Generally it’s good advice to invest in apartment buildings that are with easy driving distance to you. Especially if you’re managing the building yourself, the closer the building is, the easier everything is.
That also means your team members (the property manager, attorney, brokers, etc) are all within an easy drive. And your investors will prefer to invest locally, too.
But sometimes you have little choice but to look for deals that are well outside your area. For example, if you live around San Francisco or New York, you may be frustrated at the complete and utter lack of good deals, and buying at a 5% cap rate doesn’t really cut it for you.
What to do?
- One option is not to do any commercial real estate investing.
- The other option is to look in other markets.
When I first got started with apartment building investing, I started looking in Texas even though I live in Northern Virginia. I had taken a boot camp, and the guru recommended Texas. So I went looking in Texas.
The first thing I did is to build my local team of commercial real estate brokers. I then interviewed commercial lenders, property managers and attorneys. I analyzed over 100 deals before putting an 82 unit building under contract.
It will cost you more time and money than investing locally, but it can be done. Here are 6 steps for buying apartment buildings outside your area.
Step # 1: Pick the Right Area
The area you select will depend on what you’re looking for. What kind of returns are you looking for? Do you have family in a particular city or do you like a particular area of the country?
A good overview of apartment building market in major regional markets in the U.S. is the Marcus & Millichap Regional Apartment Reports (register and download here). Read the reports for the different areas you’re interested in.
I look for a combination of two things: growing employment (and population) and high cap rates. That is the PERFECT combination for apartment building investing. The Marcus & Millichap reports will help you identify these areas.
Once you identified your top 3 areas, then it’s time to go a bit deeper. Contact the economic development offices in your chosen cities and request their annual report and outlook. You’re looking for a growing local economy, new jobs, and investments.
Step # 2: Find Commercial Real Estate Brokers
The next step is to start calling commercial real estate brokers. An easy way to find them is by searching www.loopnet.com and by calling your local Marcus & Millichap, CBRE, and Sperry Van Ness offices.
In your first phone conversation, you want to introduce yourself and quality the broker a bit. Your second purpose is to see what kind of deals are available in the area: ask about prevailing cap rates, cash on cash returns, price per unit etc. This will give you an idea of what kind of returns you can expect in this area.
Then have them put you on their buyer’s list. Analyze the deals you get from them quickly and give them feedback. Call them weekly to stay in touch.
Step # 3: Get Referrals to Other Professionals
Once you’ve decided on an area to invest in and you’ve started to talk with several commercial real estate brokers, it’s time to find your other team players. Next priority is to find local property managers, attorneys, and commercial loan officers or lenders. Start by asking your real estate broker for referrals, then ask everyone else you talk with for referrals also. Call everybody you’re introduced to and track your conversations in a document so you can refer to it later (the names will start to blur after a while!).
Step # 4: Do as Much as You Can by Phone and Skype
There is a temptation to hop on a plane to “check out the area”. Don’t do that unless you want to waste time and money. There is a lot of stuff you can do remotely before that time comes. For example, you can “interview” people on phone, check their references, and analyze deals, all without ever visiting them in person.
Step # 5: Visit the Area Once You Have a Property Under Contract
Ideally, you will only visit the area once you have your first deal under contract. This gives you a really compelling reason to talk with each of your potential team members. When you actually do visit the area for the first time, you should have a very specific itinerary planned.
Have your brokers give you a tour of the area, highlighting the areas that are improving and those to stay away from. Of course, visit the property you have under contract as well as any other deals you want to look at while you’re there.
Meet your top picks for property managers, attorneys, lenders, appraisers, and property inspectors.
The goal of your trip is to better learn that market and finalize your team.
Step # 6: Do a Deal!
Now the team is in place and you’re ready to do a deal! It may take a while to find that first deal, so make sure you keep in touch regularly with each of your team members to keep them engaged.
Once you do a deal, you’ll probably have to spend some extra time at the property in the beginning to make sure the team is in place. Even though your physical presence may not be required as frequently, make sure you are holding everyone (especially your property manager!) accountable regularly.
There’s no question that it’s preferable to invest in your back yard. But if you can’t find the deals you’re looking for in your area, you may have to look elsewhere. If you must invest out of the area, it will cost you some extra time and money, but it most certainly can be done!
Are you having a tough time finding good deals in your area? How are you handling this?