Aspiring investors often ask us what they should do before buying out-of-state rental property. It doesn’t matter if you’re young or old, saving time when getting started is always a good thing. To help you do just that, we’re diving into the preliminary steps our most successful investors take before buying property out-of-state.
Define Your Motive
First things first: You need a solid game plan and investment goal. Ask yourself whether you want to invest in property for capital gains, for the extra cash flow, or to create a passive source of income that requires minimal effort. Defining your purpose from the start will help you (and your management team) develop a strategy that leads to your vision.
Then, get your finances in order and project how many properties you intend to buy in an area. Some locations only allow you to take out a certain amount of mortgages. If owning multiple properties is part of your game plan, building a relationship with a bank can help you work around that limitation.
Go Solo or Hire Help?
Managing a property from afar is a difficult undertaking. In fact, we dissuade investors from going this route entirely because of the time commitment and hassles that come with it. Nevertheless, being an out-of-state landlord is possible for investors who have the time.
If you choose to hire help, properly vet management companies to find the right staff. After all, you’re trusting them with your money so you need to know they’re qualified.
Check out online company reviews, ask for testimonials, and set up interviews. Always examine property management processes for efficiency. Look for professionals with cutting-edge management software and the right tools to communicate with you remotely.
As an investor you need access to financials, tax documents, and other reports. You’ll want assurance that you’ll receive these documents and informed of your property’s performance in a timely manner. For example, you don’t want to receive time sensitive expense reports or tax information last minute. You can miss out on deductions and leave money on the table.
If you decide to hire help, trust is crucial between you and your property management company. After all, they oversee your cash flow and therefore, your livelihood. Build a transparent relationship from the beginning that keeps you in the loop. Set the expectation that you want open communication for all decisions, big and small.
For example, property repairs are an area where trust is paramount. You want to make sure every repair is valid and your money is being spent in the right place. In this situation, let your management company know you want to see work orders and make approvals for repairs before they’re carried out. This practice will save you from having to call into question repairs in the future.
Choose Your Properties
Create a hit list of characteristics, like age and location, you’re looking for in a rental property. Older properties require more work and money, so we encourage investors to focus on properties under 10 years old. We also tell our investors to budget about 1% of their property value for repairs, but for older homes you need to set aside a little more.
Choosing the right location is just as important as choosing the right house. Target an area that offers amenities to residents like parks, jogging trails, playgrounds and rec centers. Check out the surrounding school ratings on a site like GreatSchools to pick a desirable location for families. Amenities and high quality education add value for your future residents.
See the Area for Yourself
Sure, with technology today you can technically see a property without ever setting foot on site, but that’s not the way to go. Pictures don’t tell the whole story. You don’t want to discover you’ve been duped after investing your cash.
Make the trip to tour properties and meet with property managers. Our clients with the most successful investments come to visit us for a week to meet and see the area. It’s an excellent opportunity for us to build rapport and hunt for a rental property that will meet their investment goal.
The most common problem we see with out-of-state investors is an unrealistic expectation of the income they can make from a property. This usually happens as a result of misrepresentation from the buying agent.
Don’t believe the hype; ask your buyer for comps, and question the numbers they present. If your buyer gives figures that seem too optimistic, like 30% more in rent than your competition, you need to scrutinize. Send your listing and comps to a third party who has no vested interest on the sale, and get an honest second opinion.
You can also work directly with a management company to search for a property. After the sale is made, they have to rent the place for you at the price you agree upon. It’s an incentive for them to get the numbers right and show you properties that will actually perform.
The Key to Investing in Out-of-State Property
Ultimately, you should look for a property management company that is transparent, give you the information you want, and set realistic expectations. Companies that operate without fine-print have a reason for it. Their clients want to come back and they don’t need contract “gotchas” to keep business.
Ready to get started investing in out-of-state rental property? Give us a call.