How to Invest in Out-of-State Rental Properties

long-distance investingRising 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.  Turn-key properties 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!

For more information on my rental strategy check out my complete guide to investing in long-term rental properties. 

What is the advantage to buying an out-of-state rental property that is not 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 very 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 in a location.

 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.

Find a team for your 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.

What can a real estate agent do for out-of-state investors?

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.

 Out-of-state investors need a great property manager

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.

Out-of-state investors need to have great 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.

Conclusion

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 buying turn-key rentals in different markets.

Related articles

How to find a great deal on a home

The top 8 ways to invest in real estate

 

Subscribe by email!

Join 1392 other subscribers and receive free updates on new properties I buy, monthly fix and flip updates, how-to, access to special prices, and 2 free eBooks.


Licensed real estate agent in Greeley Colorado since 2001 specializing in REO and HUD Homes. Owns 10 long-term rental properties and completes 10-15 fix and flips a year.

Posted in How to Buy Properties Tagged with: , , , , ,
4 comments on “How to Invest in Out-of-State Rental Properties
  1. Jim says:

    Mark, how do you check vacancy rates? Would be nice to have a link on that paragraph, that is, if you have written an article on the subject. Love your articles and your links are awesome except that it takes me forever to read your articles because I have to click the links. :

    • Hi Jim, there was an article in a local business journal for our vacancy rates. There should be something online that would show different locations vacancies. If not you could call property managers or Realtors to see if they have an idea. That is a good idea for a new article!

  2. Russell says:

    When purchasing a rental property in another market does one get a loan from a bank in that same market? I can’t imagine my local bank here in California wanting to loan on a property in Indianapolis for example. This has been my assumption, am I wrong?

    • Hi Russell, It is different with each bank. My bank will not loan in other states, but some will. many of the turn key companies have banks they work with that finance out of state investors.

Leave a Reply

Subscribe to Investfourmore

Join 1392 other subscribers and receive free updates on new properties I buy, monthly fix and flip updates, how-to, access to special prices, and 2 free eBooks.
  • Facebook
  • LinkedIn
  • Twitter
  • Pinterest
  • YouTube

Tools and Calculators

InvestFourMore has an easy-to-use, but comprehensive calculator for determining rental property cash flow.

Invest in properties across the US with turnkey

InvestFourMore provides a free referral service for those of you looking to add real estate to your investment portfolio, but at a lower level of effort and risk. Turnkey investing is also ideal if your local market is too expensive for your strategy.

Interested in REO?

Learn how to break into REOs with InvestFourMore's REO Starter Kit. Mark Ferguson's business has exploded since becoming an REO agent. This kit shows you in full detail how to get into the business for yourself.

Follow by Email

Join 1392 other subscribers and receive free updates on new properties I buy, monthly fix and flip updates, how-to, access to special prices, and 2 free eBooks.
%d bloggers like this: