The pros and cons of buying rental properties outside of your home market is a topic I have come across a lot in the past few months, so I thought I´d cover it in today´s blog (and in a brand new podcast recorded this morning). I hope you enjoy my take on the issue and would certainly welcome any feedback afterwards.
It is easier to keep an eye on your own neighborhood
There is a lot to be said for investing in your home market. Here are just a few of the benefits:
1 You have already accumulated a lot of local knowledge just by living there for many years.
2. You probably have a network of friends and family who could help you out of a tight spot.
3. You can visit the property regularly and be on hand to assist with emergencies.
4. You can view every property personally several times before buying.
5. You can network with other local investors in the area.
However as we all know, sometimes it is just not practical to buy rental properties in your local town. Prices in most big American cities (especially the east coast and practically all of California) are REALLY high.
- That means it can take a long time to save enough money to buy even one home, never mind a diverse portfolio.
- That means rental returns are much lower. All things being equal, a $500,000 property doesn´t rent for 5 times as much as a $100,000 property.
The grass is sometimes greener on the other side of the country
If your goal is to build up a passive income stream through affordable rental properties with a steady cashflow, then the only option for many people is to look further afield. If you have made that decision, then I don´t think it really matters much if best location is a 2 hour drive away or on the other side of the country.
However, there are a number of steps you need to follow if you don´t want to lose your shirt. If it is easy to lose money buying the wrong property in your local market, it is even easier to do it in a market you have never lived in at all. If you are serious about investing in locations far away from where you live, then here are my 7 recommended steps to get started.
1. Get control of your savings and get pre qualified
In fairness, this applies to everybody no matter where they want to invest. I´m writing it as step number one because there is absolutely no point in looking at other peoples houses if you don´t have your own house in order first. By definition, real estate investors live below their means and have acquired the habit of saving money. Getting on top of your household budget and getting pre qualified for a conventional loan (if you choose to go that route) are essential first steps.
2. Find a market
I am a big believer in focusing on pro landlord states with growing populations, diverse open economies and naturally strong cashflow returns. If these fundamentals aren´t in place, then you will have to work very hard to convince me that they are worth looking at as a long term investment. If you can also find a place you would actually enjoy traveling to, that´s a big bonus as there are tax deductions for many of those flight, hotel, restaurant and car rental expenses incurred (speak to your CPA).
3. Start Researching
Taking the time to study both the macro and the micro data is important. I wrote a blog a while back listing my "Top 8 websites for researching USA property" which is worth a look if you have a spare few minutes. Another tip - subscribe to local newspaper alerts in the city you are focusing on. For example, I receive an email every day from the Tampa Bay Times and have key word alerts for real estate related items.
4. Do your number crunching
A lot of people don´t realise this, but the only way to get good at analysing deals is to practise analysing deals. Even if you aren´t ready to buy anything for 6 months, use that time to study 10-15 homes per week. Don´t jump all over the map either, stick to a relatively concentrated area. I can guarantee that after analysing 50+ deals, you will be ahead of most people. Tweak your formulas as you go along. Biggerpockets has a good calculator to get you started, but if you start buying seriously, you will have to develop your own template.
Note that I´m putting this as number 5 and not number 1. Sometimes people start calling agents, investors and property managers in multiple cities before they have done their homework, and they´ll just end up annoying the people who can potentially form part of their investment team. I think you can get a lot more out of networking if you can show that you´re serious and have done a lot of homework yourself first. I get a few "teach me everything you know" requests and most of them get ignored because I don´t want to invest my time helping somebody before they´ve invested their own time first.
6. Build a team
You could write a book on this alone, but I´m just going to touch on it very briefly* here. It goes without saying that you need a trustworthy team on the ground. If you are interested in the Tampa market, then we can certainly help as we have a very well established team of partners in place who help us buy, renovate and place tenants in a wide range of great rental properties.
* See Torcana Podcast 10 for services you need as an out of state investor
7. Take action
This is where a lot of people (understandably) fall short. You can dedicate months of evenings in front of a computer screen researching everything important but if you can´t find the courage to pull the trigger then nothing is going to happen. It is called analysis paralysis and it´s just something most of us have to work though.
- If you are waiting for a perfect deal to fall on your lap you´ll be waiting a lot time.
- If you´re waiting until you´re not scared before investing, you´ll be waiting a long time.
- If you want to know every single thing in advance, you´ll be waiting a long time.
Research prior to buying is essential, but remember that lots of important lessons can only be learned from experience. We have bought dozens and dozens of houses and have made plenty of mistakes. But we made less mistakes this year than we did last year or the year before. There is nothing wrong with mistakes and you shouldn´t view making them as a sign of failure. It´s actually the opposite if you learn from them and keep moving forward. The experience gained from taking action is invaluable and we always had enough research done beforehand to make sure that the pros always outweighed the cons.
Torcana Podcast 16
Earlier this morning I recorded Podcast 16 which discusses the topics described above in more detail (it´s 20 minutes long). Please click here or on the image below to listen to it directly, or better still, subscribe to all of our podcasts via Soundcloud or just search for "Torcana" on the podcast app of your iPhone or Android device.
That´s it from me today, thanks for tuning in and don´t hesitate to contact us directly (firstname.lastname@example.org) if you´d like to discuss our forthcoming investment opportunities and/or how we can help you achieve your real estate goals.