RE From Out of State/Country- Why do it?
More often than not RE investors have a local mentality. I have literally had a fellow investor tell me 3 years ago that he, "wouldn't own a property if he couldn't stand on his roof and see it from there." Funny enough this rental property millionaire lost about half of his net worth in the current market slide by following this bit of "wisdom". He lives in Las Vegas and took a drubbing in this market. Don't forget one of the principles that successful investors have used for year, diversification.
I have to say that when beginning as a Real Estate Investor, I did have that "local" mentality, but I now own property in 3 states, Illinois, Indiana, and Michigan. I am also currently exploring the south as well. My original investing efforts were just when the boom was starting and local knowledge allowed me to make a tidy sum doing flips. Luckily, my father and business partner had a good handle on what a bubble looks like before it pops and we pulled out of the Chicago RE market altogether in late 2005/ early 2006. If it hadn't been for his foresight, I would have lost a boatload of money.
Over the last few years, I started looking at larger projects in anticipation of when the market turned around. It was during the learning process for these deals that I converted to my current strategy: "Invest for cashflow, and any appreciation is just icing on the cake." There are several reasons that I can quickly think of to seriously consider investing in new markets remotely.
First of all is ROI. Very simply put, if you can't cash flow don't do it. I agree with the most of the benchmarks for cashflow put forth in the Bigger Pocketsforums (50% rule, 2% rule etc). I personally don't use mortgages in a declining market (aversion to inverse leverage), but if you do it is possible to find deals that will cashflow $100 per door or better with an assuption of 100% financing. I don't think that if I live in San Diego for example, that I can find those deals so easily in the local market.
The second is that diversification word I used earlier. If you own property in one market, what happens when that market has a major hit to the economy and you take a loss (Detroit)? Would it not be better if you were in another market that was doing well to offset those losses? If things slide in Los Angles, your cashflow properties in the Midwest or the South pick you up.
The third reason to invest remotely is that the economy of an area is a major indicator of local rental markets. Why not pick from a market that offers good cash flow opportunities that you don't have to go to a war zone to get and has a diversified economy? These places do exist. They may just not be in your own back yard. Perhaps it is time to open your mind to the possibility.
Upcoming: How to Build an Effective Team Remotely
Comments (7)
Mariah, In my opinion it depends on how much of your overall strategy requires new capital being invested. There is no "magic number" that tells you to move your efforts to a new area. I like to move into new markets with a small investment that is WELL within my means and flip properties or wholesale them to generate capital to move on. This was a smaller investment grows and then eventually turns into a portfolio without . jeopordizing too much of my personally earned income. I am a big fan of your strategy of utilizing family to keep an eye on your investments though as long as it is not a burden to them and thus strains the relationship. Just remember that it can take from 4 months to a year to build enough knowledge in a new market to comfortably put money in. I would start familiarizing myself with RE in a new area now and begin looking to set up a network as you get more comfortable with the area. I will go through the process that I have used successfully in my next few posts. Please Please Please don't purchase property without due diligence, incluing visiting the area multiple times.
Tony Tomasek, about 15 years ago
Sounds fair, Tony. I look forward to hearing some of the important lessons you've got to share!
Joshua Dorkin, about 15 years ago
Josh, I can see your point on this being a tough way to get your feet wet in the industry. There are 2 ways to learn that people can take advantage of. #1 Personal experience and #2 experiences of others. I started this blog not with the intention of encouraging people to abdicate control of their money and investments to strangers miles away, but to allow people that are considering doing so to benefit from my experiences as an out of state investor. If investing remotely is done well, it can be very rewarding. If you fall into certain traps or pitfalls it can be a nightmare. I hope to help others avoid costly mistakes.
Tony Tomasek, about 15 years ago
The first property I bought is outside of my local area, in an area where I have family to manage my properties for me. If I stuck to buying locally, I could not even meet the 1% rule, much less the 2% rule. I have a second property under contract and am negotiating with a seller on #3 and #4. At what point do I need to quit and look for another place to invest because too much of my net worth is dependent on the economy of a fairly small Midwest town?
Mariah Jeffery, about 15 years ago
Tony - Investing long distance is certainly a viable strategy, but is NOT one I advocate to new investors. There is enough that can go wrong with an investment property. IMO - New investors need to understand an investment with their feet on the ground before handing it over to a team of people hundreds or thousands of miles away.
Joshua Dorkin, about 15 years ago
I live in Hawaii and have been investing in Memphis. The internet makes this possible. Being patient and working with people you can trust is the key.
Account Closed, about 15 years ago
Good article. It's hard for many investors to break out of the "backyard" investing mentality. The fact is that most of the best deals are NOT in their backyard. When we scour the country researching markets to offer investors our next real estate opportunity, we look at many factors within the housing market as well as the local economics. What you end up with is an investment that outperforms most people's backyard "deals". Marco Santarelli Norada Real Estate Investments <i>Your Premier Source for Turnkey Investment Property</i>
, about 15 years ago