Real Estate Investing From Out of State

Investing from out of state is not easy to do, but can be done with research, patience, and a large bit of know how.  If you have been following along you know how I recommend determining a major area to invest in.  Now it is time to decide where to focus your investing efforts within that market in order to profit without major headaches. 

This is where you have to start building your team.  Once a major market area has been identified, you should begin to contact realtors.  I personally look for a realtor that already works with out of state investors.  That way they have a bit of an idea of what they can expect from me as an investor and also have some idea of what an out of state investor wants.  In the past I have called brokerages and interviewed realtors over the phone to make sure that they are ok with the type of investing I do. (Multiple offers a low prices etc.)  If not, I called the next.  I have to say that it has taken me as many as 20 conversations to find one I am comfortable with.  I am now considering using faxes instead that outline my chosen strategy, my experience as a Real Estate Investor and asking if they would like to work with me to contact me.  Time is of the essence to me currently.  One word of warning if you choose to make calls, do not let just one realtor who says that the strategy you would like to employ won't work completely dissuade you.  That is a short sighted realtor that will have a rough time surviving the current economic situation. 

Once you are comfortable that you have the right realtor, I would ask their advice on what areas other investors seem to target right now and also WHY they target that area specifically.  I also make it clear that I want to familiarize myself with the market a bit and then schedule my first few visits to the area.  Yes that is visits (plural).  I then have them start sending me new listings for the areas that they recommended and also ask for any sold listings in the same areas for the last 90 days.  I am looking for what the average home lists for, and what they will eventually sell for.  I pay particular attention to what any homes that are rented out are listing and selling for.  Once I am familiar with the areas recommended on paper, I schedule my first visit to the area.  I like to be able to look at any new listing in my target areas and know if it's a low, average or high listing price on average and what it will rent for.  Until I can do that, I don't buy anything. 

Also once you have a good realtor, your hunt for a good Property Manager should start.  Property Managers are a major piece in the successful out of state investor's puzzle.  Bad ones can literally take the wind out of your sales, and good ones can help you create a successful portfolio of properties in the area.  I certainly ask for referrals of course.  However, I like to have a conversation with a Property Manager to explain how I want this part of my business run.  Once again if they cannot work with me in a situation that is VERY close to my vision.  I want a Property Manager that is not so big that I get lost in the shuffle if I only have one or two homes with them for a while.  I also do not want to deal with a brand new property manager that may be or soon get in over their head.  I make sure that I get references and check them thoroughly.  I also ask them wjhat the vacancy rate is in my various Area of Operation for the average rental.  If they cannot answer this to a reasonable degree of certainty, then there is a sign of a manager that may not be the best you can get. 

 One bad manager into being an out of state investor, I learned that for starters, they are survivable.  The key is to keep an eye on your properties.  I like to view each unit as it turns if possible.  If you cannot personally make the trip, please at least work with someone that will provide before and after pictures of unit turns.  As for warning signs that you have a bad one, if your rent is not getting to you EVERY month with an accounting of all expenses for the month you are in a dangerous situation.  This is non negotiable and you should consider finding a new one if it is happening to you.  I personally have a stipulation that if there are repairs necessary of over $100 in any given month, then I must give personal approval before work is done (excluding emergencies). 

 Once I have a good PM in place, I run any deal I am getting by them to see what it will likely rent for.  I want someone that will give me advice on rental rates and also on what type of features will keep me competitive in a market  and deliver me a good amount of rent.  This is invaluable information when running a rental business of any kind, but especially so in the out of state investing arena.  This advice should keep my vacancy rate down, and my ROI up.

This housing collapse and resulting recession have resulted in the proliferation of a large number of "one stop shop" type of businesses that cater to out of state/remote investors.  I have been watching what's going on in my markets and have done some research to boot.  I would very much like to weigh in on whether or not to use them as a investor that owns property remotely.

 I believe that if such a business is done correctly, it can be invaluable to the remote RE investor.  That said in a few cases I have also seen it done badly and have personally witnessed people sold overinflated assets that are destined to underperform the market.  How bad can it be?  How about 25% to 30% above actual CMV!  I would thouroughly check out any company that I was going to purchase a property through that will rehab it, rent it, manage it, and help you with your exit strategy all in one.  Guaranteeing you to profit handsomely all the while.  I personally like a bit of seperation in these areas.

I would only make an exception if I saw a serious benefit to my business.  For example getting properties for a total investment that is well below current REO sales in the area.  Once again though I would want my own realtor to verify all comps.  One of these companies should be able to leverage their resources and buying power to get great deal and then help the investor, their client buy with TRUE equity.

  The fact is a VERIFIED fantastic deal would hook me quickly in a market that I was less familiar with.  This would be a deal in an area that I picked out as a sub market that fit best with my particular strategy for the market I am in.  I would use the help of a buyer's agent that I chose to determine how good a deal this is before putting any earnest money down.  Please do not rely on the company you are purchasing the property from for comps.  If you believe that no one in this business would need to take advantage of others for personal gain, then you will very shortly be parted from your money.  

I also am not a huge fan of using an appraisal that someone selling a property provides me.  I think that for the most part you can use those as toilet paper.  Nope, I will get my own thanks.  Too easy to find a appraiser that "fits the bill" so to speak.  Not necessarily that they will be fraudulent, but some are slower to react to current market conditions than others.

Also beware of a bait and switch scenario that some have used.  That is to rent a property for above market rents to a tenant that has no intention of sticking around.  The cash on cash return is a bit different if your $800/mo tenant skips in month 2 and now you have to replace them with a $600/mo tenant because that is what the market will bear.  Verify what realistic rents for the area are by looking at local listings (I mean go there and actually look)as well as using the internet approach like Zilpy.com.  Please be aware that I have had Zilpy.com say that my property will rent for $825 a month and the market will only bear $625 a month, so this is not always a perfect number. 

 So to be fair, would I use the One Stop Shop to enter a new market?  Sure, but I will follow the admonition of one investor I know to: "Trust, but verify."  Please do the same in your endeavors.  Oh and checking with the BBB is not a terrible idea either.

Choosing an overall market to enter remotely can be tricky to say the least.  In a down market, there seems to be so many choices.  Everything is a "steal" compared to 3 years ago.  Do you grab a couple of properties in an area that has high appreciation potential? Do you focus on depressed areas and go after purely cash flow?  I have seen investors be successful in these markets, with various strategies, but not by investors that have no experience in investing remotely.  The answer is not as straight forward as you may think, but I have a serious recommendation.

Consider sticking to the middle of the road.  Investing in property remotely inherently carries more risk than owning rental property around the block from home.  You want to make sure that the moves you make in this type of investment do not close off any exit strategies available to you and also have a good enough ROI to make the extra work worthwhile.  Consider this, give yourself as diverse selection of exit strategies as possible just in case this particular investment is not for you, or you find a better one to pursue. 

This means that I would focus on metro areas that have as good of an economic outlook as possible.  Look at economic diversity first.  I recommend staying away from areas that are largely dependent on a single economic sector or employer unless you have considerable experience in making good decisions remotely.  Money can be made in these markets, but it is much riskier of an investment and not for first timers.  In relating that to my personal selections, I would rather own property in Indianapolis, IN during a downturn than the same property in Ft. Wayne, IN.  Indianapolis is a much more diverse economy, while Ft. Wayne is heavily dependent on manufacturing.

Home affordability is important too.  You want an area that you can eventually capture as much of the equity you bought with and built as possible.  This means that you will most likely selling to a homeowner.  (Hopefully after collecting a fair amount of rent.)  You at least want to have that as a likely option.  If homes aren't affordable to the average person, you are more likely to resell to an investor, or hold it very long term (Not the end of the world if you are getting a good return).  One word of caution, if a market is so affordable that any decent rental prospect is now a homeowner, then you may be setting yourself up for hassles from tenants.

I also like to look and see if the area is garnering much interest from other serious investors.  If the area is so attractive to you, perhaps there are other investors sucessfully implementing a similar strategy.  If so that means that your strategy is most likeley viable.  If not, be very careful.  This is a sign that you are stepping MAY be dangerous territory.  I am all about minimizing potential risks in this type of investing.

Finally, I like to pick a Metro area that has a good mix of renters and homeowners.   This means that there should be a good supply of good tenants for the property in question.  Once again you minimize your risk of long term vacancy as well as limit the risk that you will have to settle for less than desireable tenants.  There are strategies that lower your risk of hassels even more and I will cover those in a future article.   

Coming Next: One Stop Shops- To Use or Not? AND Step 2: Identifying Your Submarket

I felt compelled to write this post in response to a comment made about the previous article. It is true that it takes a special breed of Real Estate Investor to invest from long distance away.  Are you able to be committed to the venture and overcome the problems you face? Or are you likely to get frustrated by roadblocks, and give up?  If you are the former, you may want to consider this strategy.  If the latter sounds like you, perhaps you should invest in Mutual Funds and not bother with Real Estate as an investment vehicle. 

Make no mistake, being a landlord is not for everyone, even locally.  It IS a second AND third job for most people.  You will have all the normal obstacles to overcome and also some serious handicaps to negotiate if you choose to invest from out of state.  These handicaps can be minimized and the obstacles negotiatied if you choose to.  The key is to make sure that the extra work is worth it.  If you are not up for a challenge and willing to risk small setbacks in order to learn and grow, don't consider investing in RE remotely.  It takes even more dedication and determination to be sucessful in a market you are many miles away from.

I have had to fire crooked property managers and contractors, dodge fraudulent business proposals, refuse to engage in unethical business practices and yes even evict a tenant or two.  I have also had to "fire" business partners that have held my company back from growing and adapting to change.  Quite frankly it helps if you develop the ability to smell BS a mile away.  I will be writing about what to look for and what to expect from good RE agents, property managers, and contractors in later posts. 

 Another thing to consider is how often will you be able to travel to the area in question.  If you cannot view a property before purchasing, please don't buy it.  Due diligence is key and having access to the property before a purchase is very important.  No matter WHAT the pictures look like.  There seems to be a proliferation of people purchasing properties that they have never seen on the internet.  Please DO NOT buy property you have not seen personally AND had thoroughly inspected by an independent professional.  This is a recipe for disaster.  I do NOT recommend a completely hands off process of investing because I will never advocate that you give others complete control of your money and investments.

You will also benefit from the ablility to inspire confidence in others that you have what it takes to succeed in this business.  RE Agents, property managers, and contractors will deal much better with someone who they deem likely to succeed.  This is even more the case when you are investing from a long distance away.

Management skills are also essential when dealing with and building a team of people that will help you achieve your investing goals in the area.  They will be your "employees" and will need clear direction and encouragement from you.

I have personally found that investing from Out-of-State is at times more stressful and usually more rewarding than investing in my own market.  Quite certainly I look to be rewarded for my pererverance by a 15%+ ROI on my OVERALL purchase price or I don't even give a second thought to purchasing the deal.  It is VERY important that you recieve a great return to offset the somewhat greater risks that are inherent in this type of investing. 

   More often than not RE investors have a local mentality.  I have literally had a fellow investor tell me 3 years ago that he, "wouldn't own a property if he couldn't stand on his roof and see it from there."  Funny enough this rental property millionaire lost about half of his net worth in the current market slide by following this bit of "wisdom".  He lives in Las Vegas and took a drubbing in this market. Don't forget one of the principles that successful investors have used for year, diversification.

I have to say that when beginning as a Real Estate Investor, I did have that "local" mentality, but I now own property in 3 states, Illinois, Indiana, and Michigan.  I am also currently exploring the south as well.  My original investing efforts were just when the boom was starting and local knowledge allowed me to make a tidy sum doing flips.  Luckily, my father and business partner had a good handle on what a bubble looks like before it pops and we pulled out of the Chicago RE market altogether in late 2005/ early 2006.  If it hadn't been for his foresight, I would have lost a boatload of money. 

 Over the last few years, I started looking at larger projects in anticipation of when the market turned around.  It was during the learning process for these deals that I converted to my current strategy: "Invest for cashflow, and any appreciation is just icing on the cake."  There are several reasons that I can quickly think of to seriously consider investing in new markets remotely. 

 First of all is ROI.  Very simply put, if you can't cash flow don't do it.  I agree with the most of the benchmarks for cashflow put forth in the Bigger Pocketsforums (50% rule, 2% rule etc).  I personally don't use mortgages in a declining market (aversion to inverse leverage), but if you do it is possible to find deals that will cashflow $100 per door or better with an assuption of 100% financing.  I don't think that if I live in San Diego for example, that I can find those deals so easily in the local market. 

 The second is that diversification word I used earlier.  If you own property in one market, what happens when that market has a major hit to the economy and you take a loss (Detroit)?  Would it not be better if you were in another market that was doing well to offset those losses? If things slide in Los Angles, your cashflow properties in the Midwest or the South pick you up.

The third reason to invest remotely is that the economy of an area is a major indicator of local rental markets.  Why not pick from a market that offers good cash flow opportunities that you don't have to go to a war zone to get and has a diversified economy?  These places do exist.  They may just not be in your own back yard.  Perhaps it is time to open your mind to the possibility. 

Upcoming: How to Build an Effective Team Remotely