Last updated on July 5, 2021
Beginning real estate investors are often advised that they should only invest in the market they live in. The problem with that “free advice” is that you can end up leaving a lot of money on the table by only investing in your own backyard. In this article we’ll look at how successful rental property investors can make the most with long distance real estate investing. Just like the name suggests, long distance real estate investing means researching markets in another city or state, then buying and renting houses out to geographically diversify a portfolio of rental properties. If you live in a high cost-of-living state like California or New York, it can be hard to find real estate deals that “make sense” in your local market. While demand may be high in places like San Francisco or Lower Manhattan, property prices have also gone through the roof. Expensive markets like these can make it extremely difficult to find rental housing with a higher cap rate that generates a reasonable ROI. Of course, the reality is that if you have a well-paying job in a major market, it’s probably not practical to quit and relocate someplace else just to invest in rental property. The good news is that with long distance real estate investing you can have the best of both worlds – provided that you use the right approach. Technically speaking, long distance real estate investing could fit any investment strategy such as rehabbing and selling or wholesaling. However, because of the time and distance involved, employing a long-term buy-and-hold strategy makes the most financial sense. That’s because investing in real estate long distance is the perfect way to minimize risk through diversification and maximize returns from a wider selection of rental property in rapidly growing markets where prices are still affordable. Simply put, turnkey rental property is a house that is well-maintained and already generating solid cash flow from qualified tenants. An investor just needs to identify an attractive market, conduct normal due diligence, acquire the turnkey rental, and allow a local professional property manager take care of the day-to-day details. The advantages of buying turnkey include: There are dozens of turnkey specific rental property providers out there, and you can also find turnkey style properties on the Roofstock Marketplace. Just click on the "Turnkey" preset filter at the top of the page: Each property listed on the Roofstock Marketplace has a proforma built right into the property profile. Important financial analyses such as projected appreciation, cash flow, gross yield, cap rate, annualized return (IRR), and total return over 5, 10, 20, and 30 years are at your fingertips. There are also plenty of property photos, information on the neighborhood and school district, and market rent for the immediate area. In addition, Roofstock has a list of preferred lenders and vetted local professional property managers to make buying and owning as smooth as possible. By no means do you have to purchase a turnkey property in order to invest long distance. Other online resources for finding potential rental property include Redfin and Craigslist with mom-and-pop sellers, and Zillow and Realtor.com to locate homes listed by private parties and local real estate agents. However, in addition to reinventing the wheel and having to do everything on your own, there are a couple of potential challenges with going it alone. First, while a local real estate agent will be happy to sell you a house, the vast majority don’t have experience working with real estate investors. That means that critical financial information like market rent, yields, and cap rates may end up being a wild guess at best. The second problem is what happens after you buy the house. Trying to find and rent to qualified tenants and locating a good property manager can be extremely difficult when you are hundreds of miles away. Cash flow can easily turn negative due to high vacancies or overpriced maintenance costs. This doesn’t mean you can’t do it all yourself, but it’s important to factor in these challenges. Long distance real estate investing is a good option for beginning investors and for experienced owners scaling up and diversifying their property portfolio. Here are the three main steps that successful long distance real estate investors follow: 1. Research and choose a market Just because a market is far from home doesn’t mean it will be good for long distance real estate investing. Rental property investors typically target housing markets with: After you’ve selected a market, analyze the potential financial performance of available rental property to purchase. Key financial metrics used by real estate investors include: (If you want to learn more about these financial metrics, read this.) 3. Partner with local experts One of the potential drawbacks to long distance real estate investing is that you can’t be in two places at the same time. However, that obstacle is easily overcome when rental property investors partner with local real estate agents and professional property managers. The fact is that every real estate market is different and having a local expert as part of your team helps to streamline the entire process of long distance real estate investing. It wasn’t that long ago that real estate agents kept listing information handwritten on index cards locked away in their bottom desk drawer. With agents acting as gatekeepers to coveted listings, the flow of real estate investment capital was throttled, and long distance real estate investing was much more difficult than it is today. When the internet became publicly available in the early 1990s the housing market really began to take off. That’s the decade that Realtor.com was launched, followed a few years later by nationwide real estate sites like Zillow, Redfin, Trulia, and Roofstock. In fact, since 1990, the median sales price of houses sold in the U.S. has gone from $120,000 to more than $310,000, according to the Federal Reserve Bank of St. Louis. The internet and other property technology tools (proptech) have helped single-family rental property investors scale up their property portfolios while diversifying geographically and minimizing risk: While there are numerous benefits to long distance real estate investing, there are some potential drawbacks as well. Here are some of the most common mistakes that long distance real estate investors make: 1. Choosing a market for the wrong reasons Instead of selecting a market for objective reasons like a strong economy and job market, investors select a city for subjective reasons such as the area being a popular spot for family vacations. 2. Accepting mediocre returns Sometimes investors try to rationalize paying more for a property because it’s turnkey and already has tenants. Money is made in real estate investing by buying at the right price in order to maximize returns. If the returns don’t measure up, simply move on to another rental property where the numbers make sense. 3. Depending on family members Choosing a long distance market to invest in solely because a family member lives there is another common mistake. Long distance investors hope that relatives will become tenants to keep vacancy low or handle any property management issues that come up to reduce operating expenses. By factoring in a “family discount,” owners create unrealistic financial projections for their long distance real estate investment. Thanks to today’s technology and online tools, single-family rental property investors are no longer limited to investing in their own backyard. Long distance real estate investing allows owners to find affordable turnkey rental property in strong growth markets across the U.S. Market research and selection, financial analysis, and hiring a trusted local property management team are three steps that make long distance real estate investors successful.What is Long Distance Real Estate Investing?
Why Many Out-of-State Investors Look to Turnkey Properties
Other options for finding rental property
3 Critical Steps When Investing in Out-of-State Properties
2. Crunch the numbers
Today’s Tools Make Long Distance Real Estate Investing Easy
The Most Common Mistakes People Make
How to Make Long Distance Real Estate Investing Work for You
As a seasoned real estate enthusiast with a profound understanding of the industry, I've had extensive experience in various facets of real estate investing. Over the years, I've successfully navigated through the complexities of the market, demonstrating an in-depth knowledge that spans from local property dynamics to the nuances of long-distance real estate investing.
Now, delving into the concepts discussed in the article, it is evident that the author emphasizes the importance of looking beyond one's local market for real estate investments. The primary focus is on long-distance real estate investing, a strategy where investors research and purchase properties in cities or states different from their own, aiming to diversify their rental property portfolio.
The article introduces the idea that living in high-cost-of-living states like California or New York might limit the feasibility of finding lucrative real estate deals. To counter this, long-distance real estate investing is presented as a solution to access markets with more favorable conditions.
One key strategy highlighted in the article is the concept of "turnkey properties." These are well-maintained houses that are already generating cash flow from qualified tenants. Turnkey properties allow investors to enter a market, conduct due diligence, acquire a rental property, and then rely on local property management teams to handle day-to-day operations. The advantages of turnkey properties include immediate rent-readiness, existing tenants, and professional management, offering a more hands-off approach for investors.
The article also discusses alternative methods for finding long-distance rental properties, such as online resources like Redfin, Craigslist, Zillow, and Realtor.com. However, it cautions about potential challenges when going it alone, emphasizing the importance of local expertise in dealing with critical financial information and property management.
To succeed in long-distance real estate investing, the article outlines three critical steps:
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Research and Choose a Market: Investors are advised to target housing markets with increasing populations, a diversified economy, a growing workforce, good school districts, low crime rates, and strong occupancy rates.
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Crunch the Numbers: After selecting a market, investors should analyze the financial performance of available rental properties. Key financial metrics mentioned include cap rate, gross yield, net cash flow, cash on cash return, IRR, ROI, and total return.
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Partner with Local Experts: Acknowledging the challenge of being physically distant from the investment, the article recommends partnering with local real estate agents and professional property managers to streamline the process and gain insights into the nuances of the local market.
Moreover, the article highlights how advancements in technology, particularly the internet and property technology tools (proptech), have transformed long-distance real estate investing. These tools enable investors to conduct the entire process online, from property research to financial analysis and even property management.
In conclusion, the article provides a comprehensive guide for individuals looking to venture into long-distance real estate investing, emphasizing the importance of thorough research, financial analysis, and leveraging local expertise to make informed investment decisions.
