By Fred Matera, CIO, Redwood Trust A lack of affordability will lead to near-term weakness,…
There is more to residential real estate investing then one’s local neighborhood. Savvy investors are often more inclined to seek investment opportunities outside of their current state of residence for a number of reasons. To some, there might be a shortage of inventory in the marketplace. But to the keen investor, there are opportunities in every price range if one is prepared to look outside of their own backyards. There are other markets that present the opportunity for higher ROIs (returns on investment). Investors should be open to exploring other real estate markets but should also consider the challenges of property management when purchasing a rental, in part, due to the logistical concerns that emerge when managing one single rental or a portfolio of rentals located out of state. Without “boots on the ground”, it’s difficult to manage the day-to-day operations of a residential real estate portfolio. That being said, this shouldn’t discourage inventive investors. Here are my recommendations for investors looking to delve into the residential real estate investment space in another state.
Do Your Homework
- As an investor entering a new market, odds are that you’re unfamiliar with the many factors that influence your investment: Purchase prices, taxes, housing regulations, capitalization rates, and/or the rental market conditions of the state or neighborhood in which you are looking to deploy equity.
- Hence, you are left to rely on your research as well as the professional opinions of the local market players.
- Websites such as Trulia & Zillow offer a plethora of research for you to use at your disposal when formulating an intimate understanding of a new market.
- Seek out the professional advice of local market players. Local real estate agents and brokerages can be an invaluable tool in establishing a rental portfolio in an unfamiliar market. Leverage their experience and local knowledge to acquire assets in desirable areas with high demand for rentals. As you look to establish a local presence, it’s always helpful to make friends.
Tips for managing the property yourself
- Assuming you have already purchased a rental in a different market, forming a reliable network of real estate agents, plumbers, electricians, handymen, and/or property managers is paramount to your investment’s success. Start with a realtor from the area you’ve invested in. They will be able to recommend affordable and reliable “mom and pop” providers which will help cut costs and preserve your rental’s cash flow.
- “The Essence of an investment in real estate is a good tenant,” -James McClelland (MACK co. of Chicago—largest owner-manager of single-family rental properties in the Midwest)
- It is important to be selective when placing a tenant. You won’t have the time or the luxury of keeping a close eye on your property, nor will you be able to pressure a tenant to pay rent in the event that it is overdue. A reliable and proactive tenant can eliminate a lot of the headaches caused by maintenance and rent collection.
- Automate your rent collection
- Utilize tools such as ClearNow or eRentPayment to streamline the rent collection process, transferring funds directly from your tenant’s account into yours. These platforms are capable of sending notifications to your tenants, alerting them when their payment is due. This prevents any late collections as well as any trouble a landlord may face while tracking down a tenant for rent from another state.
Consider a property management company
- Depending on the size of your portfolio, managing rentals out of state can be a full time job. A property management company serves as a practical solution for investors that are looking to either A) outsource the “management” aspect of their investment and/or B) scale their business.
- Many successful long-distance investors also utilize property managers to find tenants, assist with any emergencies, and handle the repairs and maintenance of their assets. If you plan on hiring a property management company, make a list of five firms in the area and schedule interviews in person to determine which is the best fit for you. Take a look at Renters Warehouse. They provide greater reach, a streamlined approach and reasonable rates.
- Although this may seem like an ideal solution for all investors, these services come at a price. Since real estate investors are in the business of generating cash flow, it is critical to take property management expenses into account when calculating the cash flows of an asset you are looking to acquire.
CoreVest is a leading provider of financing solutions to residential real estate investors. We provide attractive long-term debt products for stabilized rental portfolios as well as credit lines for new acquisitions.