Updated: Mar 7
I love California. The beaches, the sun, the people. What’s not to love? Well, return on real estate investments, that’s what’s not to love about it.
With extremely compressed cap rates (capitalization rates) of 1-3%, it’s hard for me to justify purchasing a deal there, since I’m a cash flow buyer. Cap rates are the ratio between the Net Operating Income (NOI, which is income minus expenses) to property price. Here’s an example: if a property recently sold for $2,000,000 and had an NOI of $200,000, the cap rate would be $200,000/$2,000,000, or 10%.
Another problem with investing in properties in California is the fact that it has rent control. My strategy with multifamily properties is to invest in value-add deals, with the ultimate goal of making property improvements and raising the rent for added income and appreciation. I simply can’t do that with value-add deals, so if I can’t raise the rent, I can’t make any money.
I’ve done a lot of research on multifamily markets and found that the best markets that fit my investment criteria are located in Texas, Florida, and Georgia. In addition to being “landlord-friendly” states (not having rent control and being able to evict tenants who don’t pay rent), along with excellent cap rates; Those states also have excellent job growth, population growth and rent growth. I’ve found that you need all three of those growth markers in order to have a strong real estate market, which includes solid cash flow and appreciation.
I’m happy to share the lessons I’ve learned from years of investing in out-of-state markets with you. Hopefully, it will make your job a little easier.
Lesson #1: Your Property Manager is the Most Important Piece of the Puzzle
Your property manager is the most important piece of the investment, as you depend on their experience and expertise to keep the property in good shape, as well as rent the units, and keep the vacancy rates low.
Quite honestly, I wouldn’t self-manage even if I lived 2 minutes from the properties I syndicate, let alone 5,000 miles away. Over the years I’ve learned that hiring a property manager who is big enough to have massive experience is the best strategy (each of my property managers has been managing at least 10K units during their careers).
They’ve accumulated exceptional experience and have a lot of expertise, but they’re not too big to work with or too big to afford. I remember one large property manager who required weeks in order to just schedule a call, and I need to have access to a property manager or a property management company that has a VP or Regional Manager whom I can simply text and get immediate answers to any questions I have regarding the property. This is particularly important when doing value-add projects, as there are many moving parts and logistics with regard to tenants, subcontractors, and deadlines.
Lesson #2: Learning Out-of-State Markets is a Never-Ending Process
A lot of syndicators and investors tend to buy properties where they live, because they know the market and have a certain comfort level with that knowledge. Unlike Los Angeles, where I know what the market is doing and where the strong properties are, I have to educate myself about an out-of-state market because I don’t live there and really don’t have much knowledge about the market.
There are many ways to learn about an out-of-state market that can bring me up to speed before investing. To start, I read various market reports, talk to local brokers, my property managers, and even read local news. Therefore, I know about any new employer coming into the market and can learn about any new large construction or development projects that have been announced.
Gaining all of that knowledge is crucial, because I want to be sure that the market I’m looking at has the three key growth factors: job growth, population growth and rent growth. In order to find the right market, you have to do an in-depth market analysis.
This includes a close-up look at the market demographics. You’ll want a market that has a large grouping of millennials and baby-boomers who are ready to retire, because those are the groups who fuel renter growth. If their numbers aren’t high, you might want to look elsewhere.
To research population growth, demographics, and other key market factors, you can use online tools like www.census.gov and www.citydata.com. Both of these websites give you the information you’re searching for. If you really want to drill-down into metrics like property appreciation, neighborhoods, employment growth and more, there are advanced tools available to you.
These include www.yardimatrix.com, www.irr.com and Vero FORECAST at www.veros.com. The only issue is that those sites are expensive, but if the information is needed, you’ll find it on those websites. Here’s something else, if you want to find out if a market or state is landlord-friendly, check out Vertical Rent (https://www.verticalrent.com/entry/eviction-process-by-state-a-50-stater-nationwide-overview), which has information on policies in each state. If it sounds like overkill, it isn’t. You don’t want to discover that you’re unable to evict a tenant for non-payment of rent after you invest your money.
Lesson #3: Finding a Balance in Traveling to your Out-of-State Properties
When it comes to physically traveling to my out-of-state properties, I’ve learned that there’s always a happy medium between travelling to the property and having phone conferences with key team members who are involved in the property’s management.
Before getting into details, I’d like to tell you that I’ve found that you really have to do both: conduct onsite visits and have ongoing phone conferences. Either/or will not suffice, as each one addresses specific property management and operational issues. It’ll be easier to understand once I explain why both are really necessary.
There are two types of on-site visits: one is touring and walking the property with your property manager, and the other is conducting an unannounced property visit. Each plays a key role in helping to manage the property. The on-site visits with the property manager help to reveal repair and maintenance issues, needed upgrades, and an inspection of how the subcontractors are doing their jobs - commercial landscaping, as one example.
When you’re on-site, you’re able to discuss problems face-to-face with your property manager and work out ways to resolve any ongoing issues. It’s an excellent opportunity for the property manager to show you options on how you can improve specific areas of the property that are in need of work, or discuss ways to reduce expenses. I’ve found that face-to-face is far better to discuss those types of issues, instead of trying to describe them in a phone conference.
The unannounced property visit is almost like a “secret shopper” visit, as nobody is preparing anything special for your arrival. You’ll end up seeing the property as tenants and prospective tenants see it, which includes: how it’s maintained, how clean it looks, and all the other things that go into a property’s appearance.
You may have an opportunity to talk to tenants, walk the property on your own, and see if there are any issues that strike you as being problematic. You can then list those issues and discuss them in detail with your property manager.
The phone conferences are designed to discuss day-to -day operational issues like vacancy rates, tenant problems, needed repairs, or replacement of equipment and other things that can be handled with a phone call. You can have standing weekly or bi-weekly meetings, depending on the needs of the property and the property manager.
As you can see, the on-site visits and the phone conferences work in tandem to help get things done.
Many syndicators like to purchase multifamily properties that are close to home, as they’re familiar with the city and with available properties. On the other hand, out-of-state real estate offers opportunities that you might not find in the state where you live, like “landlord-friendly” laws as well as population growth, job growth, and rent growth. I’ve learned that those factors are critical when evaluating an out-of-state market. There are many online tools available to help research and evaluate out-of-state markets. I’ve also learned that your property manager is the most important piece of the puzzle when it comes to managing your property, as it would be next to impossible to self-manage a property that is thousands of miles away from where you live. Finally, I’ve learned that you have to strike a healthy balance between on-site visits and phone conferences with your property manager. Both are important and have unique roles in managing the property. Once you have everything aligned with your property manager, market analysis, and finding a balance between on-site visits and phone conferences, you’ll find that out-of-state properties are excellent investments.
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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 highlights honest, insightful, and thought-provoking discussions on the multiple approaches for successful real estate investing.
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.