida, Texas, and Georgia is $100K-$150K per unit. That’s a significant difference, and is a key reason to look at markets out of where I live.
Finding Good Markets
As I mentioned, you want to invest in a market that is landlord friendly and has good growth potential. You also want a market that has positive rent growth, instead of declining rents. Because I like to pursue value add deals, negative rent growth would preclude improving properties and raising rents. Other things to look for when looking at out-of-state markets are positive job growth and positive population growth. These are key markers that the market is growing, with new people moving into the market. That’s key for multifamily property owners.
When looking at new markets, there are several ways you can learn whether they meet the criteria I’ve outlined. There are several key online resources you can use to research potential markets. For example, if you’re researching job growth in a market you can Google www.city-data.com. When researching population growth simply search the census website at www.census.gov.
You should also research property appreciation in the various markets you’re considering for investment. Online resources include YardiMatrix, CBRE, Milichap, VeroFORECAST and others. All of these tools let you run analytics on market-specific cities, and you’ll gain key information on job growth, vacancy rates, employment information and more.
Research your Market
Once you’ve found a market that meets your criteria in terms of employment growth, vacancy rates, etc., you’ll want to research that market in order to learn all you can before investing in a multifamily property. Start by finding out who the top brokers are, and arrange to talk with them. Discuss the type of properties they’ve represented and what current listings they may have. Your goal is to get to know more about several with the ultimate goal of meeting them in person and touring properties with them. Brokers are a vital part of doing business out-of-state, because they know the market far better than you do. That knowledge is valuable to you as you look to invest in properties in states where you haven’t done business.
Another key partner to know is a property manager or property management company. The last thing you want to do is try to manage a property in Florida from California, for example. I’ve learned that it’s best to let property management companies do the local managing of the property while you manage the asset.
That means the property management company will focus on leasing the property, handle tenant complaints or problems, take care of all maintenance issues, do comparative analysis of rents at other properties, collect rents and so much more. Your job will be to manage the property management company and take care of the asset, including paying taxes, analyzing net operating income, getting competitive insurance quotes and other asset management functions.
If you’re planning on a value add deal with the property like I do, that will be another area that you’ll manage, often with the help of the property management company. There are a lot of logistical issues regarding a renovation or remodel, and an experienced property management company can handle a lot of those tasks for you.
Managing the Property Management Company
You can make managing your out-of-state properties easier by having a team in place to take care of many aspects of managing the property. To do this, you should have a top real estate broker, a real estate attorney who is familiar with multifamily properties, and a top performing property management company.
The best way to get names of top property management companies is from local brokers and lenders. They have usually worked with many of the property management companies and know which ones are responsive to a property owner’s needs and are also held in high regard by other developers.
Once you have several property management companies to research, call them and conduct phone interviews with your top choices. This will help you narrow down your choices. Once you have a short list, arrange to meet with them in person and tour some of the properties they manage.
I’ve found that the best approach is to tour a property with an appointment and one that is unannounced. I often pose as a prospective tenant to see their approach, how I’m treated, and their level of professionalism. I find that this approach provides a more realistic picture of how they operate.
Tasks for Your Property Management Company
Once you have a property management company that you’re ready to hire, be sure they have the ability to deliver key reports to you. Be sure that they can develop a capital expenditure budget (CapEx) and an operations budget. These are important budgets, and if the property management company has the ability to make recommendations on trimming expenses on the operational side and help determine what capital expenditures are needed, you’ll have more time to devote to other tasks.
You also want the company to provide you with a variety of reports that show comparables. These should include rents, sale prices of similar properties, amenities offered at competitors and other similar tasks. Here is something else you want to have your property management company do: hire employees. These can be rental agents, clerical staff on site, or maintenance personnel. It’s hard to be able to conduct job interviews long distance, so having this ability is a major timesaver for you.
The other key item on the property management company’s “to-do list” is to have the ability to deliver reports on the operation of the property. These can be weekly or monthly income and expense reports, leasing reports, status reports on rental arrears, maintenance reports and other key metrics that will keep you appraised of any problems or trends that you need to be made aware of. Professional property management companies have these abilities, and you want to be sure that you’re hiring one that can deliver.
One of the biggest jobs a property management company does is find tenants and lease apartments. There are a variety of tasks involved with leasing, including advertising the apartment, reviewing and screening applications, meet with the tenants and answer questions.
As for advertising, they have to have a good knowledge of the market so they can position your property against the competition. This can be unique appliances, in-unit washer and dryers, amenities like pools, a clubhouse or exercise facilities, a group workspace and other competitive advantages.
They also have to work with other realtors and leasing agents to help find tenants, as well as have someone to handle showings throughout the week and on weekends. Property management companies also handle all tenant move in logistics, collect rents, perform a detailed inspection with the tenant prior to move in, and collect a security deposit.
When a tenant moves out, the company will be required to inspect the unit and report any damages. They are responsible for having the apartment cleaned, painted if need, and any repairs made so the unit can be rented quickly. When required, they will need to file all relevant paperwork for an eviction, as well as represent the property owner in court.
Never limit yourself by only purchasing properties in your local area. There are many excellent opportunities out-of-state that require some effort on your part but have the potential to provide both income and appreciation. The key is finding the right real estate markets to invest in, and you can start by doing research. There are many tools and resources that are available online that can help find markets with excellent employment and job growth, income and population growth, and other metrics that show a healthy economy. You also want to invest in a landlord-friendly state, that doesn’t have rent control or the inability to evict a tenant who doesn’t pay rent. Once you have a property, you’ll want to hire a property management company to handle the day-to-day operation and management of your out-of-state investment. The property management company should be able to provide reports on income and expenses as well as handle all tenant relations, including leasing, maintenance and logistics relating to renting and move in.
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About the Author
Ellie is the founder of Blue Lake Capital, a real estate company specialized in multifamily investing throughout the United States. At Blue Lake Capital, Ellie helps investors grow their wealth and achieve double-digit returns by investing alongside her in exclusive multifamily deals they usually don't have access to.
Ellie is the host of REady2Scale, a podcast that focuses on the "APS" of real estate: Asset, Process, and Strategy. Each episode discusses how investors can scale their real estate portfolio and/or businesses.
She started her career as a commercial real estate lawyer, leading real estate transactions for one of Israel’s leading development companies. Later, as a property manager for Israel’s largest energy company, she oversaw properties worth over $100MM. Additionally, Ellie is an experienced entrepreneur who helped build and scale companies by improving their business operations.
Ellie holds a Masters in Law from Bar-Ilan University in Israel and an MBA from MIT Sloan School of Management.