For those of us who live in a high-cost area like Southern California, getting started in real estate investing can be difficult. One option to consider is out-of-state real estate investing. But where to start? Here are some steps you can take:
Step 1 – Find a Location
Finding a location to start your out-of-state real estate investing journey is the first step. Part of this process entails coming up with your criteria.
Some criteria will be personal such as: How much do you have to invest? Are you investing for immediate cash flow? More focused on appreciation? Do you want to be able to visit easily?
Other criteria that are perhaps more universal, including the area’s economic outlook, population growth estimate, crime rate, schools, rental vacancy rate etc.
Once you figure out your criteria, it’s time to hit the internet. If you’re looking to maximize cash flow, then the mid-west and parts of the south are where you’ll likely focus. For appreciation, the mountain west may a good place to start.
A simple Google search can yield lots of information on a location. Websites like Zillow, Redfin, and Realtor.com, can give you a rough idea of what values look like in an area. Additionally you’ll learn what is on the market or has recently sold. One important resource not to overlook is your own friends/acquaintances. You should let people know you’re interested in real estate. You’ll be surprised what connections you might make.
When I made my own out-of-state real estate investing criteria several years ago, my list looked something like this:
- Must be cash flow positive, but more focused on appreciation.
- Reasonably easy to visit from Southern California.
- Diverse economy with low vacancy rate.
- City I would live in. (That way if things went horribly wrong and all I had left in this world was the property, it wouldn’t be the end of the world if I had go to live in it. I also figured if I would be willing to live there, other people would be too. )
These criteria led my search to Colorado. It was a short, inexpensive flight from Southern California and I had friends and family there. I told people of my interest in real estate investing. Soon after my search began, I had the good fortune to find a friend who had a connection in Fort Collins, a realtor and property manager Kevin Bolin. I turned my attention to Fort Collins, which I had visited in the past. Money and Outside magazines had recently recognized Fort Collins as a great place to live. I decided to give it a shot and reach out to Kevin.
Step 2 – Assemble your team
After choosing a location to invest in, the next step is to choose your out-of-state real estate investing team. The two most critical members will be your realtor and your property manager. You’ll also want a lender (unless you’re sitting on mountains of cash) and a CPA/Tax Preparer.
Realtor
In order to be successful you’ll have to find a property that works for you. For this important task, you’ll want an experienced realtor who can help you narrow your criteria further and do your leg work since you don’t live there. A good realtor will know the area well, visit and help you evaluate properties, and help craft offers. I’d recommend finding someone who owns rental property in the area themselves. That way you have confidence that your realtor knows what will make a good rental in the area.
The best way to find a good realtor is by word of mouth. That that can sometimes be difficult. However, if you let people know you’re looking to invest in real estate, you’ll be surprised who might have a connection. Alternatively, blogs devoted to real estate investing like BiggerPockets have members all over the country where you can get referrals.
In my case, having a great realtor like Kevin has been vital. Kevin owns investment real estate and has been involved in investment real estate in Fort Collins for some time. He knows what to look for in a good investment property. Kevin knows my criteria and price range. He keeps his eye out for properties that might work for me and lets me know when he finds something. He’ll visit the property, photo/video it for me, provide his evaluation and his estimated rate of return. Once we decide to try to buy a property, Kevin helps me craft an offer that maximizes my rate of return while giving me a decent shot of getting the property. Once under contract he coordinates and helps arrange the inspection and any follow-on bids.
Property Manager
A good property manager is worth their weight in gold. They will find reliable tenants, keep rents at market rate, collect rent and get it to you in a timely manner, and take care of routine and emergency maintenance. Even with a solid property manager, you should try to visit your property at least every other year. After all, no one will care about your property more than you do. It’s important to get eyes on periodically just to see the condition of your property for yourself and see any changes in the area.
Word of mouth is once again the best way to find a reliable property manager. Short of that you’ll be left with an internet search of some type. Once you find a potential property manager, you’ll want to talk to the owner of the business and check out their website . When you talk to the owner, you’ll obviously want to know the monthly fee. Also whether there is a leasing fee/releasing fee. Are there any other recurring fees? Do they have in house maintenance or contract it out? Do they perform regular/preventative maintenance? What is their vacancy rate compared to rate of area? How and when will you get your rent? What documentation will they provide and when?
When I started with Kevin, he owned a property management company Kevco, So I went with Kevco. Several years ago, he sold it to Nicole Hanson who continued to do an amazing job. Kevco finds and screens reliable tenants, keeps rents at market rate, performs preventative maintenance, doesn’t charge unnecessary fees, and direct deposits rent into my account the 15th of each month. I get a detailed list of income/expenses each month with all receipts and a detailed income/expense breakdown along with my 1099 each year. Kevco really makes my job easy. Remarkably over 12 years I’ve had only 2 vacant weeks – and those were due to COVID.
Please check out our post on Property Manager Selection here.
Other important team members
In addition to your realtor and property manager you’ll want at least two other members on your out-of-state real estate investing team – a mortgage provider and accountant/tax preparer.
Once you’re close to being ready to make an offer, you’ll want to get a pre-qualification letter from a lender. That letter basically says you have the financial means to make the purchase. Many sellers won’t consider an offer that doesn’t come with some type of proof of financing/ability to purchase.
Real estate enjoys quite a few tax benefits. The rules regulating these benefits change at times and can be tricky to comply with. A CPA/Tax Preparer will ensure you maximize your tax benefits while not running afoul of the tax man. You should look for a CPA/Tax Preparer who works with clients who own real estate investment property and who is comfortable filing out-of-state returns.
Step 3: Find a Property/Make the offer
Now that you have your team in place it’s time to find a property and make an offer. Ideally, you’ll have had time to go visit the location and meet your team in person (one reason to find a place easy to get to) before making an offer. But if not, with Google maps and street view you can get a good enough idea of a property and its surrounding area to make an offer.
Once your first property is under contract, I do recommend you go see it either during the inspection or soon after. That is the only real way to get the feel for the property and area. Plus, you’ll have the chance to meet your team (assuming you haven’t been out already in person). Note: Most real estate purchase contracts give buyers great freedom to back out of the contract, so getting a property under contract without seeing it in person is not unusual or particularly risky.
Once you have a successful purchase under your belt and you trust your team, buying sight unseen the next go around may make sense.
Turn Key Rentals
This topic deserves its own post which we’ll post in the not terribly distant future.
Turnkey rentals is a somewhat recent addition to out-of-state real estate investing. Normally, it involves a company who will do everything for you – find and rehab a property, sell you the property, find tenants, and find a property manager.
There are several companies out there who follow this model. Some of these companies are reputable and some are not. You’ll want to be very careful if you go this route as I’ve read about some scams where properties purchased weren’t as advertised by the turnkey rental company.
Conclusion
When you live in a high cost area, out-of-state real investing may be the way to go. It can be tricky getting started. But once you do, it can be a very rewarding experience.
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