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SHOW NOTES FOR EPISODE #068 – 7 TIPS FOR SUCCESSFUL OUT-OF-STATE INVESTING
In last week’s episode, we discussed the pros and cons of buying out-of-state. This week, we present the strategies for being a successful out-of-state investor. In the 7 tips presented in this podcast, you’ll learn what not to do and what you must do to be a successful out-of-state investor.
Introduction
In last week’s Fun Facts Friday episode #066, we discussed the pros and cons of buying properties out-of-state. And if, after listening and evaluating, you are still considering buying out-of-state properties, in this podcast, we want to present a few key tips to help you be successful in that endeavor.
I have bought 5 rental properties so far in 3 different states and, so far, they are working out OK. I’ve certainly had my bumps and bruises along the way but I’ve definitely learned a lot and I know others who have gone through the same learning curve. These tips will not guarantee success – just help you avoid some of the common mistakes we have encountered.
Two Main Reasons People Invest Out-of-State
Rental properties are a great way to generate passive income, increase your net worth and help build a path to financial independence. So why in the world would anyone even want to purchase a rental investment out of state? As I mentioned in last week’s episode, there are many reasons why. And although reasons may vary from person-to-person, there are really two main reasons.
- The numbers are better – better ROI or return on investment
- Diversity
The numbers are better out-of-state because the market you live in is too expensive. If you’re like me, then you live in a market that just does not make sense to buy cash flowing properties. If you barely break even or, even worse, have negative cash flow, it just doesn’t make sense. Out-of-state properties can be more affordable, you can buy newer properties for less, better CAP rates and price-to-rent ratios and cost of services may be less. Either way, you get a better return on your investment.
Also, purchasing a rental property out-of- state can be a great way to diversify your real estate portfolio. Sometimes it’s not smart to have all your eggs in one basket (that being – in one city or state). If all your rental properties are located in one area and there is a strong local economic downturn such as Houston and the decline in oil prices or, there is a natural disaster like New Orleans and Katrina or some other sort of rare event, that one thing could devastate your whole real estate portfolio if that is the only place you are investing. Having rentals in different states or cities can help reduce your overall risk.
My retirement plan consists of building enough passive income from rental properties to not only help me meet my needs but to also generate funds to help others, especially our mission in Haiti.
It is very important to follow a path to success to ensure your financial independence dreams. If all goes according to my plan, I should be set by 2020.
Seven Tips
If you have a good local market, where you can make your numbers, I say go for it! It is better to be near your rental properties. But if that is not the case, or you just want to diversify, her is a list of 7 tips that will help make you out-of-state investing experience be successful.
1) Have a Plan
Before you even consider buying out-of-state, you need to know your “why” – why you are investing in the first place? What do you hope to achieve and why? What is your strategic focus? What are your short and long-term goals? Are you buying raw land, single family, duplexes, triplexes, large multifamily, trailer parks, self, storage, assisted living facilities, or office buildings? Or a combination thereof? Are you a buy ‘n hold investor, wholesaler, flip ‘n fixer? What is your mission and vision? Your goals for this year, the next 5, 10 or 20 years? How will you achieve that goal? You need to clearly define your strategic plan first!
2) Pick an Emerging Market
If you have listened to this podcast for a while, you know I have discussed emerging markets and the value of investing in an emerging market. If you can buy anywhere, then you might as well pick one of the best cities for real estate investing – one has that has a vibrant economy, increasing population and good job employment and other factors that insure your financial success. It’s just common sense to me. If you choose a city with decreasing population, a declining job force and a bad local economy then this means you are losing renters, profit, and equity. Things could be great for your first few years but later down the road you will regret ever purchasing this property and you will have a hard time getting rid of it without losing money. It’s best to just do your thorough research first and pick a market that shows both short and long term promise. (You might want to listen to episode #008 – Top 10 Real Estate Investing Markets – this is not an all-inclusive, be-all, end all list. And it’s always changing. But it gives you an idea of some of the hot markets out there. I always, though, suggest that you do your own research!)
3) Secure Financing
It amazes me how many newbie real estate investors try to jump into the game without ever knowing how they will purchase or finance the property. You can spend all the hours you want reading and looking for properties but if you do not have the financing or cash in place than you are stuck. If you have the cash to buy then great, kuddos to you but if you need to secure financing, contact some lenders and try to get a pre-approval before spending a ton of time searching for properties or sellers. I was fortunate in that I was able to purchase my first three properties with cash, but that is not always the case and, it actually makes MORE financial sense to take out a mortgage instead of pay cash. And sure, you can always try to get seller financing but that isn’t always available.
When, I started investing, I had no recent credit history. I had been debt free for 20 years and living in Haiti as a missionary for 11 of those years. I had to re-create a credit history – and even though it made me cringe to sign up for new credit cards, a car loan, etc. to build that credit history –I had also read Kiyosaki’s Rich Dad Poor Dad and understood the value of “good debt” for real estate investing. So, I sucked it up, and was able to get up my credit score upto 780 which helped me get good rates and terms.
4) Due Dilligence
If you find an investment property you are interested in, you will want to pay extra attention to all the details. Not having the means to see the property first puts you at a disadvantage. That’s why it is extremely important you do major in depth research on whatever property you want to buy. You will want to check the property and neighborhood out on Google maps, check assessor and other public records, do a google search on the address, check crime statistics, evaluate rent prices, find local investors to talk to about the property, contact property managers to get their opinion on the address in question, and hire a good inspector and appraiser once you have the house under contract. That’s just to name a few.
5) Research the Seller
Just as important as researching the house, is to research the person selling you the house. Do internet searches on the firm, the individual’s name, check the better business bureau for complaints, search forums for info, find others who have used them and speak to them about their experiences. Believe it or not, there are a lot of shady crooks out there looking to take advantage of unsuspecting newbie real estate investors. Do not leave one stone unturned or it could come back and haunt you. And by haunt you, I mean potentially cause you to lose thousands of dollars.
6) Find a Good Property Manager
I’ve said it before and ill say it again, “A PM can make or break you!!” I’ve had the luxury of working with both good property managers and horrible ones. And I’ve fired more than I’d like to admit. But take note: This is the most critical element of successful out-of-state investing! A good PM can make you life wonderful! A bad one can make your life a living hell! Does that sound harsh? Nonetheless, I think you get the point! Be sure you do a thorough due diligence on your PM. If possible only talk to those you can get strong referrals from. Check out Yelp and the Better Business Bureau. Carefully interview your PM and also speak with other investors who have used them – not just people they refer but check their website and rental ads and track down owners. It is worth it to research and interview multiple PMs before finally making a decision on who you will use.
7) Make Sure the Numbers Work
It’s easy to run numbers using cool spreadsheet calculators like my free 3-Minute Rental Property Analyzer available at the old dawgs website – olddawgsreinetwork.com. What is not so easy is digging even deeper to actually enter the correct numbers to get a realistic number. You can shave down your expenses and costs all you want to see better numbers but at the end of the day, you are only hurting yourself. It’s better to have more conservative numbers going in that having to cope with unrealistic expectations. Your in depth research should give you all the data you need to properly input solid numbers. If your returns are not met, then move on to the next property. Simple as that. Don’t make mistake #7 from my blog entitled “12 Common Mistakes Real Estate Investors Make and How You Can Avoid Them” at olddawgsreinetwork.com and fall in love with the property! It’s important that you see how the romance won’t work out and just move on!
We have multiple podcasts that should help you succeed in out-of-state investing. I especially recommend that you listen to some of our podcasts on how to find good markets, secure financing, build a strong team and analyze potential investment properties. Here are a few of our podcasts that may be of help:
- #006 How to Get Started in Real Estate Investing
- #008 Top 10 Real Estate Investment Markets
- #010 Setting Your Real Estate Investment Goals
- #018 Why I Buy Out-of-State Properties
- #020 Building a Great Out-of-State Steam
- #036 Analyzing Real Properties – Part 1
- #040 Analyzing Real Properties – Part 2
- #042 Analyzing Real Properties – Part 3
- #060 Your 2017 Strategic Plan
- #060 The Pros and Cons of Out-of-State Investing
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Get a free copy of our 3-Minute Rental Property Analyzer at olddawgsreinetwork.com.
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