5 Tips to Ensure Your Out-of-State Rentals Are Profitable (Read This BEFORE You Buy!)
Out-of-state investing is in vogue these days! Thanks to the internet, you can live anywhere and still have access to every market in the country.
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This makes the barrier to entry very low for buying cash-flowing rentals 3,000 miles away, but it can also give people a false sense of confidence when it comes to the ease of creating stable cash flow through rentals.
YES, buying a house you’ve never seen in a market you don’t know is totally possible, but the fact is the purchase itself is always the easiest part of real estate. Making sure you buy it right, choose something in demand, find someone to manage it well, and get it occupied in a timely manner is the hard part.
Here are a few high-level tips to ensure your out-of-state rentals cash flow the way you imagined they would.
5 Tips to Ensure Your Out-of-State Rentals Are Successful
1. Buy in an area that has high rental demand.
Look at the forest through the trees here. I don’t care how great your numbers are, you need to buy a place where there is a supply of renters demanding properties. If you buy a place that’s worth $200,000 for $10,000, you might be jumping for joy. But if there are no tenants in that market, you’re sunk. Rental demand is largely driven by jobs, so buy in markets that have job stability, job growth, and ideally population growth.
The property itself is obviously important to focus on, but the underwriting of the specific deal isn’t what gets people in trouble, over-valuing the property metrics and under-valuing the surrounding forces is what gets people in trouble. You must consider the market in question and the propensity of renter availability. Always solve the biggest problem you can, so if finding a tenant is a problem, the best solution is to buy where there is no shortage of potential tenants.
2. Research local rents.
You should be sure of this question before you buy anything. As I mentioned above, the paper underwriting you’ve done is a mere fraction of what’s important when buying a great deal. You’ll want to know—not guess—what the market rate for rents are.
You can find this through asking your fellow local investors, checking comparables on Craigslist and other sites online, and asking what the property manager thinks they can rent it for. This may sound simple and obvious, but many people don’t try to really lock down the market rent until after the property is purchased, which is too late if they are wrong. If you ask market rents for a property that’s in demand, you should be 90 percent of the way toward success already.
3. Manage your property manager.
I highly recommend a property manager in all situations, but for out-of-state investing, it’s a must. Find the best one you can, then find alternatives—because it’s likely you’ll have to fire some people along the way. If you’re having trouble with tenant placement despite having a nice rental that you’re asking market rents for in an area where rentals are in demand, you may just have a property manager who doesn’t care that much.
Don’t worry, this is extremely common. The problem is just exacerbated by you being an out-of-state investor. Sometimes PMs are simply bad at their job. But most of the time, problems stem from laziness or a lack of communication. They have much less incentive to work hard when they never have to see your face.
My suggestion is to talk to your property manager anytime you feel like it, and never feel bad about annoying them. If you’re walking on eggshells around the person who is in direct control of your investment, you need to fix it ASAP. It’s also worth flying out and shaking the hand of someone you’re giving so much responsibility to. You want to know what is going on with your unit and tenant placement, and they are the person on the ground who is supposed to support you.
You should never feel bad about wanting to communicate with your PM. If they are hesitant to do so, find someone else who doesn’t make you feel bad about staying on top of your property.
4. Ask for money all the time.
Now that we have a good property in a hot area, and we know what market rent is, and we have a great PM in place, ASK FOR TOP DOLLAR.
You can negotiate down in price when potential renters come see the place. Or you can reduce the rates in a few weeks if it’s been on the market for a while. You can give discounts for all sorts of things, but what you can’t do is raise the price on someone once you know they are interested in your asset.
I also get professional photos of everything I buy—before and after rehab. In addition to putting those pics online, I have the PM put it in a three-ring binder to show to potential tenants. Everyone loves to be part of a story, especially when it comes to flips. Let them feel like part of something bigger.
Now, you don’t have to set your price out of fear or desperation, and you don’t have to drop the price too soon out of anxiety. You have plenty of reserves, because you’re a responsible investor. A little bit of extra holding time won’t kill you. Plus, asking top dollar does something psychologically to people that allows them to buy a product at a price premium if it’s sold well, packaged well, and the price set confidently. (This is Apple’s entire business model!)
5. Start with the end in mind.
Most tenant placement problems come from having a rental in a low-demand area or incorrect pricing. Increasing rental demand in a city is outside the scope of what most individual investors can do, but our pricing is easy to alter.
In addition, property managers are usually easy to find, though it’s important to note that great ones are very hard to find.
If you already have a rental and are having a difficult time with tenant placement, understanding these conditions should at least help you identify what your root problems are. There are people who are resistant to hiring a property manager for cost reasons, but I believe this to be very short-sighted—especially if the unit isn’t renting. Two months of missed rent is far more than the property management costs for the year.
If you’ve over-rehabbed or over-paid for a property, then it may be painful from a cash flow perspective to simply reduce your asking price. Sometimes it’s not profitable to do so, and you get stuck between a rock and a hard place. That’s why it’s so important to consider these rules before you purchase, because you want to solve all the troubles from the very start.
What other questions do you have for me about out-of-state investing? Are you encountering any obstacles I haven’t mentioned above?
Let’s talk in the comment section below.