It's ideal if you buy rental property in an area near you. But if you live in an expensive place, you might not be able to invest there because the price of entry is too high (hello, California and Hawaii).
If you don't live in a good investment area, you can still invest. Just focus on an area that offers investment opportunity, a practice known as long-distance real estate investing.
There's a little more involved with investing this way, but if you follow a formula, you should have just as good a chance at making money as you would investing in your hometown. Here's how to make long-distance real estate investing work.
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Learn all you can about the area
When you invest locally in rental property, you know from living nearby which areas to focus on: places where people want to live. The neighborhood is affordable, it's close to jobs and/or public transportation, has a low crime rate, and the schools are good.
When you invest out of town, you can find out all this information by researching online. Once you've found an area that meets your qualifications, such as a city in the Rust Belt, for example, you're ready for the next step.
Gather a team
To lower your risks when investing in long-distance real estate, you'll need some help. It doesn't matter how cheap you can get a property if no one wants to rent it. You'll need a team to help you pick a potentially good rental property.
A real estate agent
You'll need a real estate agent local to the area you've decided to invest in. You can find one by searching the internet for "real estate agents that specialize in investment properties in Cleveland," for example. You then can contact some of the brokerages that come up in your search, or you can use a directory. The Bigger Pockets website, for example, has a directory of agents you can contact.
Explain your goals to the agent, and get them to send you leads. You can start making offers without ever visiting the area, although it's always a good idea to go there yourself if possible.
A property manager
I've personally found it difficult to find a good property manager, but that doesn't mean they don't exist. Your best bet in finding a competent property manager is to get leads from the real estate agent you use.
A good property manager will have the following traits:
- Screens potential renters by conducting a credit and background check.
- Makes sure the rent payments come in on time and in full each month.
- Communicates in a timely manner with your tenants when issues arise.
- Has vendors they work with. (Make sure they are not charging more than market rate for this service. Ideally, you will enjoy a discount.)
- Inspects the property at least yearly.
- Communicates with you often.
A lender
You can use your preferred lender if they are licensed in the state you're investing in. If you want to use a local lender, your real estate agent should be able to refer one to you. Some questions to ask a lender include whether they will use rental income as part of your income (the answer should be "yes"), how much of a down payment is necessary (some might go as low as 15%), and what percent of the home's value can you borrow.
Run the numbers
The process now becomes just like it is when you invest locally. Run the numbers on various properties to determine which ones make sense. Find out whether you'll have positive cash flow (rent income minus mortgage, taxes, insurance, repairs, and vacancies) and what the net operating income (NOI) and capitalization rate, or cap rate, are. NOI is rental income minus operating expenses (excluding the mortgage). Cap rate is NOI divided by the purchase price. A higher cap rate is good, but a high cap rate indicates a riskier investment.
Once you get one long-distance deal under your belt, you can use this formula to start building a portfolio of investments anywhere you like. And that is the way to build your fortune in long-distance real estate investing.
