Five Considerations for Successful Out of State Investing

I have a slight twinge of jealousy when I hear real estate investors talk about driving for dollars and scouting their market for ugly houses with deferred maintenance and weeds growing high in the front yard. However, if you are buying out of state or from a significant distance you can't always take advantage of these methods. Since 2004 I have invested in three different states while living overseas, flying back to check on properties about once a year. In my experience, I have found it is better to start locally to gain skills and experience before making the switch to distance investing. I wrote a previous post on how to build an effective team when investing long distance, but I am often asked what are the biggest considerations with long distance investing. Below are five issues I have found with out of state/long distance investing, as well as some ways to mitigate and embrace the challenges.

1. Locking in a Deal Requires Quick Action: Most great investment deals emerge when you can combine speed with effective due diligence. Geographic distance hinders your ability to personally view a property. Putting in an offer and lining up financing can be done quickly with a good locally based team, but will not be as seamless as when you are on site. To find properties, I use designated buying trips where my realtor lines up a series of properties in advance and I make multiple offers to lock in a deal. I also use this time to touch base with my lender and property manager to ensure they have what they need for this next acquisition.

2. You Always Can't Sell Your Own Properties: Properties have seen several years of appreciation as many markets return to their 2007 pre-crisis prices. This is a great time to cash out by selling at the top of the market and then buy after a price correction. Self selling is a great skill to obtain in your local market before moving into long distance investing. I learned a lot from selling my own properties when I was living in the States, including how to stage a property and price it, and I had the flexibility to sell with or without a commission which lowers transaction costs. Personally, I like the negotiation process and prefer to not delegate it to others. But, when I sold properties while living overseas I had to have a trusted realtor who is an effective communicator. The additional commission expenses are justified if you can sell in a strong sellers market when prices are at their peak. I sold a condo while living in Lebanon prior to the global financial crisis and avoided losses that would have far exceeded a 6% sales commission.

3. You Miss Out on the Savings of Self-Managing: Self managing is a great way to save 8-10% of rents per month while learning to develop effective management systems and to spot the red flags related to both tenants and properties. One of my first prospective tenants looked great when considering their current job and educational background. But, a check proved that this person's credit was terrible. I don't think there was a single debt that that this person had not defaulted on. At the time I was just starting out, and letting this tenant move in could have been financially devastating. I have found it is better to gain the skills needed to manage properties prior to turning this responsibility over to a property manager. The knowledge gained from self managing has has saved me from several bad investments over the years. Before buying long distance, it is imperative to have a good property manager in place, who has relevant knowledge of the local market and will implement your decisions. BP has great tools for interviewing potential property managers to find the right fit.

4. Monitor Local Rents to Stay Competitive: I have worked with some great property managers and they can save you time, money and significant headaches dealing with challenging tenants. But, I have also found some property managers are reluctant to raise rents or may encourage keeping low paying tenants warning of excess rental inventory. Depending on the situation this may be great advice, but some property managers may be reluctant to raise rents because it requires time and effort to find new tenants. In response I try to buy properties in highly desirable neighborhoods, close to great schools and public parks. It can be helpful to remind property managers that your properties are more competing than other inventory justifying regular rent increases. I also continue to do my own research, monitoring market rents online to stay informed of the market rents.

5. Buy and Hold Becomes the Default Approach: Flipping from afar can be done by experienced investors with trusted contractors, but the need to be accessible to handle issues in a timely manner usually requires a decision maker on site. I have flipped a house from overseas, but it was only because I had a great local team on the ground. Being offsite also hinders your ability to network at local real estate investor meetings and find potential partners. I have found this makes buy and hold investing a natural default investment strategy. I refinancing properties that appreciate to fund the next acquisitions instead of partnering with others a deal. It certainly works as an investment strategy, but tends to be a slower way to build a real estate portfolio. To augment my investments between trips to buy new properties, I have used online platforms such as Realty Shares which is a great way to generate solid returns without directly purchasing a property.

Investing out of state provides some great upsides, but starting closer to home to learn the fundamentals is a smart way to learn the fundamentals of real estate investing. I welcome any comments or thoughts from other investors who have found success in long distance investing. I wish everyone the best on their investment goals in 2017.