Last Updated 6-20-2018A common obstacle that real estate investors run into at some point in their careers is the need to start investing in an out-of-state market. Maybe you’re an experienced investor who needs to diversify to other markets. Or maybe you can’t find any local deals that fit your investment criteria.
Andrew Cushman, a full-time multifamily investor who has purchased 1,566 units in the last 5 years, fell into the latter category. He lived in Southern California and needed to go outside his state to find a more affordable market. In our recent conversation, Andrew explained the two ways he was able to effectively familiarize himself with an out-of-state market before buying his first multifamily investment property.
Technique #1 – Contact Active Real Estate Brokers
Andrew’s first idea for how to familiarize himself with an out-of-state market (in his case, the market was in Georgia) was to contact the most active real estate brokers in the market. “We started looking [for properties] in 2010,” Andrew said. “We went to Loopnet and just started looking and saying, ‘okay, what brokers have the most listings in these markets?’ Then I just started calling those brokers and figured if they have the most listings on Loopnet, they are probably some of the more active brokers and those would be the right guys to talk to.”
During these conversations, Andrew would try to gain as much knowledge about the market as possible. One specific thing he would always ask the brokers was if they had any research reports they could share. “Companies like Axiometrics, MPX Research, and Berkadia, they do all these great research reports,” Andrew explained. “A lot of them are expensive. But what I found is when I’m talking to brokers and looking at deals, I would say, ‘hey could you send me any research reports you have on this city (or this neighborhood or whatever),’ and they’re more than happy to send it to you. So I would just get reams of useful information on the market.”
Technique #2 – Interview Local Property Management Companies
Another effective technique that Andrew employees is researching and creating an extensive list of property management companies that covered the market he was interested in. His main research method was interviewing. Andrew says, “I would call and interview them. [I do that for two reasons.] Number one, to find property management companies, but then also to just learn about the market.”
After conducting countless interviews, Andrew has created a document that lists over 20 questions he most frequently asks when interviewing a property management company (a link to this list is included at the end of this post). Here are a few examples of questions he asks and his reasoning for asking:
- “’Hey, what kind of properties do you guys specialize in?’ If they primarily do A [class properties], then I know they’re probably not the best fit for us.” (Andrew specializes in B class properties)
- “’Are you strictly third party or do you own and do third party management?’ If they own a property a quarter mile down the street from the one I’m hiring them to manage, it’s just human nature that they are probably going to favor the one they own.”
- “What kind of due diligence services do you provide?”
- “How do you study markets?”
- “’What is their structure as far as management?’ You’ve got the onsite people, but who do they report to? Usually, that’s a regional, and the question I like to ask is ‘how many properties does that regional oversee?’ If it’s 6 to 8, that regional is probably going to be able to give you a fair amount of attention. If it’s 15, something like that, then that regional is going to be running around like crazy and it’s probably going to affect just how much attention you’re property is going to get.”
- “How do you determine what is a good area and not a good area?”
Based on the answers provided, Andrew gains a better understanding of the market. But, he also knows if the property management company would make a good partner, based on whether they provide a good or bad answer. Only if the interview is successful do property management companies get added to his list.
A good answer to “how do you determine what is a good area and not a good area,” for example, would be, “well we look at crime rate, we look at population growth, we look at job growth, we look at median income, and we look at what companies are going into the area or leaving the area. And we send our people to investigate specifically.”
Andrew said a bad answer to the same question “would just be probably more vague. ‘Oh yeah that area is decent.’ They can’t give any reasons as to why it’s a good area or bad area.” Andrew continues, saying another example of a bad answer is, “if I get the sense that they’re just leading me along and saying, ‘oh yes it’s a great area’ so that I’ll buy the deal and give them the business.”
One of the most difficult aspects of investing outside of one’s backyard is familiarizing oneself with the new, out-of-state market’s conditions. Andrew overcame this obstacle by creating boots on the ground relationships with active real estate professions.
First, Andrew reached out to local real estate brokers. Through brokers, he was able to gain an overall understanding of the market via detailed research reports.
Also, Andrew reached out to local property management companies. He called in order to obtain market knowledge, but to interview them to see if they would be good partners as well.
Click here to download a copy of the questions Andrew asks prospective property management companies when conducting an interview.
What about you? Comment below: How do you familiarize yourself with an out-of-state real estate market?
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Disclaimer: The views and opinions expressed in this blog post are provided for informational purposes only, and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action.