Live in a high priced real estate market? Consider investing out of state in a cheaper market. These six steps will help you succeed!
Living in a market with lower priced properties allows you to search your community for ugly houses with deferred maintenance or tall weeds indicating a property is no longer being loved. But, if you live in a high priced market you need to be more creative and look for other states where the properties are more reasonably priced. may need to look at other states to find reasonably priced rental properties. There are six factors for successful out of state investing.
1. Quick Action: Locking in a good deal requires combining speed and effective due diligence. A significant geographic distance hinders your ability to respond quickly to opportunities. You have to build a reliable team that includes a local realtor and property manager who can act in your place. You realtor may need to view properties for you and identify issues of that might not be readily apparent from listing photos or online maps. Using a local lender can also expedite the buying process as they will be more familiar with the area.
2. Periodic Visits: You can't rely on this team for everything, you still need to allocate time for periodic trips to the state both to assist in buying properties and also to identify trends. I have had my realtor line up a series of properties in advance of visiting so we can maximize our time on the ground and make multiple offers if necessary. Use these visits to touch base with your lender and property manager to ensure they have what they need for your next acquisition. You also want to use these visits to verify any assumptions you have about the area and identify see any positive or negative trends developing in area, such as increasing job opportunities from a new employers or families leaving the area because of declining schools.
3. Know When to Sell: In many areas across the country properties have recovered or exceeded valuations from before the global financial crisis. This may be a great time to cash out by selling at the top of the market and putting the profits into a market that is less overvalued. Selling properties yourself is a great skill to learn and it will save you on the sales commission. But, sometimes you can't be on the ground for the amount of time it takes to sell. In these situations you will have to rely on your trusted realtor to help you sell. The additional commission expenses are justified if you can sell in a strong sellers' market when prices are at their peak. While living in Lebanon, I sold an overvalued property in the States just prior to the global financial crisis. Timing this sale at the right time avoided losses that would have far exceeded a 6% sales commission.
4. Effective Property Management: Self managing your properties is a great way to save 8-10% of rents per month and train yourself to qualify good tenants and properties. But, it is impossible to properly manage properties from a long distance. A good property manager will have a list of local contacts to help with repairs, maintenance, or other services. If you plan to buy long distance, it is imperative to line up a good property manager before you make your first purchase. Interview several property managers until you find one that is organized and knowledgeable. Treat it like a job interview, you want to make sure you hire the right property manger the first time to avoid having to switch property managers from a distance. Also, see the previous post Long Distance Investing: How to Build a Team.
5. Monitor Local Rents: I have worked with some great property managers who can save you time, money and significant headaches dealing with challenging tenants. But, I have also seen some property managers who are reluctant to raise rents because it is easier on them to keep the same tenants or find tenants faster if the rents are under market rates. Not raising the rent may be the correct advice, if it will incur a lengthy vacancy, but make sure you are monitoring local rents to ensure your rents remain competitive. Mistakenly under pricing your properties can cost your thousands of dollars each year. To help ensure the best rents and tenants, I seek to buy properties in highly desirable neighborhoods, close to great schools and public parks. Having a product that is appealing to a large number of highly qualified tenants allows you to fill your properties quickly at fair market rents.
6. Buy and Hold Becomes the Default Approach: Flipping properties from a distance can work for experienced investors with trusted local contractors, but theses projects usually require having a decision maker on site. Being out of state hinders your ability to monitor the details on projects and reduces your ability to network at local real estate investor meetings and build personal connections with local partners. If your are going to be investing out of state, you will find buy and hold investing often becomes your default investment strategy. Finding quality properties, making any necessary repairs at the beginning, and holding the properties as long-term rentals will mitigates much of the stress related to investing far from home.
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