One of the biggest questions I hear is “How can I invest out-of-state? I hear the returns are much better, but how would I even start to do that?” Assuming you live anywhere other than in a handful of cities, you are probably right about the returns. You also realize that you don’t need to be local to your investments so that you can routinely “check in on them”.
So you are fully convinced this is what you want to do, now what?
The two major components of investing out-of-state:
- How to Choose a Market
- How to Find Properties in an Unfamiliar Market
How to Choose a Market
Choosing what market to invest in depends on your goals. For example, do you want to flip properties or buy rental properties? A good market for a rental property may not be a good flipping market and vice versa. I personally don’t flip properties, so I won’t focus on those markets here except to encourage you to make sure you do investigate what makes a good market for that type of investment. I can however suggest what to look for in a good market for rental properties. Some of these may even carry over to other types of investments.
What are some considerations in choosing a market for rental properties?
- State Laws: Is the state tenant-friendly or landlord-friendly? You want to invest in a state that is landlord-friendly. This means that if you have a bad tenant the laws work in your favor to get him/her out as quickly as possible. Tenant-friendly states tend to give renters so many rights that you could potentially be stuck with a bad tenant for months while your expenses go through the roof (pun intended).
- Trends: What are the population trends in the market? Population is probably the most important trend to look at because it is representative of other trends you want to research, such as industry and overall growth trends. A growing population = awesome. A decreasing population = look out.
- Price-to-Rent Ratios: How much rent do properties in that market get compared to how much you have to pay to acquire them? For example, I have a rental property in Atlanta that I bought for $74,000 and rents for $1025/month. I looked at a comparable foreclosure in Orange County, CA that I would have had to pay $270,000 for and it rented for $1200. See the problem?
This is far from an all-inclusive list of things to look at when analyzing a potential market, but if those three things are good you are probably looking at a good market to buy a rental property. (In case you have no desire to do that much research, here is an insider’s tip- find people who have already done all of this analysis and piggyback off their finds. Make sure they are credible and don’t just take their word for gold, maybe even double-check what they say with some easy research, but this will save you a lot of research time on your own.)
How to Find (Rental) Properties in an Unfamiliar Market
Now you’ve chosen a rental market to invest in, but how do you find a property? I’ve seen it done one of two ways: You find a real estate agent you really trust who has connections to contractors, inspectors, and property managers –or – you can buy a turnkey property, meaning at the time you buy the property it is fully rehabbed with tenants and property managers already in place. Which route you choose depends on your goals for getting into the property. Are you primarily focused on the numbers, or are you more focused on less risk and less work? Here’s a breakdown of the two options:
- Lowest purchase price
- Highest rate of return (ROI)
- Vacancy time between purchase and tenant placement, due to rehab
- Risk of rehab costing more than planned
- Length of wait time and paperwork if a foreclosure or short sale
- Fewer checks and balances on the purchase, rehab work, and property management
- Cost of materials can be more expensive because they are purchased in smaller quantities
- Teams on the ground have to be formed manually (i.e. someone knows someone who knows someone)
- Fully rehabbed
- Tenants already paying at time of purchase
- No work required outside of normal due diligence
- Standardized materials make repairs less costly
- Certain standard of quality guaranteed
- Checks and balances increased by how many players are involved
- Teams are already in place
- Higher purchase price
- Lower rate of return (ROI)
How much of a difference in price and returns are we talking about here? A realistic illustration of the differences between the two options:
Property A: foreclosure, $25k purchase price, needs $10k of repairs, will produce a 20% ROI
Property B: turnkey, $60k purchase price, needs no repairs, will produce a 12% ROI
So you are either in for $35k with a 20% return, or $60k with a 12% return. It seems obvious, right? Anyone would pick Property A at first glance. What you have to keep in mind though is that a lot of that money savings and increased return is actually compensation for how much work you have to put into the process. There is a big difference between active and passive income and when you are that involved in a purchase, you are doing active work. This work may be perfectly fine with you and maybe you even enjoy it. If that is the case, rock it out. If you want less stress, less risk and a lot more free time to pursue other things, maybe the turnkey route is worth it to you. If for nothing else, turnkeys are definitely a good route for new investors while they learn how to crunch numbers and own an investment property rather than being overwhelmed with building teams and managing rehabs. Remember, even if you go for the turnkeys your tenants are covering all of your expenses anyway, so if you are still cash-flowing well maybe the higher price tag doesn’t matter.
It all comes down to the definition of investing. Investing means you use (something) to gain a return. In this case, it’s a difference of using your time and money to get a return, or just your money. Choose based on your goals, but know your options.
In the next version of Out-of-State Real Estate Investing I will hit on things to focus on once you own an out-of-state property. Until then,
Does anyone have a compare and contrast experience? Are there any flippers who can elaborate on finding a good market for flipping?