Some places are so expensive these days that it’s all but impossible to find a rental property that will produce positive cash flow, particularly if you are buying with a loan. So it’s not surprising that many investors look out-of-state (and some out-of-country) to find rentals that will actually cash flow.
While this practice has become more and more common recently, it comes with a large number of risks that an investor should be fully aware of and prepared for. Buying out-of-state is anything but a passive investment.
When You Should Consider Buying Out of State
As a general rule of thumb, you should always buy where you have boots on the ground all else being equal. Indeed, even if not everything is equal, you should lean toward buying where you are at. In fact, if you can get properties to cash flow where you live, you should really buy where you are.
It’s just an enormous benefit to be able to visit the property and go around the neighborhood for real rather than some glossed-up digital version. It’s also much easier to verify work has been done, correct problems as they arise, and switch managers or contractors if need be when you live in the same place as your properties.
That being said, when there isn’t an ounce of blood to squeeze out of a turnip (or rental property), it’s time to look elsewhere. Even then, closer is still better. I knew some Australians who bought properties in Kansas City a while back and quite frankly, I think that’s a bit far. From what I could tell, it didn’t work out very well.
If you do decide you want to risk it and go looking for properties out of state, there are some things you need to carefully take into account.
Considerations to Make
The first thing to note is that you should probably give up on the idea of flipping or BRRRRing. Unless you build an operation in that town and then leave, you simply won’t be able to put enough time and legwork into finding deals with sufficient equity to flip at a solid profit or refinance out completely. Sure, you shouldn’t settle for buying at market prices, but getting deals at 70, 75 or 80 percent of market value from out-of-state will be tough.
I should note some investors wholesale deals out-of-state and do quite well. But these are usually large, centralized operations marketing to people all over the country (usually with SEO and/or web ads). And furthermore, many of them are not nearly as successful as they make themselves out to be.
The next point is that you should buy in nicer areas than you would locally. So, for example, if the lowest class area you would be willing to purchase in where you live is a C minus, bump that up to a C or even a C plus out of state. Less tends to go wrong with higher-end rentals.
In addition, try to take on smaller rehab projects. If you would go up to $30,000 where you live or thereabout, top out instead at $20,000.
There’s no exact science here, but try to keep the areas better and the rehabs smaller when investing out-of-state.
Vet, Vet, and Vet Some More
When it comes to property management, I like to say that the three most important things are “screen, screen, and screen some more.” With out-of-state investing, I would say it’s
“vet, vet, and vet some more.” And by this I mean to vet the city, the local area, the team, and the property.
When it comes to the city, make sure that the population is at least stable and preferably growing, the economy is diversified (not reliant on one industry like Detroit was with auto manufacturing) and that crime is not out of control. Sites like city-data.com are great for this type of information.
You should look at the same thing for the local area, but pay special attention to the crime rate, unemployment rate, and quality of the schools (greatschools.org is the place to go for that).
It’s also important to drive around the neighborhood and look to see if there are a lot of boarded-up or burnt-out buildings. Ask yourself if there is pride of ownership (or just pride in the neighborhood) and thereby little trash in the street or overgrown lawns. You should also ask the neighbors how they like the place. They will typically be quite honest.
I once asked someone what he thought of the neighborhood. “It’s alright if you don’t mind dodging bullets,” he responded.
I passed on that one.
The work involved in doing all this is one of the reasons it’s a lot easier to do this type of thing when you live in the same city as the property. If you buy out of state, you will need to find a team to oversee much of this for you.
That being said, I would always highly recommend visiting the property you are buying yourself. Perform the due diligence yourself and make sure the rehab will be about what the real estate agent or operator says it will be. (And get a property inspection too while you’re at it.) The cost of a few plane tickets and a motel is little compared to the cost of buying the wrong property!
Many out-of-state investors work through an operator or turnkey company. Some find the properties themselves and then look for a property manager, contractor, etc. Either way, it’s essential to vet your team.
It should be noted that buying through a turnkey company makes it even that much more difficult to get built-in equity. After all, why wouldn’t they just pocket that equity instead of passing it along to the end-buyer? So usually, if you buy with a turnkey company, it will be at market prices.
Even still, real estate can be a good investment under such circumstances. But you can’t be passive about this “passive investment.”
Make sure to interview the operator (or property manager, contractor, etc.). Look online for reviews and if there are bad ones, ask them to explain what happened. Also, ask for references and give those references a call. You would be surprised what some of them will tell you.
Once you have hired someone they should offer you consistent reports and get back to you promptly. Keep a close eye on them and scrutinize things when they don’t look right. Remember, the squeaky wheel gets the grease!
And lastly, if they aren’t working out, switch. Use a different contractor, change property managers or buy through a different turnkey company. Don’t be afraid to do this if necessary. People usually wait too long to make such a change, sometimes far too long.
Buying out of state is difficult and has many risks, but it can be done right and be profitable. You just need to be very careful and follow the above steps if you plan to take a go at it.