This is a long article with over 3,000 Words. Even for me, that's a lot. So my suggestion - if you plan on reading it all in one sitting, you might want set aside a good 20-30 minutes to go over the information. Also, as there are many links to resources that can help you out, I'd suggest that you also bookmark this as a reference page. With that said, I wish you all the best in investing out-of-state or out-of-country. While you may find that you don't need to go through this whole process (especially after you buy a few properties), what I found is that this system has been a great educational tool for me. Feel free to leave a comment if you have any questions or suggestions or you find anything to be in error. Dan Ryu
Are you looking to invest from out-of-country in US Real Estate? If so, I'm sure you have lots of questions! I know I did when I first got started.
One of the first questions anyone asks when they are considering international real estate investing is: Where should I invest?
This was my thought process.
Where should I invest when I can invest anywhere? As someone investing in US real estate from Korea, realistically I wasn't going to visit my properties very often - it's too costly to do that. So I had, in a sense, the entire country to consider!
Of course, it was natural for me to consider areas that I was familiar with. Since I grew up in California, it made sense to start with California - but it didn't make "cents" (sorry... that was a bad joke). Basically, California real estate was out of my price range for my first investment. I wanted to invest in an area that fulfilled the following criteria:
- High monthly rent to purchase price ratio (the closer to 2% the better)
- Market monthly rent close to $1,000
- Out of pocket money under $25,000 (that means all in cost - I was investing with a partner so that meant we'd have $50,000 total to purchase with.)
By the way, it's sometimes "hard" to come up with these types of considerations on your own. I'll let you in on a little secret: I "borrowed" someone else's. Why re-invent the wheel? If someone else has a system that's working, why not just copy what's working for them (at least for your first investment)? So, I went to my favorite website for learning about domestic real estate investing in the United States - BiggerPockets - and I started reading different forum posts. I focused on the Success forums - Here's how you get to those forums:
I went to a forum that seemed relevant to what I wanted to do. It's constantly being updated, so just look and see what "success story" seems closest to your own to start with. Here's an example if you're interested in buying a Single Family Home (Residence) aka SFR as a rental property:
Take a look at the people who are posting in the forum and look for someone who seems to "know" what he or she is talking about. Click on their profile:
On some people's profiles, you'll see a goal.
Some will be very general and might not help. But others might have very specific goals. That's how I figured out my goals - by copying someone else's who was interested in similarly priced properties!
So don't let not knowing your goals stop you from starting. Just start with someone else's.
Choosing a city to invest in
After figuring out how much money I wanted to spend and what type of investment I was looking for, I now had to set about finding the right market to buy in.
But how can you possibly narrow down an entire country to a few states and cities to examine in more detail?
What characteristics do you want in a city or area to invest? Let's start with the basics:
- Increasing population - It's pretty obvious, but if the population is decreasing and people are leaving, they're leaving behind housing and increasing supply. You don't want that. Instead, you want to invest in a place where the population is growing.
- Increasing employment - People will be attracted by jobs. Figure out where the new jobs are. Figure out where the new companies are setting up shop.
- Employment diversity - If there's only one major source of jobs in town, what happens if that company decides to leave? Instead, you ideally want an area that has a diversity of employers.
- Desirability factors - There are certain characteristics of a city that will always make it a desirable place to live. That might include weather, transportation systems, natural beauty, etc.
So do you have to spend hours looking at each city and Googling these different factors? You could, and I certainly did some of that. But you can probably get away with narrowing down your search by doing some general searches such as "the best cities to live in" or "the most affordable cities to live in."
Now that you have a sense of the general macro trends, you can start to drill down into each area.
Real estate factors
After you have identified a few markets, you can look at a few real estate related metrics. Here are some different metrics that I looked at:
- Median income vs median house prices. What has the historic median income of a particular area been? What has the historic median home price been? What are current median income levels? What are current home prices like? If, traditionally, median home prices have been three times the median income, and now houses are currently selling for five times the median income, it might indicate that a "bubble" has formed in that area and you'll want to proceed very carefully.
- Path of progress. In what direction has development traveled? Some interesting photos to look at are nighttime shots of the USA. Look at where the lights are clustered and in what direction they seem to be moving. See if you can get historic shots of development in the community. Is the area you're wanting to invest in the "path of progress?"
- The 2% Rule - One very simple metric to look at is whether the monthly market rent in an area can command 2% of your purchase price. So for example, if you buy a house for $50,000 and the expected monthly rent is $1,000 / month, you get 2%. You get this by dividing the rent by the purchase price and multiplying by 100. The closer you can get to 2% (or in some cases above), the more likely you are to cashflow. Please keep in mind that this is a very simple metric to do quick calculations. Neighborhoods that tend to get 2% rent to purchase price ratio also tend to be riskier neighborhoods to invest in - more crime, higher vacancy, and more difficult tenants.
- Rents close to $1,000 or higher. One expense that you might have heard mentioned is capital expenditure or reserves. Over time, the appliances in your house and the roof will have to be replaced. Based on some conservative estimates, capital expenditure can run up to $250 per month. Given this fact, your investment has to produce enough income to safely save for these events that will happen down the road. Here's one article by Ben Leybovich that takes a closer look at capital expenditures. Be sure to check out the comments to see the general discussion on these numbers. And one more article on capital expenditures by Brett Lee.
What did I do?
So based on all of the above, you can see that narrowing down a market can take a long time. I wanted to give you a bigger picture of factors to consider before introducing how I was able to find a city to invest in.
A Tale of 2000 Cities
Although I considered most of the above factors, I narrowed down my choices by looking at one main thing - metros that had not yet recovered from the 2008 Crash. I reasoned that eventually the market would recover and therefore prices of houses in these metros still had room to move up. I came across this report which listed the top 50 metros in the USA that had still not recovered from the housing crash - A Tale of 2000 Cities. I looked at the Top 10, and I did more due diligence on each of the cities listed. I liked Jacksonville, Florida, because of the increasing employment and population trends. It also had desirability (weather, nearby river) and a good median income to median home price ratio.
I had never visited Jacksonville (or Florida, for that matter), so it was time to 'get to know the neighborhood.'
How to find a subdivision
Real estate is very local. So how do you go from a large metro to a specific neighborhood to look for investments? Here's what I did:
- Zillow. I first used Zillow.com and typed in the zip code. Based on my original financial criteria, I set filters that would allow me to look for areas that had homes for less than $150,000. By doing this, I could get a sense of where the "nicer" houses were and where the "rougher" neighborhoods might be.
- Google the subdivision. Now I needed to find out the name of the different subdivisions within Jacksonville. I googled "Jacksonville zip code map" and "Jacksonville subdivision map." (If you're not able to find the subdivision, then try using Zillow. Type in the zip code and choose a house in the area. Zillow will often list the name of the subdivision it's located in.)
- Find out the desirability, price, and the path of progress of the subdivision. Before making phone calls, I returned to Google once again. This time I started googling different subdivisions to find out more about the areas. One of them - Murray Hill - seemed to meet the criteria I was looking for.
- Price. it had homes that were under $100,000 and that seemed to rent for near $1,000.
- Desirability. it was located 10 minutes from downtown. The average commute time in the US is about 20 minutes. Murray Hill also seemed to have a bit of an artistic feel to it based on its historic architecture and culture that included one of the first gay clubs in the US. It was also a highly walkable city.
- Path of progress. Murray Hill is located next to Riverside which had already undergone lots of development. So, based on those three factors, I now wanted to get confirmation on what I was hearing. But how could I get unbiased opinions?
- Network. I turned again to BiggerPockets to network. I typed in "Murray Hill." I looked for other investors in the area and I found a few. Time to introduce myself and ask a few questions. Here are some of the messages I sent and some of the responses I received:
As you can see, there are local investors who are very willing to help out other investors. I then used the information I was gaining to contact local real estate agents and property managers - to see if I could get more confirmation on what I was hearing from investors.
In addition to the steps listed above, I also did the following:
- Compare rents. Obviously, you need to know how much rent you can expect to earn from your property, so it's important to check out the market demand for rent. Below I list many tools you can do use to find out what local rent prices are like. Personally, I use Craigslist and Zillow more than any other tool.
- Check the quality of the schools. I clicked on a few homes in Murray Hill on Zillow and looked at what their assigned schools are. I then checked the schools on GreatSchools.org. I looked at the details of the population (school scores / ranking, lunch programs, etc). This is to get a better sense of the community. Who lives here? What can I learn about the community? The schools scores weren't great, but that's also somewhat expected in neighborhoods where prices are low.
- Check the crime rate. I held my breath as I typed in Murray Hill's zip code into spotcrime.com. If I saw too many violent crimes, I knew it would be a pass. What I saw is that there were pockets of crime on certain blocks. I also googled "Murray Hill crimes" and looked at local online Jacksonville newspapers to find out more about crime and the community. Interestingly, I was able to identify potentially riskier neighborhoods by just looking at the crime maps.
- Call property managers. Now I knew the names of places to focus on. This is key because I could now call up property managers and real estate agents and ask about specific neighborhoods. You will sound much more professional if you call someone and say something like, "I'm looking to invest in SFR rentals in Riverside that cost less than $100,000 and rent for more than $1,000 / monthly. I particularly like houses near X and Y street. Do you have anything for me?" rather than, "I'm an out of state investor. Where should I look to buy houses?"
I also wanted to confirm what I was hearing based on my research. So I decided to next reach out to property managers. I wasn't sure what to expect. A stranger from out of the country calling out of the blue to talk about houses to invest in? I thought surely people wouldn't give me the time of day.
Instead, I found property managers to be very helpful. They confirmed some of the things I was hearing from the local investors, so I was gaining confidence about investing in this area.
Boots on the ground
Congratulations! You've figured out where to invest. It fits the criteria you're looking for. So now what? How do you go about actually buying a property? And how do you go about actually managing your property?
After talking to my real estate partner who also lives in Korea, we came to same conclusion - ideally we should partner with someone on the ground in Jacksonville.
That's a whole other process we needed to go through - finding the right people to partner with. So, in my next post, I'll focus exclusively on how we found the right partners to invest with.
Also, I realize that I'm assuming you know how to figure out the financials behind a rental property, but I'll also review that in an upcoming post as well.
And now, here is a list of internet tools international real estate investors can use to do online due diligence and find the right area to invest in:
List of internet resources
- BiggerPockets - If you’re going to invest from abroad, chances are you’ll need some type of connections with people in the area you want to invest, either real estate agents, property managers, partners, etc. A great way to build those networks, and maybe your first step after you decide on what type of investing you want to do, is networking through BiggerPockets.
- Meetup - Check for local networking events to join. If there are none, then I suggest that you make one. Starting and organizing a meetup helps you gain access to a lot of experienced investors. Here's an post I wrote on BiggerPockets about how organizing a meetup has helped me learn, gain access to investors and form partnerships.
Looking at properties and finding property prices
- Zillow - I usually start with Zillow to learn about the prices of nearby houses. Zillow can also help you identify the names of the subdivisions.
When I first started out, my goal was to know the price of every house on each block of Murray Hill using Zillow. I started to create a spreadsheet of this info but realized I probably didn't need to know all of that info to invest.
What I did was put up a huge wall map of the Murray Hill neighborhood. I did this old school and basically used Google Maps to capture a square area of a map and print it out. Then I taped all the squares together. In the end, my map was about 6 feet high by 4 feet wide and took up most of my study room. I wish I had taken a picture of it, but my wife took it down since I wasn't using it anymore and it kept coming down.
I labeled the streets / blocks with stickers and then went house by house to find out what I could about a neighborhood. I got through a few blocks and then realized that networking with people on the ground might be more efficient. But I did get a much better sense of the area.
Sometimes doing things like this are inefficient, but it gives you a much more detailed picture of things and gives you more confidence to move forward!
- CAFR (Comprehensive Annual Financial Report) - This report is compiled by an auditor of any area. It is paid for by the city. It will give lots of detailed information about an area. The link will take you to an article by Brandon Hall of BiggerPockets on how to use a CAFR.
Here's an example of a CAFR for Jacksonville, Florida, though I personally didn't use a CAFR before my investment because I didn't know about them at the time.
- An article on BiggerPockets by Chris Clothier on buying out of state. (Chris is a managing partner for Memphis Invest, one of the largest homebuyers in the the US.)
- Realty Trac - Large Scale Demographic Trends
- Also you can google questions like: “jacksonville florida home prices to median income” and “jacksonville florida population growth trends.”
- Allison Leung of BiggerPockets, also discusses many Market Trends.
- One trick I've tried recently with areas that I'm researching is viewing the City Council Meeting Minutes. Some of the smaller towns (I'm looking to invest in Mobile Home Parks) actually write out the comments of the public and list police arrest records. It can definitely give you a better sense of the area's 'culture' and 'issues.'
A key to finding the right area to invest will be knowing what you can expect in terms of rent prices. Here are a list of sites you can use:
- Craigslist - To figure out the right Craig's List to use, I just type in a Google search such as "Craig's List Jacksonville Florida" and then I click on the link.
- http://www.zillow.com/ (If you look at "Price History", you can sometimes see the rental history. One thing I like about this - you can see when a property was listed and when it was 'delisted', giving you an idea of how long it was vacant. You can also see if the prices were dropped or increased, giving you a sense of demand.)
- And here's a pretty good article on BiggerPockets about researching rents - The Ultimate Guide to Fair Market Rents.
- Google Custom Maps - Use the "My Maps" function of Google Maps (you need a Google account). Choose the option to "create a new map" and name it for the area that you are researching (ie. Jacksonville, Florida). Then, enter the address of houses you're are looking at and add notes about them. You can also add in nearby amenities (i.e., the nearest Walmart, McDonald's, Big Box Retail, etc.). You will slowly create a map that helps you understand the area better.
Also be sure to use Google's satellite and street views to tour the neighborhood.
- Both of these allow you to see an aerial view of an area. The second link - TerraServer - even allows you to see how the area has developed over time with historic photos!
Property taxes and ownership records
One thing I wanted to know before I bought my first SFR was more about the owner. I wanted to construct a history of real estate transactions and understand why the owner had sold or was looking to sell on each occasion. So, I started by looking up who the owner was through the County Assessor's website.
I learned who bought the property, and then I started to research other properties the owner had purchased through a records search. I compiled all of this into my own history. I used a combination of Google, Facebook, and public records to find out what I could. I found out the owner had owned multiple properties and was trying to sell them all at once. I also found out the owner's current address to get a sense of how far away he was from his properties.
From that information, I found out that one of the owners had lost his/her medical license. So that gave me some more insight into the circumstances surrounding the sale of his properties.
I don't think this is all necessary. But my main focus was to make sure there was nothing "shady" going on - make sure the owner wasn't someone who didn't have the right to sell the house. Also, I thought that more information might benefit my bargaining position as well as help me figure out what the owner's real needs were.
So that's it for now! I'll be adding more articles on partners and financing coming soon. Also, I'll add another article on Systems & Tools to help make this process as efficient as possible.
What do you think? Sound doable? What tips do you have for others? Add a comment below!