I have heard a few main reasons why people are interested in investing in real estate from out of state. One is that people are looking for a market where they can achieve a higher cashlfow. Another is that they say the market they are in is already too inflated. One reason which I have not really heard, but would be extremely valid, is that there is no positive job growth in thier market.
Investing in real estate out of state can be a worrying experience. To combat some of the worry, it is a good idea to get familiar with real estate investing, the market, and the people you are going to be working with.
Establish your Criteria
To borrow from Steven Covey's The 7 Habits of Highly Effective People: "Begin with the end in mind." You should start with your goals from investing and work backwards to develop your criteria.
Some people are looking to replace their W2 quickly, others are building thier retirement nest egg, some are looking to build and pass on wealth to future generations. By starting with the goal you can then prioritize things like cashflow, appreciation, and longterm stability.
- $250/month net cash flow
- 1% rent rule
- Metro with positive net migration for 20 years
- Positive job growth
- Built after 1990
Select Your Market
Picking a neighborhood in the city you live in is one thing. Picking a market to invest in remotely is a completely different challenge. At first you will have the thought. "I can pick any market I want". Then the thought, "I can pick ANY market I want?" How will you choose between hundreds or even thousands of different markets?
First you can use the criteria you established in the previous step to filter potential markets. If you are hevily cashflow focused, a growing market that is priced very high compared to rent is likely going to be an unattractive market for you. There will probably still be 20 or so potential cities in the US that could meet your criteria.
You can use data from the census and other data aggregation sites to find out which markets meet your population growth, job growth, and demographic requirements.
Second you may want to consider geography from where you live. Even if you want to be as hands off as possible, there is still a chance you will need to visit the property. So picking a market that has a direct flight, or is a couple hour drive from your home is advisable but not critical.
Being a couple hours away or a cheap direct flight away will be helpful if you want to travel to the city to help with networking, and to get a better feel for the neighborhoods in the city. Intuition can be wrong, but it takes a lot of data to get to the same understanding of a neighborhood that being there and talking with the people that are from there can give you.
Build Your Local Network
It may be intimidating if you are starting by knowing absolutely no one in your market. This may be the case for most out of state investors. Even if you are investing in a market that you have spent some time in and know reasonably well, there is a good chance you still want to build your network of real estate professionals in that market. The great thing is that there are plenty of resources to be able to network and gain local knowledge.
Usually when networking and trying to find professionals that are well recomended you will not directly find that individual. For instance you may not directly meet a real estate agent when networking, you might meet an investor who buys similar properties you do, and ask them if they have an agent they recommend. They might even know of a few agents that specifically work with out of state investors.
Using biggerpockets to network is good for two reasons. First is because there is a solid depth of active users on there. The other is that since there is an education component from the platform, there is a good chance of meeting like minded people from the site.
While Biggerpockets has a few local forums for specific markets, the vast majority of the markets do not have specific forums. You will have to be a bit more creative in getting in contact with individuals who are experts in the market you are looking into. A creative way I saw recently was someone asked "Which major city in Texas is your favorite for investing?" The post then whent through a few of the major cities and outlined why they were thinking of investing in each one.
This post got lots of responses from active investors in Texas. They then engaged with them in the thread. The next step they could have taken was to connect with them and send a private message to continue the conversation.
Local meetups are a great place to find other investors and real estate professionals. It is also a quick way to get a consensus on particular vendors. There is a good chance that a prominant real estate agent, attorney, or even turnkey operator is known by many people at a group and you will quickly be able to get references about them.
You can find about local meetups through biggerpockets, meetup.com, or by tracking down the local REIA (Real Estate Investment Association) Though this is not currently the best option for meeting people due to COVID restrictions.
There are groups on Facebook dedicated to real estate investors, real estate deals, and real estate agents in every major market in the United States. You can start interacting with these to make connections in the market you are looking at. Typically this has a worse signal to noise ratio than the other options for networking.
Turnkey Vs Directly Purchasing
Deciding whether to work with a turnkey provider or purchasing something off the MLS or from a wholesaler is an often debated subject. On the surface, working with a reputable turnkey provider is a great idea. The problem is that there is a substantial amount entrusted to one entity.
Turnkey can be a good way to acquire properties remotely. A turnkey provider buys a house, makes it rent ready, places a tenant, and then sells to an investor as an stabilized rental property.
The biggest argument against them is that they have already identified an opportunity and taken most of the equity from the deal. Some will leave a little equity in the deal to make it so its a win-win scenario.
One of the big things with a turnkey provider is: Trust but verify. If you can find other investors that have worked with a turnkey provider and get thier experiences that is great. Worst case scenario of due dilligence, you should at least be able to get a few references from the turnkey provider.
Most turnkey providers have integrated property management where they continue taking care of the property after you purchase, or already have the property running by a third party. This is part of the value they are creating is that the property is already acting as an operating busines. It is good to have a plan B for management, in case something is not up to expectations.
The big push I see for people looking to purchase directly is because they either want to do the BRRRR strategy now, or they want to build a system which they can eventually employ the BRRRR strategy. Since the BRRRR strategy can have amazing results to your IRR, this can be worth the effort.
Doing a complete rehab remotely with the efficiency that would enable you to pull out 100% of your equity upon refinance is quite an ambitious goal. It has been done beore though, and is deffinitely possible. A much more likely outcome is to do a partial rehab or updating of an apartment that adds some value and allows you to refinance a decent portion of your equity out.
How do you pull off a direct purchase remotely? It will definitely involve getting some boots on the ground so to speak. You will likely putting some of the jobs of a turnkey provider onto a real estate agent. A property management company is another potential local partner to assist in selecting and managing the rehab.
Run The Numbers
Being conservative when underwriting a deal is important. You can see how I evaluate a beach house's financials. Running the numbers on a long term rental will likely be tighter with more thought put into capital reserves and maintainance costs.
Research The Neighborhood
This is probably the easiest part to get wrong investing remotely vs investing locally. You will have to rely on your team and anyone you can reach out to about data. If you do visit the area, you should talk to locals and get an idea on what they think is going on with the neighborhood.
If you look on Zillow at the neighborhood, you can look at what the home values are like from block to block. The wider they vary, the more you will have to pay attention. Large variations could show that an area is moving either up or down in desirability. It definitely would signal to be careful and thorougly research what is going on to cause values to have such variation.
There are some good reasons for investing out of state in real estate. Some of your challenges will be building a team and doing proper due dilligence from out of state. Another problem is once you decide you are not investing locally, you have to narrow down where to focus on from a list of all the markets in the country.
With a little ground work, you can get to the point where you are comfortable with the risks associated with investing remotely, and investing in real estate in general.