How to Invest in Real Estate Properties Out of State

It’s impossible to buy an investment property under $100k in a decent neighborhood that is within a three-hour drive from where I live in Santa Monica, California. In addition, in today’s market, it is almost impossible to find cap rates above 7% in a decent neighborhood in Southern California. If I have to drive three hours to check on my properties, it might as well be out of state. On the East Coast, a three-hour drive can easily put you 2-3 states over. So if you live in California, New York, or anywhere else with high property prices and low cap rates, you might want to take a serious look at out of state investing.
investing in property
Invest in property

There are essentially two ways to invest long distance: DIY vs. Turn-key. With the DIY approach, you must do a lot more work at first such as building your team in the area. At a minimum, your team should consist of a real estate agent, general contractor, subcontractor (1 per trade), property management and title companies, and investor-friendly realtors. It may take some time and money to get set up, but once you have a trustworthy team in place, it should get much easier. You can then hone in on a particular neighborhood in a city to look at properties. Depending on your level of risk or appetite for reward, you can buy a property that doesn’t need any work or a complete rehab project. You can then leverage your team to put all the pieces in place, including the tenant.The other option is to go with a turn-key investment property. The properties we offer are typically priced below market value and generate steady income. As Robert Kiyosaki says, in real estate “make your money on the buy, not the sell.” This is a win-win for our investors as they are walking into instant equity and a strong cash flow. Here you can read more about the 4 Pillars of Buying a Turnkey System.

How to pick a location for out-of-state investing

Location, location, location! This is an old saying in real estate that is still very true. The most important part of investing in a long distance property is picking a location. When I invest in long-distance rentals, I select an area with a strong economy that is growing in population, and whose numbers are favorable.

Economy

We saw what happened in Detroit: the housing market collapsed. I do not think it is wise to invest in an area where the economy depends on one industry. Detroit’s economy was primarily based on autos; and when that world collapsed, so did the city. I prefer to invest in cities with different industries in which technology needs to be the focus, which is why I really like Chicago.

Population

Many cities in America have been declining since the 1950s as people have moved out to the suburbs. However, cities like Detroit have completely tanked since 2009. Do a quick Google population search (Google “population Detroit”) to see how the numbers look over the last 15 years. Ideally, you want to see a slow but steady incline.

Rental rate to purchase price

The most important reason to invest long-distance is to make better returns. First, I would like to see a monthly rental rate of at least 1% of the purchase price (for example, $1,000 rent on a $100,000 property). Secondly, I would like to see net cap rates above 7% for a Class B neighborhood. This means that after all expenses (taxes, property management, insurance, utilities, vacancy reserve, and maintenance reserve) you will see a 7%+ return on your investment.

Keep Expenses Low

The best way to increase your cap rate is to minimize your expenses:

  • Shop around for the best property manager for the money.
  • Buy in states that have low property taxes.
  • Buy properties where the landlord isn’t required to pay utilities (check state and local laws, especially for multifamily units).
  • Some areas have special district taxes or HOAs that will kill your cash flow.

Rental demand

It doesn’t do any good to invest in another location if you can’t rent your homes. Check the vacancy rates and historic appreciation in the area in which you are looking. I don’t depend on appreciation, but it is nice to have, and you certainly don’t want negative appreciation.

Conclusion

Depending on where you live in the country, out of state investing may be your best and only option if you want to participate in real estate and get the best return on your money. You need to think of your property as a stock or mutual fund; while you can’t touch or feel it, it’s sitting somewhere making you money. If you are in an area where it is impossible to get good cash flow with rentals, you may want to consider investing in long-distance properties or buying turn-key rentals in different markets.

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