Sometimes you are unable to be in the same city as your investments.
Whether it’s because you move to a new house and do not want to forfeit a great property or the market in a faraway city is booming and you can’t bear to miss out on a location that provides incredible returns—sometimes the mantra of “invest where you live” simply does not apply to you.
If you’re ready to dive in and take the risk, then here is everything you need to know about long distance real estate investing.
What is long distance real estate investing?
Long distance real estate investing is easy to understand, but not typically as easy to do successfully. As the name would suggest, long distance real estate investing is when you own property for profit in a non-commutable distance.
There is a little bit of debate as to whether or not this means that the properties can just be a few hours away, or whether they need to be completely inaccessible on a day trip, but the principle remains the same. This is when you invest in properties that are outside of your local real estate market.
What are the benefits of long-distance real estate investing?
Many have considered the tactics of long distance real estate investing risky.
However, when done correctly, long distance real estate investing can actually be one of the greatest vehicles to build wealth. This is because you are not stuck working only in your backyard.
You will have the ability to grow your investment portfolio by leaps and bounds, and, if you can build up a good team to help you out, you can reap some of the benefits from your investments in a passive way.
However, that is the catch. To get to this point takes a lot of hard work, investigation, and typically, lots of failure as well.
Here is the flipside to the equation:
What are the drawbacks of long-distance real estate investing?
This type of investing is not always easy! Here is why:
It can be really hard to effectively make a profit out of a “foreign market.”
This is especially true when you do not even fully understand how to game the market that you live in. Because of this, you should not try long distance real estate investing until you fully understand how to do it up close.
It is also difficult to really understand the nuances of a market and how it changes if you are not living in the area.
Even if you are really good at keeping up with these changes, there is still going to be gap between when they actually occur and when you start noticing them.
Because of this, long distance real estate investors need to be especially careful. By the time you notice the market has changed, it might be too late to react!
The sheer costs of investing in a long distance real estate market is significantly higher than in a local market.
This is because there are often property manager, consultant, and travel fees associated with each listing. You could even end up paying your property manager for nothing. This is because you might find that good help is nearly impossible to come by.
Since you will not be on site to solve problems should something go amiss, it is important that, when investing out of state, you find someone who comes highly recommended. You have to place a significant amount of trust in this person and believe that they are truly going to act in your best interests in your absence.
A good way to lessen this risk is to have a local investor contact in addition to your property manager. This person could be a true business partner or just a professional connection. You could rely on their local experience and expertise in the market to ensure that your team on the ground is sourcing you the correct information.
To keep costs down, you could offer this contact a quid pro quo relationship. This essentially means that if they scratch your back, you will scratch theirs. You can offer your connections and knowledge in your area as a way to say thank you.
If you do not complete your due diligence, your choices can be risky and unwise.
Before you purchase a property in a far away location, you really need to think about the local housing market, the specific neighborhood, and the home’s location within that neighborhood. If you do not research enough real estate comps before you jump in and buy a property, you could easily be in trouble.
You need to know the recent sales price of homes in the area, but also things like vacancy rates in the neighborhood, the quality of the local schools, the frequency of local crime, and the competitiveness of the job market. You should also consider things like whether or not there are good amenities nearby, like grocery stores, movie theaters, shopping malls, and public transportation.
Top Five Tips for Long Distance Real Estate Investing
Here are the best ways to get started and achieve success in long distance real estate investing.
Get your money together first.
This seems like a no-brainer, but traditionally, investing in real estate carries a lot of risk. This is especially true when you are thinking about sinking money into a market that you might not fully understand or have access to all the time.
Be sure that your portfolio will be able to manage the potential risk.
Consider your reasons for long distance real estate investing.
Once you have your money together, the first thing to really think about it why you want to look elsewhere for properties to manage. Unless you have moved and do not want to forfeit your previous properties (or stop investing in a market that, albeit far away, you still understand) you should start by looking around at your local market.
If you can find the same kind of deals and opportunities nearby, invest in those instead. You don’t want to hold real estate that is far away when there are the exact same kinds of properties in your own area.
Consider relevant local laws.
When you begin investing in another location, you have to be aware of the laws of the land. Even if you are investing in the same state, the rules of Houston’s Harris County and Austin’s Travis County in Texas could be very different.
Fees for breaking these laws are often high and unforgiving. You do not want to get caught in a legal battle that you have to travel to participate in.
Consider the price to rent ratio.
The price to rent ratio is a great tool that helps investors understand where they can buy real estate for profit. It includes the capitalization rate, the cash on cash return rate, the occupancy rate, and the rental income.
Here is the formula that you need to follow to achieve success:
Price to rent ratio (P/R) = Average list price / (Average rent x 12)
Now that you have your ratio, here are a few things to remember as you interpret your results:
- A ratio between 1-15 means it is better to buy.
- A ratio of 16 + means it is better to rent.
Of course, this simple equation should not be the only thing you use to determine whether or not an investment is a good fit for you. However, it is a good place to start.
Think about how much you like the area.
When you invest in a certain area, you are creating significant ties with it. Because of this, it is important to think about how much you enjoy a particular city or suburb before you decide to buy property there. You should consider the local culture and the types of people who are likely to rent or buy from you.
Think about the seasons and potential for problems they could bring up. For example, if you live in sunny Southern California and own investment properties in Denver, the cold, snowy winters might provide more hassle than you want to deal with. The same problem could come up with the potential for hurricanes if you own land in Miami and are unused to dealing with these storms.
You should also pause to think about the government in the area. As mentioned, local laws can really impact the ease of investing, as well as the potential for profits. Before make buy land, be sure to not only understand the local laws, but also be comfortable operating well inside their perimeters.