Summary: This is part two of a three-part series for finding and establishing an out-of-state area for real estate investing. In part one, we provided a step-by-step guide for choosing a city/location. Part two covers defining your criteria and building your team. Part three will cover site visits and identifying and buying properties.

 

In the first part of this guide, we discussed how to identify one or two candidate cities/regions for investment (click here to read Part One). In this portion, we start fleshing out the necessary components for successfully investing within these regions.

First, a reminder of the value of piggybacking. As we advised in the first part of this series, if you are just starting out in real estate investing or are entering a new market, consider investing in an area where a friend already owns cash-flowing properties so that you can piggyback off of their knowledge of the market. Understanding a market and putting together a competent, reliable team in an off-site location is significantly easier when you have someone already in the market who is familiar with its intricacies. As an added value, you will also find that you and your investor group have bargaining power when it comes to dealing with property managers and contractors when there are several of you to whom he/she is accountable. We call this “team investing.“

 

Defining Your Criteria

When expanding into a remote market, you should define your criteria in a similar way as you did in your local market. In brief, these include 1) real estate investment strategy, 2) your goal cash-on-cash return, 3) your budget, 4) property size, and 5) desired property characteristics.

In general, your criteria won’t change as you enter a new market. However, we’ve found that occasionally, you have to adapt your desired property size and property characteristics.

For example, we prefer 2-4 unit multifamily residences. However, some markets don’t have many 2-4 unit multifamily residences available and have more single family homes or larger apartment complexes instead. In this situation, you might be forced to adapt your desired property size from 2-4 unit multifamily residences to single family homes.

Another example is school districts. It’s common for investors to prefer neighborhoods with good schools. However in many markets, the areas with the best schools are already over-priced and not a great place to find cashflowing properties.

Ultimately, moving into a remote market may require greater flexibility in defining your desired property type and preferences. In this situation, you should lean on the experience of your agent and, if he/she advises you to pursue a different type of property than you normally buy, you should consider branching out and trying something new. But remember, even if you consider investing in a different type of property, do not lose sight of your cash-on-cash criteria and your focus on cashflow, not appreciation. This focus will keep you from making poor decisions and gambling on a property.

 

Building Your Team

This section covers the members of your team (organized by location) and some of the important characteristics you should look for when assembling your out-of-state team.

 

Your “Flexible-Location” Team

When moving into a new market, some “remote” members of your team clearly need to be located in the area where you intend to buy. However, other members can be located near you, not the city of property purchase. If they have the right characteristics, these “flexible-location” team members can be utilized for purchases across states and can be with you with for the long haul.

 

• Mortgage broker/lender: A mortgage broker is a “flexible-location” member of your team to the extent that he/she is able to help you obtain mortgages in any state. Many community lenders and credit unions only serve their local area. The advantage of choosing a mortgage broker who is associated with a national company is that you save yourself the trouble of having to establish a new relationship every time you enter a new market. Establishing a relationship with a new broker in every city your invest in is laborious and time consuming because each time you apply for a loan, you must provide a substantial list of documents to support your credit-worthiness and presence of funds. If you have a mortgage broker who has connections in multiple markets, he/she should have some of your documents saved from previous loans which can be applied to new out-of-state purchases, saving you time and effort. There are numerous characteristics of a mortgage broker that makes him/her better suited to work with investors vs regular home-buyers. A future article will address these features in detail.

 

• Insurance agent: Like your mortgage broker, your insurance agent can be a “flexible-location” team member if you choose wisely. This is because some insurance agents are actually insurance “brokers,” meaning that they can provide insurance quotes from several leading national companies in multiple states. The only limitation is whether the broker has a license to provide insurance in the particular state where you are investing. However, in our experience, if your broker does not have a license to provide insurance in somewhere you are planning to invest, he/she may choose to complete additional training in that state in order to be able to cover you. This simplifies your life because you have all your insurance policies managed under one roof.

 

Your “Remote” Team

Remote team members are located in the out-of-state area where you decide to purchase. Since you want them to work well together, it is often worth finding a single core team member from whom you then get referrals to other team members. Talent attracts talent. We’ve found that if you can find an excellent real estate agent, for example, he/she will frequently have connections to other stellar team members who you can leverage when building your on-site team.

 

• Real estate agent: Finding a good real estate agent is the primary factor in developing a successful real estate investing team. The reason is that a super-star agent is responsible for knowing the market for investment properties, understanding the rental market, identifying and bringing you deals (including the often-times more valuable off-market deals), negotiating on your behalf, providing the purchase and sale agreement (with the appropriate contingencies), recognizing problems during inspection, helping build your local team, etc. The list could go on and on.

When you are out-of-state investing, you must ensure that your real estate agent is willing and able to communicate with you frequently and effectively. And since your out-of-state agent is often saddled with more tasks than agents located in-state, you need to find a real estate agent who is willing to go the extra mile to make sure every part of a deal is well-coordinated and planned – and that is the right deal for you. These additional tasks include but are not limited to: driving by properties and neighborhoods that you cannot see for yourself, recording video tours of properties, coordinating general contractors for you and meeting with your property manager to show them around a new purchase.

We have been fortunate enough to work with a couple of incredible agents in several cities over the last several years. But we have also worked with some agents that are poorly suited to working with investors. The attributes of what makes a good investor real estate agent and the steps necessary to identify him/her merits its own in-depth post down the road.

 

• Property Manager: Out-of-state investing necessitates a property manager, since it becomes infinitely more difficult to be able to self-manage remote properties. Luckily there are usually multiple decent options for property managers in most cities and surrounding areas. The easiest way to identify a good property manager is to get a referral from your real estate agent. Ideally you have an agent who has his/her own investment properties, so you can rely on his/her property manager (if he/she doesn’t self-manage). If your real estate agent does not know any property managers (which is a red flag), I’ve found that Yelp is fairly helpful in helping to identify decent property management groups. In the cases when my agent provides introductions to multiple property managers, I also rely heavily on Yelp in helping me choose which group to contact and interview first. As is the case with with real estate agents, property managers play a huge role in the success (or failure) of your investments.

 

• General Contractor: Some investors may not see a general contractor as a necessary component of an out-of-state investing team. If you buy only turn-key properties that do not have many necessary repairs, you may be rely on your property management’s maintenance and/or contracting team to make small changes.

We, however, have found our general contractors to be vital parts of our out-of-state investing team. Because we buy properties and frequently make value-add improvements, getting a general contractor who is not hired through our property management group saves us money (since property managers often charge a certain percentage on top of their contractor’s fees to manage a repair). In addition, we find that many of our independent contractors guarantee their work for up to one year, so we minimize maintenance costs down the road by hiring out ourselves. Our general contractors also show up to our property inspections and give us estimates of any repairs or improvements that need to be done up front – so we can use this information to decide if a property is worth purchasing in the first place (and to negotiate a lower price if we do decide to go through with a deal). Finally, another benefit of having a general contractor that we’ve more recently realized is that you can sometimes lean on a good contractor to help you with repairs in situations when you do not have a property manager (for example, if you have a property used for Supported Living).

We’ve had success finding good contractors through referral from our real estate agents and (in one case) our property manager. A benefit of getting your contractor through referral from other members of your team is that your contractor is then accountable to your real estate agent or your property manager since future referrals are at risk if the contractor does not deliver for you. This adds an element of responsibility for the contractor to take your project seriously and do a good job.

 

• LLC Lawyer: If you intend to house your rental properties in LLCs for protection, a common way to set up your LLC structure is with each property-owning LLC to be created in the state of the property overseen by an umbrella LLC (click here to read about our LLC structure). Thus, you will need to hire a lawyer in each state where you own properties to set up your LLC, create your operating agreements and perhaps aid in filing your yearly meeting minutes. Oftentimes your investor real estate agent will have experience with a good local real estate lawyer and can refer you on.

 

• Registered Agent: Finally, if you intend to set up a state-based property-holding LLC, you will need to contract with a registered agent in that state so you have a mailing address, though you can minimize work by using a national registered agent such as InCorp to be your registered agent in every state you own rentals.

 

What Does Success Look Like?

There is nothing more satisfying than video streaming your real estate agent, property manager and contractor at an out-of-state property inspection. If you can get all three vital members of your team to the inspection, you’ll be well on your way to making a well-informed purchase decision.

The property manager will provide you with an accurate rent analysis based on the neighborhood and the condition of the property. Your contractor will give you an accurate estimate for the cost of repairs. Your well-primed real estate agent will now have ammunition to go back to the sellers and negotiate a reduction in price or repairs to be paid for by the seller based on information gathered at inspection day. Not only that, in this situation you get the additional benefit of being able to ask questions about what types of improvements or renovations are worthwhile by engaging all three members of the team in discussion, leveraging group thinking to extract the most value out of your purchase. This should be your ultimate goal when assembling your remote team.

Having now assembled your team, it’s time to move on to actually finding and purchasing properties in your out-of-state location in part three!

 

Action Plan

• Identify your (investor-friendly) mortgage broker and get pre-approved for a purchase
• Identify your real estate agent or agents and ask for referrals to a property manager, contractor and potentially an insurance broker if you do not already have one
• Interview and choose a property manager
• Interview and choose a general contractor
• Get quotes as needed from your insurance broker
• Consider identifying a LLC lawyer prior to purchase so you can buy with a property in an LLC (commercial loan) or move a property into a LLC quickly after purchase (residential loan) – click here to read more about LLC structures