How to Buy Rental Homes 1000 Miles Away Without Stepping on a Plane

I have lived in New Jersey since the summer of 1993 when my parents picked up and moved us from Newark, Delaware. I went to college at Rutgers University where I met some lifelong friends along with my future wife Claudine. We eventually settled down in Hackensack, New Jersey and now have two beautiful daughters. In a nutshell, I’ve spent all meaningful phases of my life thus far right here in the “garden state”. In 2017, Claudine and I started buying and rehabbing rental properties and NONE of them are in New Jersey. By none, I mean a grand total of ZERO.

Our markets of choice at the moment are Indianapolis, Indiana, 716 miles from Hackensack, and Atlanta, Georgia, 869 miles from Hackensack (thanks google maps). So not quite a thousand miles away, but I figured the blog title sounded better with a nice round number in it. Nevertheless, we are officially long-distance real estate investors. Worth noting, we don’t buy ready-made, turnkey homes either. At least not anymore (let’s add this to the list of topics soon to be a future post all by itself). We buy the ugliest, most forgotten, eyesores to renovate and breathe life into. This makes us long-distance rehabbers as well.

The usual questions I get whenever I start opening up about this in casual conversation are:

1.“Wait…how?”

2.“So you guys fly there a lot?”

3.“Are you all moving?”

4.“How do you keep an eye on everything?”

My answers (fully automated at this point):

1.“No.”

2.“No.”

3.“We’re thinking about it eventually, but not because of this.”

4.“Good question. So I read this book called Long-Distance Real Estate Investing. Are you familiar with Biggerpockets?” (if they say “yes” I explain in 45 seconds. If they say “no” I explain in 60 seconds…takes me about 15 seconds to explain what Biggerpockets is)

A question that has never made it into the top 4 for some reason is “Why would you guys ever buy properties out of state??”

First and foremost, let me say there are a TON of real estate investors living in New Jersey experiencing amazing success buying rental properties in New Jersey. A few of my good friends from college are doing it and have done quite well. So let me point out that our approach is just that, our approach. Here are some factors that contributed to our decision to move forward with this strategy.

1. Price of entry

When we started buying and rehabbing homes, we knew we needed to have funds to close fast to have a chance to compete with other investors. We decided to use leverage in the form of my unsecured personal credit line. The funds from my credit line were going to have to pay for the purchase and the rehab of any houses we purchased. I had a $70,000 credit limit at the time which doesn’t go very far in northern New Jersey. Seasoned investors don’t stop reading here. Yes, I know there are lenders out there (hard money and private lenders for example) that will lend in a heartbeat as long as the deal supports it. At the start of our investing journey, I didn’t know much about any other potential funding sources, which made me somewhat afraid the other options.

2. Lower property taxes

During the time between purchasing, renovating and finding a new resident to live in the house, property taxes are still accruing. New Jersey happens to have the highest property taxes in the nation on average. We looked for markets where that particular carrying cost would be lower.

3. Rent to value ratio

An old rule of thumb in real estate investing is if the monthly rental income is at least 1% of the value of the home, then the investor has a good chance of cash flowing on that property. This rule starts to be less and less applicable in markets with higher property taxes.

For example: If I pay $100,000 for a rental property, I am looking for at least $1,000 in monthly rental income.

The markets we currently invest in seem to have an abundance of properties in decent, low-crime areas that meet the 1% rule. There are other reasons as well, but when we got started, these were the three biggest ones for us.

Now for the “how”. I can really sum it up in one four letter word: T-E-A-M. David Greene, co-host of the Biggerpockets podcast wrote a book titled Long-Distance Real Estate Investing: How to Buy Rehab and Manage Out-of-State Rental Properties. In the book, great emphasis is placed on forming a team on the ground in your market of choice before ever attempting to look at properties to purchase. Greene calls this team the “core four” and it consists of a “deal finder”, lender, property manager, and a contractor. We chose to adopt this approach.

Each prospective team member is found via referrals from real estate professionals and investors in the area who have demonstrated success in their areas of focus. Biggerpockets.com is a great resource for finding referrals. Greene points out that the importance of using referrals is based on the irrefutable, age-old law of human interaction called Rockstars Know Rockstars or just RKR for short. Basically successful people like to associate, hang out with and do business with other successful people.

The team members are interviewed thoroughly so I can get a feel for how competent he or she is. I have an extensive questionnaire I go through with each person that gets me the responses I need to determine whether or not I want to move forward with them. The interview process is my chance to listen not only to the answers to my questions but the tone of voice and level of confidence with which the answers are given.

The deal finder, usually a real estate agent or wholesaler, finds properties that fit my criteria (distressed houses in decent areas). I require that they send me each house with the potential after-repair value (ARV) with supporting comparable sales (comps) and rental income comps attached.

The contractor provides the scopes of work during the due diligence period and renovates the property so it is ready to be rented. The contractor also educates me along the way on different nuances of the renovation process in general. Each home we come across will need a different kind of renovation so there is always a great deal to learn.

The property manager has the most significant role on the team. Choosing the wrong property manager can cause the operation to fail before it even gets off the ground. Their responsibilities include, but aren’t limited to:

1.Verifying what kind of location a property is in, taking into consideration crime, income demographics, public school system, etc.

2.Educating me on how a house should be renovated to meet the prospective residents’ preferences, and how much I can expect for monthly rent.

3.During the due diligence period, they can serve as an extra pair of eyes in addition to the inspector and contractor.

4.During the renovation, I have them stop by the property to check the contractor’s quality of work in the early stages when the contractor and I are building trust.

5.Once the property is renovated, the property manager collects rental applications, screens prospective residents, shows the house, provides the lease to be signed, collects and holds security deposits, responds to maintenance calls, and collects/disburses rental income. They also coordinate the eviction process in the unfortunate event that a resident chooses to stop fulfilling their obligation to pay rent.

The lender creates a long-term loan (up to a 30-year amortization) secured by the home’s ARV. Once the loan is originated, the monthly loan payment is paid from the rental income.

Here is what the process of purchasing a house looks like step by step:

When I have settled on a deal finder (let’s assume I am working with a real estate agent), they begin sending properties to my inbox that fit my criteria. The two numbers I need from the agent are the projected monthly rental income and after repair value. Both numbers are based on comparable properties within close proximity to the subject property.

I then estimate the cost of renovation by looking through the pictures on the listing. This requires some practice. Please note I do NOT have a construction background. I am not what most would consider to be “handy” by any stretch of the imagination. I don’t like hammering nails, screwing screws, or attempting to fix anything if it’s going to take more than 20 seconds to repair. I did, however, realize it would be beneficial to have a basic level of knowledge to try to protect myself from being taken advantage of. I purchased J Scott’s The Book on Estimating Rehab Costs: The Investor’s Guide to Defining Your Renovation Plan, Building Your Budget, and Knowing Exactly How Much It All Costs to use as a reference for determining how much certain aspects of a renovation should cost. After a while, I began to compare multiple scopes of work from my contractor to get a more accurate idea of how much I could expect to pay within that specific market.

If there are no pictures on the listing, I use the average dollar amount per square foot from the scopes of work I have reviewed from my contractor. For example in Indianapolis, the average dollar amount per square foot has been about $20.00. This means if my agent sends me a 1000 square foot house that meets my criteria, but has no available pictures, I use the following equation to calculate my potential rehab cost:

1000 square feet x $20 per square foot= $20,000 for the rehab

In this scenario, I would use $20,000 for my renovation number. As long as I have the ARV from the agent, supported by comparable sales, and my estimated cost of renovation, I can make an offer from anywhere. Anywhere meaning at the gym, legs on fire in between sets on the squat rack, or on my couch at home sharing a bowl of Cheerios and watching Paw Patrol with my 2-year-old daughter, or at home knocking out some assigned chores on the weekend (married men reading this know who did the assigning). Here is how the offer price is calculated:

(ARV x 75%) – (estimated cost of renovation) = Offer price

So If my agent tells me that same 1000 square foot house will be worth $100,000 after $20,000 in renovations are complete, I will offer $55,000.

($100,000 x 75%) – ($20,000) = $55,000

My agent then writes up the contract for me to sign with a very specific contingency included. This contingency is what allows me to safely make offers without ever personally seeing the property. It gives me the right walk away if need be for ANY reason. The contingency involves a DUE DILIGENCE PERIOD. This is essentially a period of time, (usually 5 days in my offers) during which I send my contractor to the property to walk through it as well as a professional inspector if I so choose. Once I have the scope of work from my contractor, I can compare it to my estimated number and choose to move forward with the purchase of the property, or back out with no loss of funds. This contingency is an absolutely crucial component. The strategy does not work without it.

If everything checks out during the due diligence period, we proceed with purchasing the house. My contractor gets to work immediately and is paid in “draws”, which essentially means after he meets agreed-upon milestones in the rehab process, I pay him. Prior to each draw, my property manager stops by the property to ensure the agreed upon work has been done well.

When renovations are complete, the property is turned over to my property manager to immediately market the property for rent. The refinance application is also started around this time. The property manager screens the potential residents, shows the property, and sends me a copy of the lease once the resident signs. I like to time the refinancing just right so the appraiser can walk through the property prior to the resident moving in to avoid any scheduling conflicts.

At the completion of this process, there is a fully renovated home, a happy family living there, and the capital used to purchase and renovate the house is returned. All of this is made possible by my team. Long-distance real estate investing is a team sport, and each member has a role to play to ensure every aspect of the project, from acquisition to refinance, is a success. Ultimately, the odds of success can be greatly increased when one spends the time and effort up front to ensure the right team members are selected.