Long Distance Real Estate Investing

Ultimate Guide

Joe Torre,

RW Investment Counselor


Long Distance Real Estate Investing

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How to Choose a Real Estate Market to Invest In

Joe Torre, RealWealth Investment Counselor

Joe Torre


How To Choose a Real Estate Market - Video Transcript

Hello, investors. My name is Joe Torre. I’m a Investment Counselor with RealWealth. Today we’re going to do a quick video on how to choose a real estate market to invest in.

Here’s a common scenario our investors have. They want to invest in real estate, but there’s over 384 MSAs in the United States. That’s a lot of real estate markets to choose from. When you go out and get information from various providers, from Dallas or from Cleveland, every one of them has a good story as to why their market is good and a good place to invest. You have too many options, so how do you decide? That’s what we’re going to talk about today.

In general, what makes a good real estate market? There’s job and population growth, great property management, a diverse economy, favorable landlord tenant laws, positive cash flow, and some subjective factors that I’ll discuss in a minute. Going back to job and population growth, this is important. When the population of a metro is growing, that means demand for housing is going to go up, so rent should go up and property values should go up over time. Property management is probably the most important thing on this whole list because without good property management, your whole business model will fail. When investors do fail, property management is the number one reason. You have to identify good property managers in whatever markets you’re looking at.

A diverse economy is important because it gives resilience. An economy like say Atlanta, Coca-Cola’s there, UPS is there, Home Depot’s there, Delta Airlines is there, the Center for Disease Control is there. It’s a very diverse economy with lots of different industries. If one industry is in trouble, let’s say Delta Airlines during the pandemic, other parts of the economy can pick up the slack.

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The economies that have problems are the ones that are single industry economies like Las Vegas, it’s all about tourism, or Detroit, it’s all about autos. Whenever there’s a downturn in the economy or a recession, single industry economies tend to do worse during recessions. Ideally you’d want an economy that’s very diverse.

Also, you’d want favorable landlord-tenant laws. In some states, it’s very hard to evict a tenant who’s not paying rent. It takes months to get them out, and it’s a long, lengthy, expensive court process. In other states it’s very easy to get them out. The sheriff’s deputy shows up after a certain number of days and kicks them out. You want to invest in a place where the landlord-tenant laws are at least neutral or preferably favor the landlord. Then finally, you want positive cash flow. You don’t want to invest in a place where you’re going to have negative cash flow of $500 a month because prices are so high.

What happens if you lose your job and you have to pay for your living expenses, plus you’ve got this minus $500 a month to pay for? That can be a real problem. Then finally, there are subjective factors. Maybe you like a particular city because you have relatives there or you like to visit it or just enjoy going there. Things like that are also important when deciding where to invest.

That’s a good real estate market in general. Not all real estate markets will check all the boxes. There are places in Florida, for example, where there’s high population growth, but there’s not high job growth. The reason being, there’s a lot of retirees who move in that area. The retirees increase the population, but they don’t increase the jobs because retirees don’t need jobs.

This shouldn’t be looked at as a deal breaker if you don’t have any one of these things, except the property management. These are all ideal. The ideal market would have these characteristics, and as many boxes as you can check the better. A key thing to consider is what is your investment objective? What are you trying to do? Broadly speaking, there are two main goals you could invest for appreciation, equity growth, or you can invest for cash flow.

To illustrate the two, I have these two examples here. We have Dallas, Texas, for appreciation and Birmingham, Alabama, for cash flow. When looking at Dallas, note that we’re not talking about Dallas proper, but some of the suburbs outside of Dallas. A purchase price of $250,000 in Dallas, the monthly rent is $1,800, but the expenses are almost as high, principal, interest, taxes, insurance, and property management are $1,750.

That eats up most of your rent, and you have $50 of monthly cash flow, which is not much, but at least it’s breaking even. On the other hand, in Birmingham a house, a renovated home costs about $125,000. It rents for $1,100 a month, and the expenses are much less, $850 a month. Dallas has some of the highest property taxes in the country. Alabama has the second lowest property taxes in the country. You get to keep more of your rent, which is always good. Your monthly cash flow there is $250.

Now, remember, given that the prices are very different here. For the cost of one house in Dallas, you could buy two houses in Birmingham. Really, if you had enough capital to buy a $250,000 investment property or properties, buying one house in Dallas would get you $50 a month, buying two houses in Birmingham would give you $500 a month, which is a lot more.

On a cash flow basis, Birmingham looks like the better deal. Why do you invest in Dallas at all? Appreciation. 10 years from now, that $250,000 house in Dallas will be worth about $350,000, conservatively, whereas the Birmingham house might be worth $150,000, but basically growing with inflation. In terms of purchasing power, you haven’t really increased very much. You’re basically buying an ATM machine in Birmingham, something that’s used cash every month and can pay your bills.

Who would invest in each type of market? A typical investor for an appreciation market would be a working professional, maybe 35 to 45 years of age. They got a long runway before they can retire. What they would want to do is buy a house in Dallas for $250,000, wait 10 years for it to go to $350,000.

In fact, if you could buy 10 houses and wait 10 years, the 10/10 plan, you would get a million dollars of equity growth in a market like Dallas. Then as you’re closer to retirement, you can take that million dollars of equity plus the money you put as down payment and sell those properties in Dallas and then invest in a cash flow market like Birmingham to maximize your cashflow prior to retirement.

Then on the right-hand column, cash flow, a typical investor there is somebody who’s a retiree or close to retirement. If you’re getting ready to retire, you don’t need appreciation 10 years from now. You need cash flow right now to replace the income from your day job.

Presumably you have some assets. You could sell your house in California and buy 10 houses in Birmingham, or markets like it, and use the cash flow to pay for your retirement. This is a key determinant of which market or which type of market you go for.

Just to illustrate this, I have this matrix set up here. You have on the Y-axis there’s appreciation, low, medium, and high and on the X-axis, cash flow, low, medium, and high. I like to put percentages like percent appreciation or percent cash on cash return, but with interest rates fluctuating the way they’ve been lately, that’s hard to do. We’ll just use low, medium, and high just to get the concept across.

You can see in the upper left-hand corner Charlotte, North Carolina, Dallas, Texas, Tampa, Florida are all examples of markets that have great appreciation, but not as much cash flow. At the other extreme, you have Baltimore, Birmingham, and Cleveland, which are examples of markets that have high cashflow, but very low appreciation. Depending on what your goal is, you would try to identify which markets meet your criteria, and then invest in those and focus on those areas.

Now everybody says, I want both. You can’t have both, not in one market, because what makes appreciation market an appreciation market?

Basically, demand is greater than supply. There are a lot of people moving there, there’s job and population growth, high incomes, they can drive up the price of properties, bidding wars, multiple offers on properties. In that kind of market like Dallas or Tampa, you would have a high appreciation, but it’s hard to get cash flow because the prices are so high.

Similarly, what makes a good cash flow market good is that there’s abundance of supply. There are a lot of homes that can be renovated and made suitable for renters and that’s much greater than the demand for housing, and so prices are low, and with prices low, you can get good cash flow.

You can’t really get both in the same market. If you want both there’s two options. One is to look at some of these prop markets in the middle, Kansas City, Indianapolis, central Florida or just northwest of Orlando. Some areas of the country, now these places have appreciation, but not as much as Dallas or Tampa would. They have cash flow, but not as much as Baltimore or Birmingham would. They’re in the middle. That’s one option you can invest in one of these, what we call hybrid markets.

The other option is to have two markets, have one cashflow market and one appreciation market and invest in both. It’s like having a balanced portfolio of stocks and bonds, it’s just use an analogy. Some of our investors do that.

Once you identify what your investment focuses, you can focus in on which markets meet your criteria and focus on those. How do you choose the real estate market?

Identify your primary objective, appreciation
or cash flow or hybrid. Then research the markets that fit those criteria and then do your research, join local real estate investor associations.

You could go to meetup.com, type in the city name and put in real estate investor clubs and see what comes up. You can join, you can attend Zoom meetings remotely to get to learn the market, make some contacts, find out who the good property managers are, get some referrals for lenders, leasing agents, anything like that. You can do an on-site visit. That said, there is a risk to doing it yourself. When you do it yourself, you’re trying to figure out what’s going on in a market 2,000 miles away or 3,000 miles away. You’re not there. You’re not familiar with the area. The odds that you’re going to do it right the first time out of the gate, and not make any mistakes, is kind of slim. Part of this game of investing is about not making mistakes. The money you lose in one bad investment could wipe out the gains you make in two or three good investments. Part of this game is about not losing.

A better option is to partner with an experienced investment firm like RealWealth. Here’s a map of the markets that we’re in. There are about 15. About a third are in the Midwest, and they tend to cash flow really well, but not appreciate as much. The ones in the Sunbelt, like Florida and Texas, tend to appreciate better, but not cash flow as much. In each of these markets, we have vetted property providers, new home builders, turnkey renovated properties. We have property management, lenders, insurance agents, CPAs, attorneys, anything you need.

The whole ecosystem that supports your investing career we have already set up for you.
If you’re looking to invest remotely, this is the best way to go, at least in the beginning. Now, if you’ve got two or three or four deals under your belt and you’ve got some experience and you want to branch out on your own later, that’s fine. At the very least in the beginning, you should go with an experienced investment firm to minimize your risk. You can talk to an experienced Investment Counselor like myself and look over your shoulder and make sure you’re not going off the rails with your investment plans and keep you on track.

If you want to learn more about this option, you become a member of RealWealth. Then you can get access to all these resources. We have a new investor core curriculum, which are four 15-minute webinars that just tell you the basics of what you need to know conceptually to get started investing in real estate.

Then we have a library of over 900 webinars on all kinds of real estate topics. That’s overwhelming, but that’s why we created the core curriculum just to get you a quick start. Then we add to those webinars every week. Every Thursday, we have a new educational webinar on a new market or a new aspect of investing. We keep the content fresh. If and when you decide you want to, you can talk to an experienced investment counselor like myself. I’m one of three. We can give you recommendations about what markets are best for you and walk you through the process. It’s all free.

People wonder, how do we stay in business? When we refer our members to the various markets in Cleveland or Dallas or Birmingham, if our member buys something, our local property team gives us a referral fee out of their commission. That’s how we keep the lights on. I encourage you all to become a free member of RealWealth, and get started with investing. I hope you found that video worthwhile. Thanks for watching.

Joe Torre, RealWealth Investment Counselor
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