Many people want to invest in real estate but find that they can’t do so in their home market. Either the cash flows are not there or the property is too expensive. Here in Northern Virginia, the average price point is in the in the mid 500s and selections below $200,000 are very limited. With a typical investment loan requiring at least 20% down, the cash needed may limit options. Or putting all of their cash into 1 property will not allow them to diversify the way they want. In other parts of the country, the average price point is $200,000 and many decent properties can be had for $75,000 to $100,000 lowering the cost of entry.
I often hear people say…. How can you buy a house in another part of the country? So far away. How will I know if it is being taken care of? I’ll have to pay people to fix things and I won’t meet the tenants, etc, etc. Well, let’s explore the pros and cons of long distance investing and I will suggest an easy way to get started. Up front, I will tell you that I own real estate investments in this market and outside of the area so this isn’t just investment theory. I believe both have a place in a real estate portfolio.
BUYING A REAL ESTATE INVESTMENT CAN BE LIKE BUYING A STOCK
Before getting into houses, let talk about stocks. Have you ever bought a stock in an individual company? If you did, I am sure you researched the company. You knew their line of business and it was a business model that you understood. You felt they were one of the best in the industry and that they had a bright future. You probably looked at a few financials to make sure they were profitable and had the resources to continue to grow. If you felt they were under priced, you bought the stock.
Now, after you bought the stock what did you do? You tracked the prices. Maybe once in a while you checked the latest profit and loss statement. But I am going to guess that even for companies located in your home town, you did not request a seat on the board or attend the shareholder meetings. And more importantly, I am almost certain that you did not limit your investments only to companies with headquarters in your city. No, if the numbers were right and the potential for growth was high, it did not matter where the company was located.
If you look at a house as an investment, the same rules apply. If a market has the financials that meet your goals, whether you need to walk, drive or fly to get there should not matter. A good investment is a good investment. Sure there may be extra costs involved in an out of town real estate investment but that should be factored into your formula.
Now on wall street, there are, in essence, two types of investment goals. One is appreciation and the other is income. The same exist in real estate. Some investors want to buy a house in a hot market and sell it quickly for a profit. Others are looking for strong cash flow to help them in retirement. There are markets that meet those goals and some that are a blend. Chances are that your home market does not offer strong offerings that can meet both goals. You may need to use your home market for one type of investment and look elsewhere for the other.
Certainly Northern Virginia has historically been a great growth market. (Check out sales prices in Northern Virginia since 1975) At times it has also generated great cash flow. At this point in the market cycle, cash flow is possible but not as strong as some other markets in the country. But most of those markets do not project to have anywhere near the growth of our market here. Find a market consistent with your goals and go for it regardless of location.
ARE YOU LOOKING FOR A JOB OR AN INVESTMENT?
The biggest negative I hear about out of town real estate investing is that you have to pay for every little repair and it eats into your profits. Well, that needs to be factored into the purchase when buying out of town. If the numbers don’t support a property management company, then don’t buy in that market.
Furthermore, if your goal is to have a large real estate portfolio, do you really want to be fixing toilets? Do you really want those “no heat” calls late at night. I know I don’t.
Think of the “big time” real estate investors that come to mind. Do you picture them going into their apartment buildings with a mop to clean up an overflowing toilet. If you want 1 or 2 properties, you may have time to mop the floor but if you want a solid diversified portfolio of homes, isn’t it best to leave maintenance to someone else and use that time to find more homes, do your day job or, most importantly, spend extra time with the family?
As mentioned, I have properties locally and out of the area. I would much rather have a dishwasher break in Greensboro NC than Manasass VA. In Greensboro, I get a call that the dishwasher broke, the management company looked at it and it can’t be repaired. The replacement cost is $x.. I authorize the expense and that is it. Total time solving the problem measured in minutes
In Manassas, I visit the property to assess the situation, go to the store to buy the new one and arrange for installation which may or may not involve more of my time. (If I was handy, I could even install it myself) When I think about all of that I get exhausted. Total time solving the problem measured in hours over multiple days. And did I really “save” money when I think of the value of my time?
IS THERE ANY TYPE OF INVESTING THAT DOESN’T WORK LONG DISTANCE?
Yes. If you are a fix and flip investor or looking for deep discounts due to condition, it is hard, and perhaps unwise, to get homes remodeled long distance. I know investors that pursue that strategy but I can’t see how to easily make that happen. I think properties needing no work or just paint and carpet are best suited for long distance investing.
SO HOW DO I DETERMINE WHERE TO BUY?
Just like you should buy stock only in industries you understand, you should only buy homes in towns you understand. Perhaps the town where you were born fits your investing profile. Maybe you went to college in a city that would be interesting to you. Or maybe you worked elsewhere in the country for a few years. Check the economics, housing prices and rents in those areas.
If nothing clicks in those towns, start to search the web for “best towns for real estate investing” or similar searches. You will start to get ideas and eventually find city that seems to be a match.
HOW TO DO I BUY THERE FROM HERE?
In my opinion, this is the only “hard” part of out of town investing but it can also be a “fun” part. I think you need to visit your target market and see the area at least once. You need to learn about the housing stock and put together a team on the ground to help you find and maintain your properties. Zillow, Realtor.com, Trulia, etc can only do so much. (Check with your accountant but most likely if you buy there, the trip and subsequent trips are tax deductible)
You need to find either a great Realtor or a turnkey operator you can trust. Then once you get the home rented, and you hear about other opportunities, you should feel comfortable moving forward without visiting or seeing the property.
Through my various investor network connections, I am confident I can find you an investment oriented Realtor in just about any market in the country. Give me a call and I will connect you with someone who can help.
Now, in many of the smaller, modestly priced markets around the country there are companies that buy foreclosed and distressed properties, bring them back to life and sell them to out of town investors. All you need to do is “turn the key.” There are good turn key operators who do quality remodels and then there are those those that put in the stainless steel appliances with duct tape and glue.
I know quality turkey companies in several cities around the country including, Memphis, Birmingham, Dallas, Houston, Northeast Ohio, Chicago, Newport News and more. Several of these not only fix up the homes to sell to long distance investors but also provide property management.
I recently met with a turnkey operator who, in explaining their business model, said that they are more of an internet company than a real estate company. I immediately understood what he meant. This company sells a few dozen homes a month to out of town investors. If they do not do a quality job and give outstanding customer service, they will get killed with bad internet reviews and their customer base would quickly dry up. I like that customer oriented business philosophy.
So, do not be afraid of looking at out of town real estate. Call me to discuss your situation and let me refer you to professionals who can help.
It’s a big country out there and opportunities exist from Maine to California and points in between.
P.S. Since out of town real estate is about as passive an investment as there is, it works wonderfully well within an self directed IRA.