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.