With more people looking to achieve financial freedom through real estate investing, strategies that were previously only used at the highest tiers of investment are being researched and employed by regular Joe and Jane investors looking to make their way in a competitive market. One such strategy is investing remotely, outside of your state or local area. There’s no specific definition of long distance real estate investing, but a decent one might be investing in markets where it is impossible for you as the owner to drive to the property on a regular basis. In this definition we would be including areas that are 3-4 hours away on the minimum, with no upper limit on the maximum amount of travel distance. I would recommend first sticking to investing within your country of residence, but the advice presented in this article is perfectly viable for investing in other countries as well (though that will require additional research as well).
One of the greatest advantages in long distance investing is to find cash flowing real estate that is within your budget. While it might seem counterintuitive, novice investors may actually benefit from researching and considering long distance investment. This is because you need to build some credibility before you have the investment network necessary to have access to the amount of capital you need to buy in more expensive places like metro California or New York. Perhaps you’ve found an area in the Midwest with a stable population base and much more attractive cap rates than your home city. If you do your homework, you can take advantage of these benefits by investing remotely.
1. Taxes and Insurance
Not all states are created equally when you’re looking at the tax rate. Lower property taxes can make certain areas more favorable by default due to lowering your overall annual expenses. Insurance premiums are also determined based on the area of the property you are insuring and other factors and can be significantly lower depending on where you are investing.
2. Assemble your Team:
Investing in real estate remotely requires a rock solid team in place that will keep your operation up and running. As the owner of the properties, it isn’t possible to make your investments truly passive. You’ll always be involved in management and oversight if you are a responsible investor. Investing long-distance will force you to learn how to take at least some of that load off your shoulders and become a better manager, rather than a jack-of-all-trades handyman scrambling around everywhere. The first member(s) of your team are local real estate agents and brokers.
We typically call and interview with new brokers every week as a way of expanding our network. Tell them what you want and what you are looking for. Try to find brokers that work within your budget. Don’t bother contacting someone who trades in large commercial deals if your budget is only $500,000, for example. Your agent is then a window into which you can get references for property managers and any other professionals needed to run your investments. I believe the typical real estate investor nowadays is looking for cash flow primarily. If that is you, be very vocal with your agents about the fact that you are pursuing properties with higher cap rates and cash on cash returns.
2. Assemble your Team:
Investing in real estate remotely requires a rock solid team in place that will keep your operation up and running. As the owner of the properties, it isn’t possible to make your investments truly passive. You’ll always be involved in management and oversight if you are a responsible investor. Investing long-distance will force you to learn how to take at least some of that load off your shoulders and become a better manager, rather than a jack-of-all-trades handyman scrambling around everywhere. The first member(s) of your team are local real estate agents and brokers.
We typically call and interview with new brokers every week as a way of expanding our network. Tell them what you want and what you are looking for. Try to find brokers that work within your budget. Don’t bother contacting someone who trades in large commercial deals if your budget is only $500,000, for example. Your agent is then a window into which you can get references for property managers and any other professionals needed to run your investments. I believe the typical real estate investor nowadays is looking for cash flow primarily. If that is you, be very vocal with your agents about the fact that you are pursuing properties with higher cap rates and cash on cash returns.
3. Turnkey Properties vs. The Renovate-Refinance Method:
How hands-on do you want to be with your real estate investments? Turnkey properties are typically recently renovated or constructed investment properties that have been made “fresh and new” for the investors who eventually purchase them. When done properly, they should be up to par with the “renovated” standard of quality for the market and are already stabilized with existing, reliable tenants and a solid property management company in place. This is a more passive model that many investors feel more comfortable with when investing remotely. More challenging would to buy properties in disrepair and renovate them to force additional equity. When done correctly, this strategy can allow you to cash out as much or more than you put in as your equity portion at the time of refinance. This is a very management intensive process and requires a larger and more complex team to pull off. When executed correctly, the renovate-refinance model has more potential, but the turnkey model is probably more appropriate for the average remote investment.
4. Area Analysis:
This is a more complicated topic that we have already discussed in several previous articles, but there are a few things to keep at the top of your head when looking specifically at long-distance real estate investments. The most important are population trends and the state of the local economy. Look for places with growing or stable population levels and a robust economy with job opportunities that cater to the asset class you are investing in. Look into the laws governing the tenant-landlord relationship, which can vary widely from state to state. Another highly important consideration is the proportion of renters as opposed to homeowners and the related cost to rent ratio. These basically tell you how desirable homeownership is as opposed to renting your home. In places with high homeownership rates and price to rent ratios that make homeownership more affordable, a rental investment is more likely to have trouble performing.
5. Find your Lender:
You can go with a lender local to the area you are investing in, or a national lender like Wells Fargo. Coming from a development background where shopping for the best rates can make a good project a great one, we are always in the habit of doing some heavy research into local lenders to see if there are relationships we can build in the market while still being offered competitive terms. Be flexible about the LTV and the amortization schedule when entering into a new market. I would be prepared to work with a 75% LTV with a 25 year amortization schedule when entering more affordable markets. Be sure that you have a favorable debt to income ratio and, most importantly, the properties you are looking to finance are solid investments with a debt service coverage ratio above 1.2.
