In the United States there are 30,940 zip codes. But when it comes to rental property investing, only 1,960 of those zip codes are actually relevant to you.
My name is Lee Ripma, and in four years I went from being a W2 field biologist to a full-time real estate investor to a PropTech founder. I currently hold 59 rental doors, and I am in the process of ground-up development on 20 doors in the high-dollar market of Los Angeles.
If you want to hear my full story you can listen on Bigger Pockets.
Since I started 4 years ago, I’ve transacted $60MM in RE, most of it outside my home market. I didn’t do this because I’m so unique and great, I did this with math. If you have the right tools and the right math, you can do exactly what I did.
Real estate investing is not guesswork. That’s where this guide comes in.
1- MINDSET: The 2 mindset rules you must live by to succeed when investing in out-of-state rentals.
2- D.I.S.C.E.R.N: The method I use every single time a new property comes across my desk so that I have a quick snapshot of whether it’s a red light, yellow light, or green light investment opportunity. (With this method, you can make quick decisions and get good deals under contract as soon as they hit the market.)
3- PROPTECH TOOL: The primary PropTech tool I developed, VestMap, and use every day to ensure I get quick, accurate, objective data, so that I can move quickly and confidently when an opportunity presents itself. (With this tool, you will be far more agile in pulling the trigger without seeing a property).
1- The day I closed on a $5M 24 unit property in LA, I became very aware of the fact that investing in out-of-state real estate rentals carries no more risk than investing in your own neighborhood if you have the correct data and team. So often I hear real estate investors telling me stories of how their own mindset gets in the way of opportunities. And I get it, investing requires responsible scrutiny. However, when timidity gets in the way of action you have a real problem. You can always find a reason NOT to do something if that is your conscious or unconscious objective. In the slim window of when a property goes up for sale and when it’s purchased, we have to have our minds in tip-top shape when it comes to being able to move on a good deal. The D.I.S.C.E.R.N. Method is how we do it! (more on that in a minute.)
2- Find the locations you want to invest in first. It might seem obvious, but so many real estate investors make this rookie mistake. They have an agent in different states that just scour the MLS and send them over opportunities at random. Now, this can work, however, I’d never advise you to leave things to chance. If you take only one piece of advice from this guide, take this… Find the cities, counties, zips and most importantly BLOCKS that you want to invest in and then build your on-the-ground team around these data-driven decisions. After you do this, be patient!
Demographic Group
Income
Schools
Crime
Expansion (Population & Income Growth)
Rent
Neighborhood (indicator stores along with general research on business in target area)
Before we lay out the DISCERN Method, please understand the following. There is no good or bad property. There is your strategy and then there is how a location and a property stack up in relation to that strategy. So when you’re looking at the data, you should think to yourself, “Is this in alignment with my strategy?” Not, “Is this a good or bad investment opportunity?” Nothing is inherently good or bad, it’s all relative.
Do you remember those calls and letters you received in 2010 and 2020 from the US census?
The reason you received them is that every 10 years the United States Government spends a lot of time and money counting and aggregating the socio-economic indicators of everyone who lives in the United States.
Generally speaking, people tend to live with their peer group – so those they enjoy the same things with, make a similar level of income, and have the same struggles.
Demographers at ESRI™ use census data and their own proprietary methodology to break the US into 68 discrete demographic groups.
Here is an example of a few ESRI™ demographic groups: Laptops & Lattes, Home Improvement, Parks & Rec & Soccer Moms.
If you put your own address into the Tapestry™ system, my bet is that you’ll be blown away by how accurate the demographic group they place you in.
Mine is spot on!
Simplified… Tapestry™ data gives you insight into the person who lives in this area.
So then, the golden question is… Does this tenant base align with your strategy in real estate?
Is this a good place for rentals? A good place for flips? A good place for Section 8 rentals? Or, should I take a 180 degree turn and walk away.
Detailed insight into the people who live in an area is key to your understanding and whether or not it is in alignment with your strategy or is divergent from it.
Income = 90% of the magic!
When considering the DISCERN Method, income is highly correlated with every other ingredient.
For example, it’s easy to see that as income rises, so do school ratings!
It also isn’t surprising to understand that crime is negatively correlated with rising income.
The key income question you must ask yourself is this – “Can the people who live in this area afford the target rents?”
If they can’t, walk away. If they can, keep going.
I never own a rental unit where the income is less than $750/mo – I prefer $850/ mo+.
And remember, CAPEX and expenses will eat you alive if your income is too low.
Simply speaking, if my tenants pay no more than 1⁄3 of their income in rent, then I need the median household income where I invest to be at least $27,272/year = (750/.33)*12 months.
Rising median income is also highly correlated with rising property values. We will dive deeper into this in the Expansion section below.
The 80/20 rule on kids is that 80% of people have them! The other 20% have dogs.
If you have kids then you care where they go to school – and because of this, homeowners and renters shop for school districts.
In Kansas City, where I do a lot of my out-of-state investing, the Kansas City Missouri schools have very low ratings and even lost their accreditation for a while.
Therefore, people chose to live in areas with schools that have a better reputation if they are able to.
Schools serve as a proxy for both buyer and renter demand.
Keep in mind that when your demographic is younger couples who’ve yet to have kids, or, older folks where their kids are all grown up – schools don’t matter as much.
What is essential is considering your target tenants and whether or not they will be having kids soon or not. This is very important as it relates to fair housing laws. Cover your flank!
As a general rule, larger units in decent school districts naturally attract families with kids, while smaller units tend to attract single or younger couples without kids or older folks.
Smaller units tend to have more turnover.
And, you should always understand your target tenant and set up your rental while keeping in mind fair housing laws.
I personally choose to invest in a lot of 2 bedroom/1 bath units.
They are neat and have a nice clean finish.
They also tend to attract younger folks without kids, roommates, or singles.
Occasionally I will get a parent with an adult child.
Again, none of this is good or bad; it’s just the niche I’m in due to the unit size and the areas I invest in.
Crime is scary.
And when it comes to crime, you should be thinking about it in two ways – violent crime and property crime.
Violent crime can affect your tenant’s personal lives and property crime can affect your property and turnovers. Both matter and both should be taken very seriously.
So the important question you must ask yourself is how likely are you to be a victim of crime in a given neighborhood? Or in the case of your out-of-state rentals, how likely are my tenants or my rentals to be a victim of a crime.
Just like schools, people are by and large going to choose areas with lower crime, if they can afford it.
So crime is a measure of how safe a neighborhood is and is correlated with demand since people want to live in safe neighborhoods.
High-crime areas can definitely work for rentals, you just have to be aware of your risk tolerance and ensure that you have good property insurance along with helping your tenants find plans that protect them too.
In higher crime areas I put in security systems and cages around my AC condensers.
In lower crime areas I don’t do this.
So crime isn’t necessarily something to avoid, however, going in eyes wide open is crucial for knowing what it means for your property and tenant base.
What sets market rents and local home prices? Simple, supply and demand!
Ready for your first quiz…
Question: As the population grows what happens to median income?
Answer: It grows too!
In L.A. I can charge $2100/mo for a 1 bedroom apartment that in Kansas City would rent for $800/mo.
What is the difference?
The location has different supply and demand for rental units.
LA has very high demand and very low supply, hence high prices.
Kansas City has demand but a lot more supply.
Go figure – lower supply drives prices higher.
One of the greatest factors in rising demand, which by in large increases prices for both property and rents is population growth.
So here’s the million-dollar question: Where should I invest?
Answer: Understand the forecasted population growth and make sure it’s on the up and up.
Stable population or growing population works for my strategy.
Declining population does not.
Declining population may work for your strategy.
Locations with decreasing population growth often have some of the highest cash flow such as Cleveland or Flint, so maybe that is what you’re looking for.
Knowing and understanding forecasted population growth and how it fits into your real estate strategy is key to becoming successful in real estate.
When assessing a rental property that could use a bit of renovation or touch up, it’s important to consider the following…
Know the target rent for a basic finish versus a high-end finish.
This will determine how much cash flow you’ll get from a property and for commercial property it will determine the property value.
Maybe you want to put in an incredible finish and charge $1500/mo where the market for that unit is $750/mo.
Think again… You won’t be able to get $1500/mo.
You’ll always be somewhat constrained by the market rent, so you need to know and understand it.
This will prevent you from over-improving or spending where there is no return.
An easy example is granite countertops.
You need a countertop in your kitchen – laminate costs $200 while granite costs $1000.
If you won’t get extra rent for the granite countertop then there is no ROI, put in the laminate.
What do Starbucks, Walmart and Target have in common?
Large retailers spend millions and millions of dollars annually to determine where to place their stores.
Here’s the good news, you can piggyback on their location strategy by looking at the stores in an area.
What grocery stores are in this area?
How many coffee shops are there?
Where is the nearest Target™, Whole Foods™, Starbucks™, Family Dollar™? And what do the types of stores indicate about the demographic?
Quickly understand the demographics of an area by looking at the stores around
a property and make your decision from there.
Like any novice does, when I first began investing in real estate I began scouring the web for tools that could help give me as much insight into the data as possible.
Now remember, as a biologist data is EVERYTHING to me.
When I was working on my M.S. degree we certainly didn’t present handwaiving to our committee to get a degree, we collected actual data and drew conclusions from it in a statistically meaningful way.
I truly believe that my former career and the arduous and patient process of data collection and analysis is what has allowed me to succeed faster than most aspiring investors.
To me it’s simple, remove the emotion, which includes a real estate agent’s subjective bias, and look at the opportunity through data.
Okay let’s get into the tools.
Before I went out and built my own tool I tried to make what was out there work.
Rentometer is a must but it lacks some key components about the actual area, median rent only gets you so far.
There are a few other tools out there, but none that really worked.
After two years of trying to scrape together data to make objective decisions about out-of-state properties, I realized that nothing on the market was going to cut it.
So I dug deep into several different databases to find the data that would allow me to be agile and confident at the same time.
Soon enough, it was working and my investment portfolio was taking off!
The part that was unexpected to me is that as I began sharing my successes with my investor community, they began asking me about properties they were assessing.
Within months I became so bogged down in consulting, that I was unable to invest.
That is when I decided to build VestMap!
VestMap is a PropTech tool that allows you to…
Whether you are new to investing or have been investing for decades, this technology will help you take quick snapshots of blocks and tracts in out-of-state areas that you intend to build your next portfolio in.
The beauty of the tool is that it allows you to do the D.I.S.C.E.R.N Method in just a few clicks so that you can get a green light, yellow light or red light on the area you’re assessing.
Here is an example of what a report looks like so that you can see the power of the insights it provides.
As you can see, these reports allow you to quickly look at forecasted population growth so you know how many folks will be moving in and creating demand for rentals and houses.
The interactive maps let you see what is happening not just at your prospective location but around your location.
The tool also quickly tells you the median income for an area.
For me the green-light red-light is $28k or greater in household income per year due to my target rents.
So I know with one click if this area will work for me.
You’ll get so good at looking at these reports that you can glance at just the summary table and know if this area will work for you!
The tool quickly tells you the demographic group, so you understand the people who live in this area.
You’ll see the median income, so you’ll know if people in an area can afford your rentals.
You’ll see the school district name and the ratings of nearby schools, a measure of demand.
You’ll see the crime scores so you know if you need to cage those AC units.
You’ll see expansion which tells you if the population is stable, growing, or decreasing, due to laws of supply and demand you’ll want to avoid those areas with decreasing population growth.
You’ll quickly see the rents for the size of the unit you’re looking at to get a picture of income in relation to list price.
You’ll then get to piggyback on multi-million dollar national companies by seeing what the neighborhood stores are in the area.
Run your first VestMap for free now.
As a scientist at heart, I do hope you will add data to your process of buying and selling out-of-state rental properties and building the wealth you desire.
It’s working for me and my mission is to help others use my data-driven approach to investing!
One-click Reports For Real Estate Professionals.
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