How to invest in a city you don't live in?

JackTMule's picture
Rank: Chimp | 15

I'm, admittedly, still comparatively new to real estate, so I apologize if this is a dumb question. I'm interested in starting to invest in cities I don't live in (especially since the city I do live in is insanely expensive). I'm, at the same time, a bit unsure of where to start. Admittedly a lot of my real estate knowledge comes from having just grown up in Toronto living in a CRE-working family, so I'm completely lost in markets I don't know first hand.

Comments (23)

Jan 23, 2018

Not sure about Canada, but in the US there are lots of services like HomeUnion, Fundrise, and RealtyShares that link investors with developers/property managers. You normally need to be an accredited investor, unless you're dealing with a fund that's open to non-accredited people.

I am not affiliated with these groups, but I have invested with some of them.

    • 1
Jan 24, 2018

I keep getting emails about Fundrise but I haven't yet pulled the trigger. Have you had good experience with them, or the other services you mentioned? For example, do they provide dividends quarterly or monthly since it's rent streams, or do you have the option to reinvest earnings?

Jan 24, 2018

Fundrise distributes quarterly, and has a DRIP option.

Jan 24, 2018

How do you want to invest? If you're buying, say, a multifamily residential building, then I would warn you in the strongest possible terms to be careful about your money, because being 1,000 miles away from your asset makes it incredibly difficult, or incredibly expensive (or both) to manage effectively. If you're putting your money with a local owner/developer/operator, different story.

Sounds like you already understand that, so good luck

    • 2
Jan 24, 2018

I've picked up cheap single family units site-unseen in a state I don't live in a few years after the financial crisis. Still never been to that city myself. Using online resources, figuring out which markets make sense, get the comp data from local brokers, and get the local intel from them. Managing single family units remotely is a bit of a risk because things you would normally do yourself at no cost comes at a slightly higher cost sometimes. There's an above normal reliance on my broker to help out with things, but we've got a pretty good working relationship, and I've given him recurring business in leasing and acquisitions.

The most tedious part is figuring out which market to start with. It's shocking to me that there's no websites that marry rental data with sales data. The 2 key components we'd need to figure out which markets have attractive cap rates. I understand why that's the case because MLS (multiple listing service in the U.S.) wants to protect their data and limit only to registered, paying brokers. If you have friends who are brokers in the u.s., you can probably get them to hook you up with a free 'assistant' account so you can do your screen.

    • 4
Jan 26, 2018
DCDigger:

Not sure about Canada, but in the US there are lots of services like HomeUnion, Fundrise, and RealtyShares that link investors with developers/property managers. You normally need to be an accredited investor, unless you're dealing with a fund that's open to non-accredited people.

I am not affiliated with these groups, but I have invested with some of them.

Interesting, I haven't actually heard of any of these in Toronto though admittedly I haven't actually tried. I'll start looking, thank you!

ARX713:

I've picked up cheap single family units site-unseen in a state I don't live in a few years after the financial crisis. Still never been to that city myself. Using online resources, figuring out which markets make sense, get the comp data from local brokers, and get the local intel from them. Managing single family units remotely is a bit of a risk because things you would normally do yourself at no cost comes at a slightly higher cost sometimes. There's an above normal reliance on my broker to help out with things, but we've got a pretty good working relationship, and I've given him recurring business in leasing and acquisitions.

The most tedious part is figuring out which market to start with. It's shocking to me that there's no websites that marry rental data with sales data. The 2 key components we'd need to figure out which markets have attractive cap rates. I understand why that's the case because MLS (multiple listing service in the U.S.) wants to protect their data and limit only to registered, paying brokers. If you have friends who are brokers in the u.s., you can probably get them to hook you up with a free 'assistant' account so you can do your screen.

I'm definitely a bit hesitant to buy a family unit so far away, interesting to hear your story though. Did you just cold email the local brokers? Did you essentially end up paying the broker you worked with extra to do light property management before leasing?

I'll ask around for an assistant account, thank you!

Jan 26, 2018

Everyone's got their own arrangements. My property management company/leasing broker refused to help with coordinating some of the repairs that needed to get done without being paid a 10% fee of the budget. For what? To put a lockbox on the door and tell a handyman to come at a certain time? Gave the leasing business to my other broker for scheduling some of those vendors. All that was needed was to have somone point out what needs to be fixed and provide access to the property.

If you have people who seem to know what they're doing, then all you can do is put your trust in them. No different than working in a corporate office and relying on the words of our field ops for the inputs into our model.

    • 1
Jan 26, 2018

Full service property management can cost as much as 8% of gross rent for small properties. They will likely charge fees to turn units over as well. The reason most people do really well with a small portfolio of multis is because they get great leverage and they don't pay a management fee.

Best Response
Jan 26, 2018

Because residential real estate is about as fragmented as grains of sand spread across the beach, you're likely to:

1) Conduct a painstaking search for an investor-focused realtor. many of whom absolutely suck
2) Conduct a painstaking search for a property. If it's on MLS, you're most likely not going to make any money.
3) If you find a value-add deal where you may actually make a good return,you will conduct a painstaking search for multiple contractors or a GC. If you think the rehab will cost $30k, it's likely going to cost more like $40-50k... thus throwing off your numbers (for ex.)
4) Of you do all of the above successfully, then you will conduct a painstaking search for property managers, which 95% of which absolutely suck and will suck 10-12% off your income. After tax, vacancy, repairs, utilities, reserves.. do you still make money?

All in all, if after that, and you're only making a few $100 per month, then why bother wasting all those hours of work?

You're better off getting familiar with the FHA and FHA 203(k) program. If you can afford to put down 20-25% on cheaper real estate, plus closing costs, you'll be able to afford to put down 3.5% on something in your backyard.

Learn your backyard, buy a 2-4 unit, and live in the property where you can control it.

    • 7
Jan 26, 2018

Really awesome and thorough response. Much appreciated. I know you suggested living in the property I buy, but what are your thoughts on investing in say, Philadelphia, while living in New York? Still not enough value to justify it?

    • 1
Jan 26, 2018

Real estate is one of those markets where a local advantage really does help. I won't say where I'm investing but my thesis is based on a lot of local knowledge - not something a P/E screen or market trends could discover.

You can probably figure out which city i'm close to in my post history tho

    • 2
Jan 26, 2018
couchy:

Real estate is one of those markets where a local advantage really does help. I won't say where I'm investing but my thesis is based on a lot of local knowledge - not something a P/E screen or market trends could discover.

You can probably figure out which city i'm close to in my post history tho

Exactly, that's what I was eluding to in the Motown meme. I was thinking that some of the cities on Forbes list of "The Cities That Are Stealing Finance Jobs From Wall Street" would be a good investment in addition to one on the list of cheapest P/R ratio which I know quite intimately.

"It's very easy to have too many goals and be overwhelmed by them... The trick is to find the one thing you can focus on that represents every other single thing you want in life." -- @"Edmundo Braverman"

Jan 26, 2018

As a professional investor (i.e. developing projects, buying and selling buildings not units, etc.) I'm going to say hong kong. (1) Highest capital values in the world, (2) serious volatility, (3) opaque market with high barriers to entry and considerable amounts of off-market deal flow to be had... those that can do it right are literally printing money, and the suckers get CRUSHED.

Jan 26, 2018
Alexander Hamilton:

According to Forbes (See: "The U.S. Cities Where Buying Beats Renting A Home") Ohio and Michigan have the most cities in the top ten lowest P/R ratio. I am guessing that MI has less upside potential than the others.

It's an interesting angle. As you're probably well-aware, there are so many different ways to make money in residential that there isn't a right answer for "best market." I'm sure there's a reason the ratio is so low in MI and OH; my first guess is because they are declining areas. If you're a bargain hunter and you don't plan on flipping or otherwise capturing appreciation, maybe they are great. There are plenty of players who have made small fortunes in declining areas.

If you're building, as IP mentions, you'd want to be in completely different areas (e.g. HK).

But as couchy mentions, I think local knowledge trumps all. I bet there are neighborhoods around Grosse Pointe where new houses are going up, even though the state as a whole is not exactly booming.

    • 1
Jan 26, 2018

Michigan, georgia (atlanta only), ohio

Jan 26, 2018

I could tell you that a farming community in eastern Iowa has far better returns than any major metro and you would laugh. The point is you can find high return in RE anywhere. You have to know your target sector. You have to know the economic projections and you have to know the neighborhoods. Real estate is almost impossible to look at from a macro level. An entire city could be a gold mine yet the one neighborhood you buy into could be a money pit. Information information information.

Follow the shit your fellow monkeys say @shitWSOsays

Life is hard, it's even harder when you're stupid - John Wayne

Jan 26, 2018

Exactly.

Wise Men Listen & Laugh While Fools Talk

Jan 26, 2018

Local is the only way to invest in real estate (for most people). Seriously, you can make money in any market if you KNOW your market.

Jan 26, 2018
Comment