3 Techniques to Evaluate an Out-of-State Real Estate Market
Can’t find cash flowing deals in your local market? Don’t throw in the towel just yet. Have you considered looking elsewhere, in out-of-state markets?
If you decide to seek investment opportunities outside of your local market, you’ll need to learn how to evaluate a new market, and how to do so quickly – preferably in one trip. You don’t have years, or even weeks, to get to know a new market organically. You need to quickly develop a basic understanding of the market. And once you’ve qualified a potential market, you need to know which areas are trending and which areas to avoid.
Omar Ruiz, who’s been an investor and asset/property manager for over 10 years, is an out-of-state investor. He lives in Orange County and invests in Texas and more recently, Indianapolis. In our recent conversation, he explained the three techniques he used in order to learn the Indianapolis market prior to buying his first investment.
#1 – Talk to the locals
Omar’s first approach is to speak with the locals. Who better to speak with to learn the story and attributes of a market or neighborhood than the people who actually live there. In fact, without speaking to the locals, there are certain facts and pieces of information that would be nearly impossible to uncover otherwise.
Omar said, “when I was down [in Indianapolis] for one of my first visits, I actually ate at a Bob Evans restaurant. I went and had breakfast there, and I was talking to the waitress girl. She was a student, and I was actually asking her – she was giving me some info about where she lives and what she was paying, and I told her ‘Yeah, I’m looking at some of these places over here, blah-blah-blah.’ And she would tell me ‘Oh, stay away from this area’ or ‘Stay away from that area…’ She was a student at the college, she kind of gave me some information about the college as well.”
Think about it. if someone asked you which areas are the best and which areas are the worst in the market in which you currently live, you’d probably have enough to say to fill an encyclopedia. I know I would.
When visiting and studying an out-of-state market, speak to the locals. Waiters/waitresses, baristas, gas station attendants, bartenders, the neighbors, current residents (if touring a property), etc. Essentially anyone who is willing to talk to you, and obtain as much insider information as you can.
#2 – Drive the market and take notes on a printed map
Another approach of Omar’s is to drive the entire market. However, rather than stare at his iPhone using Google Maps to get around, he picks up a printed map at a local gas station (and speaks to the attendant of course – see #1).
“What I like to do actually is instead of using the map on my phone, and Google Maps or something digital there, I’ll actually go up to a gas station and I’ll pick up a regular map of the city, a printed map,” Omar said. “Then what I do is go as much as I can throughout town and make notes on that map. Because when I’m driving around the area and I just use my phone, if I see an area that ‘Okay, this looks interesting here,’ when I come back and I try to recall that moment, it’s not that easy. But when I have that paper map there, and I actually make notations on there, I’ll say, ‘Okay, this area is bad’ and I’ll probably pinpoint and circle some properties that I looked at, put the name of it, and then I can see ‘Okay, this property was there. This is what I remember about it,’ and then certain areas that are just bad, I’ll try to kind of circle around that area. That’s been very helpful for me.”
WARNING: if you follow this method, make notes and markings when the vehicle is completely stopped! Fail to do so and understanding a new market will be the least of your worries…
Likely, there are cell phone apps that can accomplish the same thing, but the point is to log neighborhood information – the good, the bad, and the ugly – while it’s still top of mind, rather than waiting until you get back to the hotel or home.
If you want to get fancy, you can use highlighters and a color-coding system to track information on a street-by-street basis (i.e. red for ugly, yellow for bad, green for good) or however detailed you want to get. When Omar performs this exercise, he looks for things like stores with “EBT accepted here” signs, boarded up homes, the types of vehicles on the street, Starbucks-type businesses, markets and convenient stores, and retail. But again, you can be as detailed or as ambiguous as you please.
#3 – Leverage the Census
Omar’s third approach, which can be done prior to or after visiting a market in-person or back in the hotel room, is to use Census data to find income statistics. “I look at the income statistics for a certain area, and I use a very methodical way of doing it,” he said. “If the majority percentage of incomes are on the low end of the scale, then that right there tells you that it’s going to be a lower income area, high crime, management intensive. Not to say that that might be a bad [market]. There’s some people that target those kind of properties in those areas and they probably do very well, but you have to have the right team in place. You have to have the right type of manager, and the right team around that manager to make those types of deals work out.”
Look up income statistics on the Census and within a few minutes, you’ll know exactly the type of person who is living in that market. Add in the information gained from speaking with the locals and mapping out the territory and you’ll have enough knowledge to find the cash flowing friendly areas, start analyzing deals and submitting offers with a good degree of confidence.
If you have the desire to invest out-of-state, you need a plan for how to gain a basic understanding of a new market.
Here are three techniques to help speed up the learning curve:
- Speak to the locals
- Map out the territory (literally)
- Look up income statistics using the Census
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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.