With rising inflation, individuals have very few options to make ends meet. Of course, one can invest in stocks, but in the short term, stocks are incredibly volatile. Seniors on a fixed income can’t survive.
Investing in real estate is an excellent option for steady income, but the local rental property is expensive for individuals living in a high cost of living area. Also, the numbers don’t pan out for a cash-flowing rental.
One solution could be buying rental property in a cheaper location. However, buying a property in another state can be daunting, especially if unfamiliar with the area. It’s hard to know where to start when looking for a long-distance investment property. There are many things to consider – like the right location, the correct type of property, and what kind of return on investment you can expect.
Let us explore if long distance real estate investing is right for you.
What Is Long Distance Real Estate Investing?
Long distance real estate investing means researching various markets in a different location than where you live and buying and renting properties to create a geographically diversified real estate portfolio. Although most investors associate long distance real estate investing with buy and hold rental properties, you can apply the same principles to flipping houses, wholesaling, or other real estate strategies.
Why Consider Long Distance Real Estate Investing?
There are four fundamental reasons to consider long distance real estate investing.
Lack of Local Deals
It is often difficult to find quality real estate deals in our local area, especially in high cost of living areas. Here is an example of a real estate investor who barely makes any money investing in a rental property in San Francisco.
Consider a Single Family House with 3 bedroom and 2 bath in the Bernal Heights neighborhood of San Francisco (Zip Code 94110). The sale price of a median home in San Francisco is $1.3M.
|TOTAL INCOME (Monthly Rent)||$8,000|
|Monthly Mortgage (20% down payment and 30 year fixed)||$4,385|
|Vacancy (10% assumption)||$800|
|Maintenance (5% assumption)||$400|
|Capital expenses (5% assumption)||$400|
|Property Manager fee (5% which is lower than average)||$400|
This landlord has been very diligent in anticipating all the costs involved in owning a rental property. Also the property is not over leveraged as the landlord has invested a large 20% down payment of $260,000.
Unfortunately the landlord barely makes a monthly positive cash flow of $56.
The Cash on Cash return of the down payment is a terrible 0.26%.
In fact, if the landlord had adopted my strategy of investing Emergency Funds at 8% return they would at least have a better ROI.
It is more common to consider alternative locations where deals are reasonable. Investing in rental housing is more successful when it generates a higher return.
Real estate investors often rely on the 1% rule. The 1% rule of property investing is a guideline that determines whether an investment property’s price is reasonable against the amount of gross income it will produce. The monthly rent for a possible investment must be equal to or greater than 1% of the purchase price to satisfy the 1% rule. Typically it is hard to find rental properties meeting the 1% rule in most hot markets.
If we live in a decent market and leverage our human capital, relocating somewhere else because of our investing goals may not be ideal. Fortunately, with long-distance real estate investing, we can stay where we are and utilize our liquid net worth to build up our real estate portfolio.
There are several real estate investment risks so one should have an appropriate risk mitigation plan in place. Investing in long-distance real estate is an intelligent decision if we want to minimize risk, maximize our portfolio, and have a more extensive selection of properties to choose from. When comparing real estate vs stocks, one of the most significant drawbacks is the lack of diversification in real estate investments.
Investing just $100 in stocks gives you access to thousands of the best companies in the world since you can buy an index fund on a platform like M1Finance. Feel free to read my M1Finance review on how to buy.
Since real estate is expensive, you can, in the best case, buy only a limited number of properties and can’t diversify efficiently. Geographic location risk is a significant factor in real estate. To avoid having all your eggs in one basket, investing across several geographies and states is always better.
If you want to treat your real estate investment like a business, your primary goal should be profit maximization. Evaluate your expenses and compare them against the rental income. One of the most significant expenses with rentals is property taxes. One can apply all the tax-saving strategies yet pay a massive chunk due to changing local and state government policies.
Constantly evaluate your real estate investment locations based on the best states for real estate investors. The list of places may change every few years, which is why long distance real estate investing helps you be nimble.
Assume you live in San Francisco and are working in the technology industry. Your rentals are in the exact location where you live, so most likely, renters would be working in the same industry. Assume we have a dot com crash. Now you are out of a job. And since your renters are also in the technology industry, they also lose their jobs. Due to the lack of local technology jobs, your rentals are vacant, and you don’t receive a rental income. So now you neither have rental income nor money from your work.
It is not a far-fetched scenario. I am sure everyone who worked in the auto industry in Detroit must have experienced such a situation where the local industry dies, and now it is hard to get tenants, and you don’t have a job either.
The entire purpose of investing in a rental to diversify your income has been defeated—another reason to consider long distance real estate investing.
How Does Long Distance Real Estate Investing Work?
Long-distance real estate investing works with the investigation and complete understanding of the market we choose to invest in. There are so many real estate markets worldwide, and each one has its unique housing metrics, neighborhoods, attractions, and cultures.
Once you determine the right location and market, take your time considering the finances, making the right approach and strategy, utilizing investment tools, and considering hiring a property management company.
Understand the Market
It would be best to learn as much about the market as possible before putting any money down. It is important to investigate various locations to determine which rental property best meets your needs and goals. Learn the potential market growth for long-term real estate investing opportunities. Therefore, explore the potential population growth, employment levels, proximity to large employers, schools, crime rates, vacancy rates, and demands for property rentals.
Define Your Criteria
At this point, you do not have the exact property you want to buy, but you can find similar properties in the market.
Look at Loopnet, Redfin, Zillow rentals to understand what properties cost in that market and how much they rent. The purpose of crunching the numbers at this stage is to determine the criteria for the property you want to buy.
For example, based on the rental data, you might figure out studio apartment investing in a college town are a better deal compared to single-family homes. Or that properties in a great school district don’t command a significant rental premium compared to the OK school district. You might also realize that the tenants don’t care much for granite countertops or stainless steel appliances, in which case you don’t need those in your rental.
To quickly filter the properties, you can use the 1% rule defined earlier. Another great rule is the 50% rule. The 50 percent rule states that half of the rent needs to be budgeted for expenses, capital reserves, and vacancies. So if your expected rent is $1,000, assume you only receive $500, which needs to cover your mortgage and profit. For example, if your mortgage was $400 then your approximate profit is $(1000/2) – (400) = $100.
Real estate investors use several metrics to evaluate a rental property. When researching the market value, you should crunch numbers for at least the following
- Net Cash Flow
- Internal Rate of Return (IRR)
- Gross Yield and Cap Rate
- Annualized Return and Return Investments With Cash Return Options
- Total Returns
Get Finances in Order
At this point, you should have a rough idea of the approximate purchase price. Consider how you want to fund the purchase. Maybe a bank loan or a cash-out refinancing from your current home. Or you want to raise capital for real estate investing or a hard money loan?
Before applying for a loan, check your credit scores. Given the number of identity thefts, it is not uncommon to find mistakes in your credit report. Avoid unwanted surprises at the last minute by setting up alerts on your credit report. I use Credit Karma which monitors my reports for free and provides free credit reports. You can also consider paid credit protection from Transunion if needed.
The debt-to-income (DTI) ratio is the most crucial statistic a lender will consider. The DTI measures how much money you have leftover after paying your debt obligations each month.
When considering a new mortgage, lenders will be particularly interested in your loan-to-value (LTV). Banks will never lend more than 80% of the appraised value. You need to have the down payment. In the case of rentals, the maximum LTV could even be only 70%.
Build an All-star Team
Now, after spending a lot of time researching, understanding the market, and calculating the numbers, the next step was to establish a relationship with real estate professionals in the location you want to invest in. Investing in long-distance real estate requires your diligence to develop trust with others who can work in that area and manage the properties.
Real Estate Agent
Use a real estate agent who owns local rental properties or works with real estate investors. You are buying an investment property.
A typical real estate agent who caters to primary home buyers would focus on different aspects of the property compared to one who works with investors. First-time home buyers care about matching cabinets and granite countertops. An investor needs to focus on buying a property that makes economic sense, even if it has a green tile countertop.
Now that you have an investor-friendly agent, you should provide the criteria you defined in the previous step. Your agent can then search for the exact type of real estate property that matches your needs.
The second advantage of using an agent who works with investors is knowing contractors when considering rehabbing options. You might need to do a total rehab as per the BRRRR method. The agent can connect you with honest contractors who provide quality work in either case. You should investigate various contractors in the area and find a reasonably priced one that can work with limited supervision.
Hopefully, the work performed by the contractor has increased the value of the house, thereby providing you with an increased after repair value(ARV). You can leverage the home’s new worth to refinance better terms of the loan. Lending institutions will be more comfortable with additional equity in the rental.
You can use value add real estate strategies to create additional income streams.
One note of caution is not to improve the property such that it is the best in the neighborhood. Renters pay the average rent for the area. If you put granite countertops while other houses have tile, you will have difficulty finding tenants who will pay extra for your granite countertops.
Next, you should investigate hiring a property management company. A good property manager will find tenants, take care of the property, utilize local contractors, and help establish and maintain rapport with the tenants. Sometimes your real estate agent might also be open to the tasks of being a property manager, in which case your life is now easier.
Establishing great relationships with local real estate professionals who have experience in the market you plan to invest in will make your long distance real estate investment successful.
Although you are physically away from the area, your established team can save you time, money, and effort. Make sure you align your goals with your team goals and compensate accordingly based on performance.
Choose the Right Property
Having identified your market, criteria, and your team players, you are ready to evaluate several rental properties matching your needs.
Make sure you run the numbers considering all possible expenses, including capital reserves and operating expenses.
Validate the latest rental estimates using tools like Zillow Rentals, Rentometer, or Stessa. Besides rent, Stessa lets you input other expenses and is a perfect free tool to calculate all the metrics we defined earlier. You can read my Stessa review on how I use it to manage my rentals.
Create the Plan
Equally important as choosing the right type of property is setting up a plan of action. Having a clear-cut outline of defined roles and responsibilities for your team along with a systematic process for running the business will help ease your stress with long distance investing.
Define a process for your property manager to follow regarding vacancies, screening, maintenance, and next steps for turnover.
Setting up a plan is critical to establishing the contractor rates for regular maintenance tasks and managing the properties outside your home location. It’s important to remember to find loopholes contractors may use in cutting corners, as it could eventually cause you lots of operational expenses. Therefore, consider every option and strategize before putting the money into the property. Implement a compensation structure and plan that allows trust and transparency.
Mistakes of Long Distance Real Estate Investing
There are several advantages to long-distance real estate investing. Some of the common mistakes of long distance real estate investing include:
Emotional Choice of Market
Instead of picking a market based on objective criteria like GDP, price to rent ratio, and job market, investors pick a city for subjective ones, such as whether it’s a popular destination for family excursions.
Many long distance investors believe they can visit the location and write off the trip as a tax deduction. Don’t let the tax tail wag the dog. Yes, our best real estate books list includes some dedicated tax schemes but focus on strategy and then optimize for taxes.
On a similar note, many investors pick a long distance rental property assuming it can be a retirement home which is not the right approach.
Overpaying Based on Home City Bias
Investors who live in New York City might be used to paying a high rate per square foot. Naturally, when they visit St. Louis, they might consider a property cheap on a relative basis and end up overpaying.
Always research comps of the local market and work with a qualified property agent.
Not Visiting the Property
The entire purpose of long distance investing is to let your team manage the whole operations. But you must visit the property at least before you make the purchase decision, primarily if you are investing over $100,000 in a single property.
You will get more information from an in-person visit than only viewing the property pictures or crime stats online.
You can also meet the contractors and property management team recommended by your agent or local real estate investors.
Believing the Proforma Numbers
Turnkey companies often paint rosy projections. Your job as a long distance investor is to verify these numbers on your own. Ensure that the unit is sold at the right price, rent at the projected market value, and not overcharged for repairs and maintenance.
Not Using Professional Property Management
Selecting a long distance market to invest in only because a family member resides is another frequent error. Unless your family member understands all the laws, they could inadvertently run afoul of state or federal guidelines. The risk of being sued for discrimination is high when you self-manage the property or use a family member unaware of laws.
Skipping Roles and Responsibilities Definition
Define precisely your expectations from your team in the form of roles and responsibilities. What tasks should a handyperson do versus calling a specialized license professional? For example, if a tenant complains of no power, would a handyperson check the circuit breakers or directly call an electrician?
Or, if the unit is vacant for more than six months, do you still need to pay the property management company? Having all the scenarios laid out will help set expectations and avoid misunderstanding.
Types Of Properties for Long Distance Real Estate Investing
Following are the three types of properties one can invest in as part of the long distance real estate portfolio.
Multifamily Apartment Complexes
A top choice for long distance real estate investing is multifamily apartment complexes. Large multifamily apartment complexes are fantastic options to boost income and help reduce vacancy. In addition, the sizeable multifamily apartment complexes are great options for our portfolio as they contain more than one housing unit that families could rent.
However, it is recommended to do a lot of market research and locate the property below market value to allow you financial stability due to more significant operating expenses. Large multifamily apartment complexes require detailed attention over other properties but can considerably influence your real estate investing goals. Consider the location, number of units, potential income, the sellers, and the cost before deciding which one to choose.
The advantage of multifamily complexes for long distance real estate investing is the economies of scale. Since you are a remote landlord, you need a sufficient number of units to hire your team of property managers and handymen for emergency repairs. You could use contractors for non-emergency maintenance items. But without someone on your payroll, it would be hard for them to be available at a moment’s notice to cater to your tenant’s emergency needs.
The turnkey property is one of the top choices because it is a well-maintained house already generating income with tenants. In addition, using a turnkey property is convenient and immediately ready to rent out.
A turnkey rental allows a property manager to take care of every day-to-day issue and immediately place tenants in the house that could offer an instant cash return. The turnkey property included applications, lease agreements, and rental history. Furthermore, since you have already established a relationship with a trusted all-star team, they can handle the repairs, maintenance, and operations, focusing on helping you grow a real estate passive income stream.
Using turnkey properties is one of the top choices to consider in long distance investing. Pick an area that was already thriving to get the projected appreciation.
One of the most significant risks with turnkey properties, though, is believing the numbers provided by the turnkey company. Often, it is not uncommon for the turnkey company to have a rosy projection of the expected rents and vacancies listed in the proforma to sell the units. Always run your numbers and do your due diligence.
Roofstock is an online marketplace for tenant-occupied single-family homes—many of which are pre-inspected, come with a tenant in place, and are generating cash flow. Some even offer vacancy protection or a 30-day money-back guarantee.
With third-party financing options available, you can efficiently acquire tenant-occupied property and request a referral to a vetted property management company. Or you can instead hire a buyer’s agent, pay for your inspection, search for financing, and maintain the property on your own.
Real Estate Crowdfunding
Real estate crowdfunding, also known as crowdfunded investing or property crowdfunding, allows several investors to pool their money together and buy a real estate investment property with the contributed pool.
The advantage of crowdfunded real estate is that you can invest in long distance real estate without sifting through tons of properties and needing to interview the team managing your property. Because of the economies of scale with multiple investors pooling your money, you can enjoy the benefits of owning apartment buildings in several states without needing to invest several thousand. Fundrise and DiversyFund permit you to invest in real estate for only $10 and $500 respectively.
The disadvantage of crowdfunded real estate is that you will lose some of your profits as management fees. Because the real estate syndicator is dealing with selecting the property, financing, rehab, and management, they would charge some fees.
|Apartment Building||Turnkey Property||Real Estate Crowdfunding|
|Track record verification||Not possible||Harder to verify||Easier to verify|
Final Thoughts on Long Distance Real Estate Investing
Evaluating various income-producing assets shows real estate is one of the most preferred choices. If you have held back on real estate, there is more convenience, choice, opportunity, growth, and financial gain when investing in long distance real estate. However, before starting the journey, understanding the market, the pros and cons, the risks, and real estate options are highly recommended.
Long distance real estate investing is not easy. It involves cold calling, lead generation, finding acquisition managers, real estate agents, lenders, property managers, accountants, contractors, and taking full advantage of local real estate entrepreneurs. In addition, you want to have the staff in place to inspect properties when you are unavailable or have someone manage the contractors.
When you invest in long distance properties, you will have to invest in the time to investigate the market and manage the property obtained with individuals you trust. It is always advisable to check on the property yourself to ensure its condition is maintained and prepare for potential emergencies.
Your potential investment portfolio can start expanding when you use the right tactics and choose suitable properties at a distance. Over time, your portfolio will grow, and your long distance real estate investment portfolio will accrue a higher return on investment.
Those who consider long distance real estate investing take full advantage of online tools and resources as well as advanced technology. Real estate investors are no longer limited to investing in their local market but can flourish worldwide in foreign locations and growth markets.
There are various strategies like buying and holding, wholesaling, selling, or rehabbing to make the most financial gain.
Readers, have you considered investing in rental properties but have been held back by the lack of excellent properties locally? If you have invested long distance, how was your experience?
John Dealbreuin came from a third world country to the US with only $1,000 not knowing anyone; guided by an immigrant dream. In 12 years, he achieved his retirement number.
He started Financial Freedom Countdown to help everyone think differently about their financial challenges and live their best lives. John resides in the San Francisco Bay Area enjoying nature trails and weight training.
Here are his recommended tools
M1 Finance: John compared M1 Finance against Vanguard, Schwab, Fidelity, Wealthfront and Betterment to find the perfect investment platform. He uses it due to zero fees, very low minimums, automated investment with automatic rebalancing. The pre-built asset allocations and fractional shares helps one get started right away.
Personal Capital: This is a free tool John uses to track his net worth on a regular basis and as a retirement planner. It also alerts him wrt hidden fees and has a budget tracker included.
Streitwise is available for accredited and non-accredited investors. They have one of the lowest fees and high “skin in the game,” with over $5M of capital invested by founders in the deals. It is also open to foreign/non-USA investor. Minimum investment is $5,000.
Platforms like Yieldstreet provide investment options in art, legal, structured notes, venture capital, etc. They also have fixed-income portfolios spread across multiple asset classes with a single investment with low minimums of $10,000.