Key Steps to Long-Distance Rental Investing, Part 1: The Basics
Anything long-distance tends to be trickier, whether that be a relationship or an investment! But if you have the key steps taken care of, the distance will be a mere factor, and not a hindrance to you achieving your rental investing goals.
This is the first of our 3-part series on long-distance rental investing. We’ll take you through the basics of what you need to get started long-distance investing, then in parts 2 & 3 we’ll look at specific scenarios: how to run a rental business in the US as a non-US citizen, and how to invest in the US as a citizen living overseas (or in a different state).
Why consider long-distance rental investing?
Why would someone invest in real estate in another state or country?
Well, usually you’d need to be pretty motivated to deal with the additional challenges and risks of buying a property you can’t easily check up on. Let’s look at some of the specific reasons that would motivate an investor:More attractive returns than their local market(s)
– Lower point of entry than their local market(s)
– Diversify their investment property risk by buying in different areas
– Better tax advantages than their local market(s)
– Establish a place to retire eventually while having tenants pay it off
So, if it seems like the grass is greener in other areas – the ones that are out of your geographical reach – then remote investing could be the answer.
Is long-distance investing risky?
If you’ve done your research, you’ve probably noticed there are some people who say that long-distance investing is too risky, but technology has helped make it a lot less so. The key (as with any type of investment) is to educate yourself and work with the best people, like a local property management company that has a strong reputation in the area.
How do you invest in long-distance rental properties?
1. Do research on your desired location.
There’s a chance you can’t visit the area and property at all before pouring your money into them. And no matter how “potential” a market is, no market is 100% guaranteed to give you straightforward, problem-free business.
So, have a criteria when scouting for potential locations:
Stable Employment Rate: An increasing employment level means that the economy is growing and will likely continue doing so. The stronger the economy, the more stable the housing demands. And higher employment levels lead to wage increases, which attracts more and more people to the area.
Stable or Growing Population: The more people moving in, the higher the housing demand goes. Any location with population growth means a great supply of renters, and likely rising property values. You can also double-check by looking at the vacancy rate of the area.
Liveability: If the area is not a favorable place to live, chances are, there won’t be many renters. So check the schools, housing conditions, transportation/commute, nightlight, and amenities. Check if the cost of living is reasonable, if the crime rates are low, and if there is diversity in the area. A pleasant place to live will have lower turnover rates (and bring higher quality tenants).
Age of Population: A place with more young professionals and young families indicates that growth in the market is on the horizon.
For areas specific to Metro Detroit, we’ve whipped up a whole series on evaluating the real estate potential of each city and neighborhood
2. Assemble your Tripod Team.
Because you won’t be around, it’s crucial to have a local team working on the ground on your behalf.
Logically, find a good Realtor, an unbiased Inspector and an even better PMC. They are all critical to finding a solid rental property with good returns and keeping it that way.
They should also be a good “check & balance” on each other.
Realtors
Investors need to work with Realtors that understand the investor’s mindset. In our opinion, 95% of Realtors are a bad match for investors. Don’t believe us? Ask an “average” Realtor about ROI, Cash-on-Cash Return or the 1% Rule, and see what they say.
We’ve also encountered Realtors that were just trying to make a quick sale and were peddling crappy properties that we didn’t want the headaches of managing.
If everyone has a team mentality, open & frank discussions about properties should be possible, and lead to an investor acquiring a good investment. We do know Realtors that understand investors and what they are looking for, but an investor still shouldn’t necessarily blindly accept such a referral.
PMCs
These are your partners who will help you find and screen tenants, report with exhaustive details, and oversee renovations or constructions. In essence, they’ll be running your business for you, so it’s imperative to screen your property management company well.
We’ve taken over rentals that a slimy Realtor and PMC screwed an investor with – as in, they were working together to purposefully screw a landlord over. So, be sure to do your due diligence on both!
Inspectors
Inspectors are the last, but not least, of your “Tripod Team” of support.
Try to find one via your own search. Having your Realtor or PMC refer you to one may be easier, but how much can you trust them to honestly assess a potential purchase and not be pressured by the Realtor or PMC that brings you a “deal”? You want an inspector to tell you everything wrong with a potential purchase, so you don’t get ugly & expensive surprises.
An example of what can happen when your “Tripod Team” doesn’t exist, or doesn’t work together well:
We had an existing client go out on their own and buy another rental.
They looked online and bought it through the listing agent, who was representing only the seller.
The client found their own inspector, but didn’t get us involved until after they bought the property.
After going through the property, we sent our client a $20k RentReady bid (with supporting video), detailing what repairs we’d have to do to be able to get the rent amount the client wanted.
The client was shocked and furious!
Without going through all the specifics, the basic problem was that the house hadn’t been updated in at least 40 years. The Realtor that sold it to them was legally required to only look out for the seller’s interests, so didn’t tell them. The Inspector did their job, which was to only point out structural problems and such with the property. Our client failed to involve us, as their PMC, to get our feedback on what the property would rent for as-is, and what it would take to RentReady it to get market rent.
We hope this example shows why your Tripod Team needs to work together on your behalf!
Once you vet your main Tripod Team, they should be able to refer you to lenders, attorneys, insurance agents, and even tax professionals. All these team members have less of an impact on your success, so going with a referral has a lot lower risk associated with them. You should still screen them though, for their knowledge, performance, and how they will mesh with you and your existing team.
Final thoughts
Rental investing can be daunting – let alone running one from a distance. But with a capable team and plenty of transparency, it’s possible to be successful anywhere you choose to invest. Conduct thorough research of the area, hire a rock-solid Tripod Team, leverage technology for videos and/or virtual walk-thrus and make sure you stay on top of all reports and documents related to the management of your long-distance investment properties.
For more specific tips on how to invest in rental properties from a distance, keep an eye out for the next 2 parts of the series.
Image Courtesy of Pixabay