Investing out of state in multifamily properties presents a unique opportunity for wealth building, especially for those who live in high-cost areas and are looking for better returns and diversification. While it may seem challenging to invest in markets you’re not physically present in, working with the right sponsor who understands the nuances of different markets is key to successful out-of-state investing.
The beauty of multifamily investments is that you’re not just investing in a property; you’re investing in a city’s growth potential. Here’s what you need to know when considering out-of-state multifamily investments.
1. Work With a Sponsor Who Provides Clear Market Analysis and Predictions
When investing out of state, it’s critical to work with a sponsor who is skilled in market analysis and understands how to assess a city’s potential. A sponsor will provide you with clear insights into a market and its reaction to economic trends, population growth, rental demand, and future developments—helping you identify promising cities that align with your investment goals.
The key is not just investing in a property but investing in a city with strong future growth. sponsors skilled in this area will look for:
- Population Growth: Identifying cities with an increasing population of at least 0.8% (and preferably 2%) year-over-year. Even better if the growth is driven by the 20-34 age group, which tends to drive rental demand.
- Economic Drivers: Understanding what industries dominate the area and how job growth is shaping the market. For example, Steady Work Capital uses the location quotient (LQ) as a metric to identify key industries that drive growth.
- Long-Term Projections: Looking at factors like policies, planned infrastructure improvements, or large-scale commercial developments, which can increase demand for rental housing over time.
2. Focus on the City’s Potential, Not Just the Property
When investing in multifamily properties, it’s important to look at the broader context—the potential of the entire city or region. While the property itself is crucial, the city’s economic health and growth trajectory will determine whether your investment appreciates in value and delivers solid returns.
Key factors to consider include:
- Economic Resilience: How stable is the city’s economy? Is it attracting new businesses, tech hubs, or corporations, which are creating jobs or even attracting people to move in to work for them?
- Rental Demand: What’s the demand for housing? Are rents likely to rise as the city grows and matures? Can new construction catch up with the growing demand?
A sponsor with experience in identifying these trends will provide guidance on selecting cities that show strong, long-term potential, ensuring you are investing in an area with a bright future.
3. Evaluate Multiple Areas Within a City
Every city is made up of different neighborhoods and areas, and each has its own potential. For example, some areas might be in the early stages of development, while others are already established with high rental demand.
A knowledgeable sponsor will evaluate several areas within a city and present you with options that make the most sense for your investment goals. Key things to consider when evaluating different areas include:
- Proximity to Job Hubs: Areas near major employers or downtown business districts often have higher demand for rental housing.
- Local Amenities: Proximity to schools, parks, shops, public transportation, and entertainment can drive higher tenant demand.
- Future Growth Potential: A neighborhood might not be fully developed yet, but strategic investments could yield high returns as it grows.
Working with a sponsor ensures you get access to well-researched, data-driven evaluations of various neighborhoods. They will look beyond the surface and help you identify the most promising areas to invest in.
4. Minimizing Risk Through In-Depth Research
Out-of-state investing can be riskier than local investments simply due to a lack of firsthand knowledge. However, with a skilled sponsor, this risk is minimized. Professionals can offer comprehensive research to help you make informed decisions, ensuring you’re not caught by surprises.
They’ll identify potential risks, such as:
- Overinflated Property Values: Some cities might experience temporary property booms that can distort the true value of an investment.
- Economic Instability: Cities experiencing high unemployment rates or economic downturns may pose risks.
- Gentrification: While gentrification can lead to property value appreciation, it may also result in regulatory challenges or tenant displacement.
By relying on a sponsor’s research and analysis, you can avoid common pitfalls and ensure your investment choices are sound, backed by solid data and future projections.
5. Scaling Your Portfolio with Multifamily Properties
One of the main benefits of investing in multifamily properties is the ability to scale your investment quickly. Unlike single-family homes, which require a lot more effort to acquire and manage, multifamily properties allow you to add multiple units in one go—helping you increase cash flow and grow your wealth faster.
By working with a sponsor, you can strategically grow your portfolio by identifying multifamily properties in promising markets that offer strong potential for both cash flow and appreciation. This scalability allows you to diversify your investment and take advantage of markets outside of your immediate area, without getting bogged down in the complexities of individual single-family properties.
Final Thoughts: Investing Out of State with the Right sponsor
Out-of-state multifamily investing provides a unique opportunity to diversify your portfolio, access high-potential markets, and build wealth without being limited by the high cost of properties in your local area. However, success in out-of-state investing requires a skilled sponsor who can provide deep market analysis, identify areas with strong growth potential, and minimize risks through thorough research.
By working with a sponsor who specializes in multifamily properties, you’re not just investing in a property—you’re investing in a city’s future. With the right guidance, you can confidently make investment decisions that help you achieve long-term financial success.
