Things you Need to Know about Investing Out of State So You Don't Lose Your Shirt
It is a fantastic time to invest in real estate right now. The key is to buy smart. A lot of investors get suckered into bad deals and the number 1 reason is that they don't do their homework. This brings us to Rule #1:
1. Do your Homework.
Trust but verify everything. There are a lot of scammers out there who say they work with out of state investors but really all they do is prey on gullible out of state investors and sell them overpriced properties in lousy areas. Most out of state investors don't know the individual neighborhoods in a town far away and don't do their homework to find out about them. This makes the investors easy targets for unscrupulous brokers or investor agents. If you aren't careful it's really easy to get suckered into a property that is made to sound great but in reality is a lemon. Don't let that happen to you.
If you are looking at a property that someone says will make you money don't just take their word for it. Run the numbers yourself to make sure it will make money for YOU. How do you run the numbers? Check out this page to see how I run the numbers on a property.
The same with location. Don't just take someone's word that the property is in a good neighborhood. Do your homework so YOU know it's a good neighborhood.
2. Don't let Price be the Deciding Factor.
There are a lot of places these days where you can buy a house for a couple of thousand dollars. A lot of investors out of the area get really excited when they see it's so cheap. I know I did. I'm in California where you can't buy a dog house for less than $250,000 so when I saw I could get a house for $5000 I was like - wowee! Bad move. The house wasn't in a good location and didn't make money.
That brings us to the next important rule of investing:
3. If your investment doesn't put money in your pocket every month, it isn't a good investment.
A lot of real estate agents and real estate gurus will tell you that even if the property doesn't cash flow now (i.e., put money in your pocket) you will make it up on the back end when you sell the house after it appreciates when the market comes back.
DON'T GET SUCKERED WITH THIS LINE!!!
You make money when you BUY an investment property. If it is a good deal upfront, the property will pay you every month. If it's a bad deal, you will have to take money out of your pocket every month to cover the property's expenses or you won't put money in your pocket. It's either a good deal or bad deal and you should know before you buy the property what type of deal it is. You either make money from Day 1 or you don't. If you remember nothing else from this website, remember that. Follow that one rule and you won't lose your shirt.
4. Without a Good Team, You're Sunk.
If you invest out of your area you can't just hop in your car and visit your property whenever you want. As much as you may be a Lone Eagle in your normal day-to-day dealings, if you invest out of state the sooner you get over the need to do everything yourself, the better off you will be.
You will by necessity rely on other people to keep you informed about your property. This requires a good team. You will need a good agent who deals with investors, a good management company, a good insurance agent, and a good mortgage broker. Get references from other investors, meet the members of your team in person if you are able to, and remember rule #1 Trust, but Verify. Don't just take someone's word that they are good, verify from other people that they are. Check out the Better Business Bureau, check online for any reviews of their services, remember: verify!
5. Don't be a Jerk.
As I just mentioned you need to have a good team out of state to oversee your investment. The problem is that from a distance it's easy to get suspicious and think someone is doing you wrong or not taking care of things like you think they should. Maybe they get a bad tenant in your rental home, maybe they don't call you back as soon as you think they should. It happens sometimes.
Know going in that you have to have patience. No one will treat your property exactly as you would but if you have a good team they will probably treat it just fine.
It's usually a good idea to actually visit the town and meet with members of your team if at all possible but if you can't and you have done your homework, then trust your gut instinct. Don't let paranoia or nervousness that you may have made a bad investment cause you to be a jerk to those who are helping you. You will just end up hurting yourself and your investment will suffer.
6. Don't be an Idiot.
Real estate isn't like stocks or bonds. You can't just invest in property and then not think about it for a couple of years. It doesn't matter how good your management company is, you still need to keep on top of your investment property. Make sure you open all correspondence and check all service invoices as they come in. Most management companies are on the up and up but you still need to keep them honest and double check their figures and so forth.
Even if you have a management company it is still your property. You need to make sure taxes and utilities are paid, the money is deposited to your account, and so forth. Also, make sure that you get copies of all keys to your buildings as well as copies of your tenant information. If you end up firing your management company or they end up disappearing into the night you will need to have these items.
Along those same lines, know what normal expenses are. If you have 10 properties and your management company is charging you $5000/month for repairs something is wrong. Make sure that you aren't making it easy for them to cheat you. Again, most management companies are honest but you need to be aware that some aren't and protect yourself.
7. Find Good Management BEFORE you Buy.
No matter how great a location you find or how good a property seems MAKE SURE that you have a good management company to manage the property BEFORE you buy it. I can't stress this enough. Doing so protects you from 1) buying in a bad area without knowing about it, and 2) having a property in a far away city that you can't find someone to manage. There are some decent sized cities where it's hard to find good management. I know. I found a great mid-sized city a while back that I could have made big bucks in but I couldn't find a single decent management company. If I had bought before I checked that out I would have been up the creek.
Remember, it's important that you be smart about investing out of state or else you can really get taken for a ride. It's possible to make really good money investing out of state but to do that you have to avoid some pitfalls that are traps for the uninformed. One pitfall is choosing the wrong location.
Got questions? Let me know. If I can help answer any questions you have I will be glad to. kip@realestateoutofstate.com