How to Invest in Out-of-State Rental Properties
Rising prices are forcing many real estate investors to consider investing in out-of-state rental properties. I wrote an article last week about investing in long-distance, turn-key rental properties here, which are repaired, rented and managed at the time of sale. This article is going to describe a strategy that involves investing in long-distance rental properties that are not turn-keys. The properties may need work, may need repairs, may need renters or may need everything and because of that you may be able to get a better deal on them!
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What is the advantage to buying an out-of-state rental property that is not a turn-key?
One of the most important factors when investing in real estate is buying properties below market value. If you can buy a home 20% below market value, you have built-in equity and it is much easier to cash flow. One of the disadvantages of investing in turn-key properties is they are have already been purchased by investors and repaired. The turn-key property has been rented, the property repaired and property management is in place. These features are great, but also come at a price. These properties are not going to be priced well below market value.
How to buy an out-of-state rental property
If you buy a long-distance property that is not turn-key then you will have to do a lot more work. The trade-off with doing more work is you can also get a better deal. In order to buy long-distance properties you will have to have a great team in place; property manager, Realtor and contractor. You may also have to spend time in the place where you want to invest to get an idea about the market and neighborhoods. It will take some time and money to get set up, but once you have a team in place that you trust, it should get much easier. Here is an article I wrote on where some of the best markets may be for long-distance properties.
How to pick a location for out-of-state investing
Location, location, location! This is an old saying in real estate, but it is true. The most important part of investing in a long distance property is picking a location. If I were to invest in a long-distance rental I would try to invest in an area that I knew. Maybe I have family, friends or have vacationed in an area of the country. I think it would be difficult to invest in a completely foreign place, but not impossible. There are many factors to consider when deciding on a location to buy a rental property in.
- Economy: We saw what happened in Detroit; the housing market collapsed. I do not think it is wise to invest in an area that’s economy is based on one industry. Detroit’s economy was primarily based on the auto industry and when that collapsed so did Detroit. I like my location, because we have many different industries.
- Rental rate to purchase price: The most important reason to invest long-distance is to make better returns on your investment. I would like to see the monthly rental rate at least 1% of the purchase price; $1,000 rent on a $100,000 purchase price. I would prefer a better ratio, but this is highly dependent on type of property, SFR or multifamily and other expenses.
- Local expenses: Property taxes and property management fees will be a large part of your costs. It is important to research these before you invest in an area. My taxes are extremely low, but other areas of the country can have taxes ten times higher. Some areas have special district taxes or HOAs that will kill your cash flow.
- Rental demand: It doesn’t do any good to invest in another location if you can’t rent your homes. Check the vacancy rates and historic appreciation in the area you are looking at. I don’t depend on appreciation, but it is nice to have and you don’t want negative appreciation.
How to find a team for out-of-state investing
It will be virtually impossible to buy, repair and manage homes from another state by yourself. It will save you money in the long run to use local professionals who know the market. You will need a great team to handle buying and renting a long-distance property for you.
- Real estate agents: A great real estate agent can help you find great deals and help you find the rest of your team. A key to getting great deals is being able to act quickly. If you ask me, you have to trust your real estate agent enough to make an offer for you sight unseen. An investor does not have time to fly out to see a good deal or plan a trip and hope that a good deal pops up while they are in town. I sometimes have to wait months to find a great deal and if I waited three days or a week to make an offer that deal would be gone. Here is an article on how to find an investor friendly agent.
- Property managers: I write about how to find a great property manager here. You have to have a property manager who will look out for your rental and rent it for you. A bad property manager can cost thousands and thousands of dollars. A good property manager will make you thousands and thousands of dollars. A great Realtor should be able to help you find a good property manager as well as the article I linked to.
- Contractors: This is probably the trickiest part of building your team. Contractors can be great or horrible and change from great to horrible very quickly. We are constantly hiring new contractors. You have to be able to depend on your team to help you find a great contractor. Your Realtor and property manager should know local contractors they can refer you to. You should not have to pay in advance for work done and always keep in constant touch with your contractors. Always get a written bid from any contractor before they start any work.
I do not invest in out-of-state properties, because I feel I can get better returns locally which I discuss here. However, I have a great market for rental properties and I can make a lot of money on them locally. If you are in an area where it is impossible to cash flow with rentals you may want to consider investing in long-distance properties or buy turn-key rentals in different markets.