Investing in long-distance real estate is a great way of diversifying your portfolio. After all, there’s no reason why you can’t buy property in a different part of the country.
But when you’re planning to spend tens or hundreds of thousands of dollars, you need to do everything you can to ensure your investment is a success.
That’s why we’ve put together five critical lessons that we’ve learned from failures with long-distance real estate investing, so you don’t make the same errors when you go to buy your first investment property.
1. Due Diligence into an Area is a Requirement, Not a Choice.
While you might think there’s something exciting about buying an out-of-state property without even visiting, doing so can have disastrous financial consequences. Many investors look for areas with the cheapest real estate and simply make a beeline for the property market. But you need to dig much deeper to find out the true value of an area before committing to a purchase. Consider:
What draws people to live in the area? Industry? Education? Commerce?
What type of people rent in this area? And how healthy is the market?
What do employment figures look like in the area?
What are the state policies on property taxation?
How are crime levels? Are they on the rise?
Thoroughly researching the dynamics of an area before committing to a real estate investment will save you from costly mistakes. Jumping into a real estate deal without any prior knowledge of the market of the area in question is the single biggest mistake you can make as a long-distance investor.
2. Don’t Try to Do Everything Yourself. Build a Professional Network to Help You.
Some investors think that the key to success when it comes to long-distance real estate purchases is in managing the entire process yourself. After all, if you take care of the transaction yourself, you will save money, right?
Not exactly.
While you might save money in the short term – particularly in relation to professional fees – neglecting to utilize industry specialists in the area will almost certainly lead to mistakes. If you’re planning to invest in long-distance real estate, start building a network that includes:
Turnkey Companies
Working with a turnkey company is a great way to get into the long-distance real estate game from the outset. Platforms like Roofstock present you with potential properties to consider and enable you to connect with other investors. A great place to begin building your network.
Local Realtors
Yes, it might be tempting to use Zillow as your one and only guide when scouring the country for properties, but it’s no substitute for connecting with local Realtors, who have an intricate knowledge of the property market in your selected area. Reach out to local firms that are highly ranked in your chosen locale, and that specialize in rental property acquisitions.
Property Managers
If you’re planning to manage your new property from afar, you will need a property manager to work on your behalf, particularly when it comes to scheduling viewings and taking care of the new tenants.
Service Providers
When you own a rental property, you need to be prepared for things going wrong. Having a group of service providers you can rely on to assist with plumbing, HVAC, pest control, and cleaning at the very least will ensure you can rectify any issues with your rental property without visiting it in person.
The more you can rely on the help of local professionals when it comes to managing your property, the less likely you are to make costly mistakes when it comes to your rental property acquisition.
3. Familiarize Yourself with All Worthwhile Investment Strategies
The good news is that there isn’t just one way to invest in long-distance real estate. When you’re seeking to make money from real estate, different strategies work for different investors. Some of your options include:
Fix & Flip
Some investors look for properties below market value and perform the necessary repairs and improvements before flipping them for a profit. Typically, this is best suited to those with experience in the building sector, as it’s important to keep costs down so you can profit from the margins.
Real Estate Investment Trusts (REITs)
If you want to avoid the hassle of working with tenants directly, you can invest in a REIT. This sees you invest in a company that currently owns income-producing properties and is a viable, hands-off real estate investment strategy.
Short-Term Rentals
Thanks to the prevalence of websites like Airbnb, you can now earn good money by offering your property to short-term renters. Ordinarily, location is the most important determinant for short-term rentals, and those near popular tourist hubs and in busy towns and cities are likely to do better than others.
Buying & Holding
This is a long-term investment strategy that sees you hold onto a property for a considerable period of time. During the years that you own the property, you lease the property to a tenant before selling it for a profit sometime in the future.
Each investment strategy has its own merit, but it’s important that you opt for an approach that fits with your current financial circumstances.
4. Consider All Costs Associated with the Acquisition – Not Just Purchase Price.
Although the purchase price of your rental property is likely to be the biggest expense you incur, it’s certainly not the only price that you will be responsible for. In addition to 20-30% down, you will have to consider the following costs:
Mortgage and Interest Rates
Unless you’re buying a piece of real estate outright with cash, you will probably have to finance the deal with a mortgage. The interest rate for investment properties is typically 1% - 3% higher when compared to traditional mortgages. You need to ensure the increased interest rates don’t affect your annual rental income.
Tax Considerations
Before you buy a property out of state, it’s so important that you familiarize yourself with the local property taxes. For instance, property tax in New Jersey currently sits at 2.49%, which is significantly higher than the 0.28% in Hawaii.
Other Expenses
When you purchase a property, you will be responsible for maintenance and repairs, utilities, property management fees, renters insurance, and homeowners association fees. Do as much research as you can before settling on a purchase, so you can appropriately budget for all fees associated with your investment.
5. Comprehensive Landlord Insurance is a Must.
Our fifth and final lesson is arguably one of the most crucial. If you’re planning to rent out your property to tenants, then you need to get the right level of insurance. Rental property or landlord insurance typically covers the following:
The dwelling/structure of the property (damage to walls, ceilings, roof, etc.)
Contents that belong to the landlord (HVAC, white goods, garden items, etc.)
Liability coverage
Loss of rental income
More comprehensive policies also include the likes of vandalism and ordinance coverage, but it’s entirely up to you what you include in your policy.
The harsh reality is that tenants are completely unpredictable. And while most play fairly and treat your property with respect, it’s too big a risk to leave your property uninsured when you’re trusting someone else with the long-term health of your investment.
Final Thoughts
Investing in long-distance real estate is an excellent way to diversify your investment portfolio. But the most important thing to acknowledge is that you shouldn’t just hope for the best when it comes to deciding where to invest your money.
The property market is broad and intricate, and you need to understand the many subtleties from place to place to get the most out of your investment. Hopefully, these five crucial lessons will set you on the right path and ensure you don’t make the same mistakes that other investors have made in the past.
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