I’m a real estate investor and syndicator. Every deal my company looks at is out of town. So this subject is near and dear to my heart. In this short article, I’m going to outline five tips we use when considering an out of town rental property.
I’m not alone. Many real estate investors are buying out-of-town rental properties these days. Perhaps you live in a location like California or New York where skyrocketing prices have forced you to look elsewhere.
Or maybe you’re in a small town and you want to invest in a larger metropolitan area. My family has chosen to live in a small town for quality-of-life reasons, and we’ve never considered buying large multifamily assets here.
Perhaps technology has given you a comfort level with buying out of town. One time, we were studying a neighborhood for a property purchase in Houston. I was driving up and down streets while my business partner was on the phone. He was studying Google Earth, and it seemed like he had a better grasp of the area than I did.
“Did you see the bars on those windows to your left? And does that lot of junk cars on the corner still look awful?”
Investing in multifamily is not the only way people are investing in other cities these days. Many investors are also investing with third-party single family rental firms. If this is your path, I would remind you to do your own due diligence to be sure these properties are a great match for your goals.
Here are five quick tips to help you buy out-of-town properties.
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1. Don’t Go to a City Out of Convenience
Would you make a contractual commitment to the first Realtor who picked up your phone call? Just like you shouldn’t do that, don’t just choose a city out of convenience. I know you like the sports team or the weather, but that doesn’t mean it’s the best place to make money.
And don’t do it because your friend said to. (Would you jump off a bridge if your friend did?) Check it out for yourself!
2. Find the Right City
My firm, Wellings Capital, uses 22 metrics to evaluate a city before looking at any multifamily deals. Check out the net population migration, job growth, the unemployment rate, the cost to rent vs. buy, rental vacancy projections, and more. And check out the landlord-tenant laws while you’re at it.
How diverse is the job base? We like to buy in cities that have a mix of health care, education, and government jobs. And though many see it differently, I’m nervous about investing in a city dominated by military tenants. The stroke of a government pen could change your economic future. That’s not something I want to bank on.
3. Locate a Great Property Manager
You’ll need this ally to help you select a property, make budget projections, and manage it for the long haul. Interview several property managers.
Check their references, and again, don’t pick the first one that seems nice. Ask hard questions, and learn about their processes, their software, their metrics, and more. Is their software homemade? Run. Or is it professionally purchased, supported, and updated? Good.
And be sure to secret shop at least two of their properties. Do this by phone and in person. Look for reasons to say no rather than yes. Especially if you like the person you met with.
4. Scout the Neighborhood
In addition to going up and down the streets on Google Earth, we use tools like NeighborhoodScout to check out the crime scores, schools, income, and other demographics. Check out your submarket and neighboring areas as well.
One caveat: In a rapidly gentrifying area, some of the stats can be outdated. We were touring a Charlotte, North Carolina submarket once, and we were puzzled about how much worse the reported crime and demographic scores were than what we were seeing on the ground.
We asked a policeman and a grocery store manager about the discrepancy. They happily informed us that the area had been improving so fast over the past two years that the crime scores were already out of date. A happy surprise.
Google Earth is great, but there’s nothing like making a site visit to the property. It’s crucial for you to get the feel of the neighborhood, check out the cars, look for bars on windows, and talk to the local police.
Choose a location where your property manager would be happy to go at night — and that you would send your daughter to live. (I’m assuming you want the best for your daughter.)
This is embarrassing, but what’s new? Once I was touring a few apartments in a city I’d never been to. A friend was driving me around, and I honestly didn’t think it would come to anything. I was on my iPhone, hurriedly going through emails rather than taking a close look at the neighborhood.
When we decided to make a serious run at one of the apartment complexes, I told my business partners that it was a great city, I really liked the area, and I didn’t see any problem making an initial offer.
Well that offer turned into a signed letter of intent, and we soon returned as a team to do due diligence. The team was headed up by us, but the majority of the group consisted of experts from the property management company we were hiring to manage the asset.
I have to say that we were all disappointed as we did the 1-3-5 mile analysis around the property. (That’s where you drive up and down each street within a one-, three-, and five-mile radius to carefully review the area where you are buying.)
I felt heartsick, and I realized that my earlier review was not thorough at all. I had now gotten my team into the midst of a purchase process for a very nice apartment complex in the midst of a mediocre location. Not cool.
This story actually had a happy ending for us. It turns out that the owners had failed to disclose a major problem. As soon as we began our due diligence, we spoke to random residents at the complex. We learned that there was black mold in the basements. We soon located it in over a third of the buildings.
I called around to local mold remediation firms and amazingly I found a guy who told me that he had been to that complex six months earlier and given them an expensive bid to get rid of it. But they didn’t respond to the bid — or his followup phone calls. So he was happy to share his bids and the damning photos he took.
We got out of that mess. And I learned a valuable lesson or two. This story, in fact, relates to the last three of the five lessons in this article. The city was not chosen from convenience, and it met our metrics. The online evaluation looked pretty good. But the on-the-ground analysis was less than stellar.
Thankfully, we had a great property manager alongside of us. They helped us uncover the mold and advised us on the ramifications of moving forward. Though it would have given them additional revenue if we moved forward, they advised us to run away. And we are so grateful that we did.
I hope you enjoyed these five tips for buying out of town properties. For more information, check out this video that I just published.
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Do you have any additional tips for buying out-of-town rentals?
Share them in the comments below!