How Out-of-State Real Estate Investing Works [Video + Transcript]

Joe Torre: Hello, investors. My name is Joe Torre. I’m an investment counselor with RealWealth, a real estate investment firm. Today we’re going to do a quick video on out-of-state real estate investing. This is a question that comes up a lot.

Here is a scenario: you live in a place that’s great to live, but not a great place to invest. It might be a highly expensive place like Manhattan, where the property prices are too high and the rents are too low relative to the purchase price, so we have a negative cash flow of $1,000 a month, or maybe you live in some rural area out in the country and there’s just no opportunities for investment.

That means you have to invest in real estate out of state, but that’s scary because you’re going to be investing in a property that’s 1,000 miles away or 3,000 miles away, and you’re not going to be there to look after it. That’s the problem that we’re going to solve today. The goal here is to live where you want but invest where it makes sense.

What you’ll need are a couple of things. First thing is finding a good market. I’ll go through these quickly. Job and population growth, a fairly large metro population (500,000 or more), a diverse economy, favorable landlord-tenant laws, and positive cash flow.

Job and population growth are critical for out-of-state real estate investing (or investing in any market) because if the population is growing and jobs are moving into the area, that means demand for housing is going to go up. That means rents will increase and property values will rise over time.

The reason you want a good-sized metro population is that you need good property management. Preferably, you want to identify two good property management companies in a given area, so if the first one you hire doesn’t work out, you have a backup. If you’re in a small town or small city of 50,000 people, you’re not going to have that many options when it comes to property management. There might only be one in town.

Also, if a local factory closes down or something in a small metro of 50,000, that could really devastate the local economy. A larger economy or metro area with 500,000 people or more is a safer bet.

The next thing you want is a diverse economy. An economy with a diverse range of industries is more resilient during difficult times. A good example is Atlanta. If you look at the top 10 employers in Atlanta, you’ll see no two are in the same industry. Coca-Cola is there, UPS is there. Home Depot is headquartered there. The Centers for Disease Control are there. Delta Airlines is there. If one part of the economy is not performing well, then other parts can take up the slack.

The economies that have problems are places like Detroit, which is heavily reliant on the automobile industry, and Las Vegas, which is largely dependent on tourism. During a recession, single-industry cities tend to suffer disproportionately. Your tenants will lose their jobs and not be able to pay rent. This creates a bunch of problems for out-of-state real estate investors and landlords in general. A diverse economy is a good thing to look for. The next thing is landlord-tenant laws that either favor the landlord or are at least neutral.

There are some states where it’s almost impossible to evict a tenant who’s not paying rent. A street-smart tenant who knows how to game the system will just live in your house for free for six months until you get rid of them. Other states, if they’re not out in 14 days, the sheriff’s deputy shows up and evicts them. You want to be in a place where the landlord-tenant laws favor you the landlord.

Then finally, you want positive cash flow when choosing a market for out-of-state investing. You don’t want to have to have negative $500 a month or $300 a month. That’ll just eat away at your savings. If you lose your job at some point, which you will, because real estate is a long-term investment, so at some point during the time you own it, you’re going to lose your job… having a negative cash flow is going to hurt you.

In addition to a good market, you also need good property providers. That could be new home builders, or it could be a turnkey provider. These are people who buy an existing home, say, built in the ’80s, and then they renovate it. They put in new kitchens, new baths, new carpet, new paint, and fix it up so it’s nice and rentable. Either of those two is a good option. Also, multi-family units like duplexes and fourplexes, but all of these must cash flow. There are some markets where you can buy a brand new house, but it’s going to be negative cash flow, and that’s going to introduce a lot of risk.

This one is the most important thing with out-of-state real estate investing: property management. You’ll need good property management. When investors do fail, the number one cause of their failure is property management. Either they’re incompetent or sometimes they’re just outright crooks. They’ll tell you that you need a new water heater and charge you $400. You don’t need a new water heater. How do you know? You’re 1,000 miles away. They’ll rip you off. You have to have good property management and preferably several in the same market. That’s why we said earlier that you want to be in a major metro area where you can identify multiple good property management companies.

It should be a professional operation, not a mom-and-pop shop. The problem with mom-and-pop shops is that if mom is on vacation or is out sick, there’s no one minding the store, and there’s no backup. You want a deep bench of property managers, leasing agents, and work crews so that when there are busy periods or somebody is out for vacation, you have a lot of people who can take up the slack.

You also want scalable software and systems so you have reporting 24/7, so you can find out what’s going on with your property anytime you want. A good rule of thumb is that a property management company should have about 300 properties under management or more. Below that number, it’s too small to hire enough people to give you good service. They have a lot of problems and a lot of time a lot of projects that they have to work on, a lot of repairs to make and they don’t have enough people and they can’t afford to hire more people. With more than 300 properties under management, they start to get economies of scale, and they can provide better service. That’s just a rule of thumb.

As I said earlier, you want to identify more than one good property manager per market when investing out of state. Then service providers. You want lenders, preferably a lender who’s licensed in multiple states, so if you decide to invest in one state and then six months later buy another property in another state, you don’t want to go through the hassle of having to submit your tax returns and your W-2 forms all over again to a new lender. If you have a lender who can lend anywhere, you just have your paperwork on file and you can borrow anywhere you choose to invest.

It’s also essential that your lender be a specialist in investor loan products. Most lenders deal with owner-occupants who are going to buy a house to live in, and they’re not aware of some of the loan products that are out there, especially for investors, so you want someone like that. Then, of course, there is the entire ecosystem that supports real estate investors, including inspectors, appraisers, insurance agents, and others.

To build a team like this is a daunting task, but that’s what you need for out-of-state real estate investing to work for you. Doing it yourself is risky because it’s challenging to build a team, especially when you’re far away.

What are the odds you’re going to do it right and not make mistakes? You can make a mistake, and it’ll cost you a lot. Real estate is not a liquid asset. If you make a mistake, you’ll be stuck with it for a while. It’s safer to work with an established provider, at least in the beginning, and that’s what RealWealth does.

RealWealth was founded in the Bay Area in California 20 years ago, just to solve this problem. You can see San Francisco’s skyline there. San Francisco is one of the most expensive metros in the country and does not generate a positive cash flow. You can buy a property there for $1 million that’ll rent for $5,000 a month, and you’ll have a negative cash flow of $1,000 or more every month. That’s not a great place to invest. A lot of our investors are tech workers in Silicon Valley. They work for Google, Facebook, and those kinds of companies, and they want to invest in real estate, but not here. That’s how RealWealth got started. We do all the heavy lifting.

We do all the economic research to find the best real estate investment markets. We have a thorough vetting of property providers and property management. Free education. We have a website with over 900 webinars, articles, and podcasts on all aspects of real estate investing. We have a community of over 70,000 members, and we continue to grow. In addition to providing all these resources, we also serve as your advocate after the purchase.

If, a year down the road, you’re having trouble with a property manager not getting back to you and not being responsive, please let us know, and we’ll put them on a call and get them to sort it out. Because we send them a lot of business, they want to keep our members happy. This is one of the risks associated with buying properties remotely. You’re a single individual investor, and you don’t have a whole lot of clout. As part of a network of 70,000 members, you do have clout. You can work with these providers and they’ll be responsive.

Here’s an overview of the markets we’re in. About 15 markets overall. Approximately one-third are located in the Midwest. They tend to cash flow really well, but they don’t appreciate very much. The ones in the Sun Belt, like Florida or Texas, they understand really well but don’t cash flow as much. A lot depends on your goal, what are you trying to accomplish with your investing? We have other webinars and videos on that.

In each of these markets, we have property providers. The new home builders are typically in the Sun Belt, where there’s a lot of growth. The renovated homes are the ones in the Midwest. We have property management in all these markets, lenders, insurance agents, CPAs, attorneys, and 1031 exchange people. The whole ecosystem you need to do real estate investing is already set up for you.

As an overview of how it works, you get a free membership by clicking the orange Join for Free button in the main menu. Then you just get educated. Watch the webinars every week, every Thursday. Review the webinars that are archived on our site. When you’re ready, you can schedule a strategy session with an Investment Counselor like myself. I’m one of three. You can learn about what market is best for you. We’ll talk about your goals, your risk tolerance, your timeframe and we’ll help you narrow down markets to the two or three that are best for you, and then you can focus on those.

Then you just contact the property providers, tell them that we spoke, and we want to see their properties or properties they have in the pipeline. They’ll send you a link, or they’ll put you on their email distribution list every time they get a new property. While you’re evaluating those, you can get pre-approved for financing with one of our lenders or your own lender. If you want to use your own, that’s fine too. If you want, you can visit in person, or you can just do it all remotely. When you see a property you like, you just sign the contract electronically with DocuSign, wire the Earnest Money Deposit, and you’re in business.

If you want to learn more about this option, join RealWealth.

The first thing you’ll want to do when you become a member is watch the Core Curriculum series. It’s four short 15-minute videos on how to get started. As I mentioned earlier, we also have a library of over 900 webinars, but that can be overwhelming. We created this Core Curriculum to get you started. This is what you need to know to get started.

Watch that, and then explore any other webinars or articles that interest you. We add to the content every week. Every Thursday, we have a webinar about a new market or a new aspect of real estate investing, including out-of-state real estate investing.

If and when you’re ready, you can speak to an investment counselor like me, ask your questions, and get recommendations for your specific situation. Again, everything is free.

People often ask how we pay the bills. The answer is that we educate investors and direct them to our various property teams across the country. If our members buy something, those property teams send us a referral fee out of their commission. That’s how we’re able to offer you all this for free. That, in a nutshell, is how to invest in real estate out of state. I hope you found that video worthwhile. Thanks for watching.