The Game Plan For Buying Properties Out of State

Welcome to another edition of the Coast-to-Coast Real Estate Investor.

Last week I wrapped up the overview of the various states to invest in. If you haven’t read any of those, or heard the Podcast versions yet you can go back and access them. The blog entries are located here in the archives, and the Podcasts can be accessed at:

http://www.talkshoe.com/talkshoe/web/talkCast.jsp?masterId=20058&cmd=tc

Those “where to buy property” episodes will be real useful to you for laying the groundwork on where to invest.

Today, I am covering a basic game plan for buying property out of state. This game plan is structured around long-term holding, but those of you interested in flipping properties can still make use of much of it. Today, I’ll be presenting the overview, and in the following weeks, I’ll be examining each step much more thoroughly.

So, let’s begin!

Step 1. Researching Markets –

Before you ever invest in an area other than your own home market, you need to have a clear idea of where you are going to invest…and why. Your reasoning can be as simple as the desire to buy a vacation home, or as calculated as trying to invest in a highly appreciating market. But, you need to be clear on your goals.

Begin with one market in mind. In the beginning, don’t try to chase all over the country after deals. With an entire country’s worth of real estate out there, you can get stretched way too thin and end up unproductive and totally frustrated. Simply put, you can’t know everything about every community, and there’s a lot of market research you need to undertake before you buy. Thus, you need to focus your attention. Believe me, I know this first-hand. You can easily fall into the trap of spinning your wheels looking at too many places at once and get more wrapped up in looking than buying! Being busy looking at properties will not make you wealthier – only buying them will.

So, where do you go to research markets?

My Podcast & Blog, of course are good places to get market information. As I noted at the beginning, the overviews presented over the last several weeks are good places to begin. And, down the road, I’ll be taking very intense, detailed looks at various areas.

Commercial sources are another great place to do your research. There are great magazines such as Where to Retire and powerful websites such as www.bestplaces.net that can provide all kinds of market information.

Government resources – the U.S. Census is a tremendous resource when it comes to digging up details on job growth, demographics, and housing prices among other things. State economic development offices and boards of realtors can help you get more localized information.

Step 2. - Locating properties

Locating properties is actually one of the easiest parts of the process. However, as I mentioned, it’s also the biggest trap because there is an endless supply of properties across the country; so, I will re-emphasize the importance of focusing your search.

Websites are the natural place to begin searching. One of the things that made out-of-state investing so possible now is the access to property listings on the Internet from sellers and realtors.

Craigslist (www.craigslist.com) is among my preferred places to look. If you haven’t come across Craigslist yet, it’s like the worlds biggest classified advertising site. For Sale By Owner sites, like www.fsbo.com are another place to look. FSBO’s are good because you are dealing with sellers directly and deals aren’t complicated by real estate commissions.

Real estate sites like www.realtor.com, and those available from virtually every real estate office are another logical choice. Realtors, with their access to multiple listing services have access to the main source of property listings, and a good share of brokerages allow the public to access the local multiple listing service (MLS) listings from their websites.

One commonly overlooked source of property leads is other investors. You’ll find investors with properties they are trying to flip, rentals they want to sell, and fixers they are trying to wholesale - so they can be a good source of leads. A side benefit is that they are the most common source of owner financing, so if you don’t want to go the traditional mortgage route, they offer a potential advantage.

Step 3. Buying properties

Keep in mind that whether you are buying a vacation home or trying to flip a property in a hot market, you are an investor. As an investor, the numbers must make sense in any deal. Always keep in mind that you need to buy right. That means getting good prices, good terms, or both. As an investor you can’t afford to buy at retail – or worse, above retail. Speculators do that in hot markets, but that’s more akin to gambling than investing.

Because of the need to get good deals, For Sale By Owners hold particular appeal. As I noted a moment ago, FSBO's are good because you are dealing with sellers directly, and deals aren’t complicated by real estate commissions. As an investor, in general, you will find that working with owners far easier than working through real estate agents.

That’s not to say you shouldn’t work through real estate agents. Realtors are the single largest source of properties for sale, so you can’t overlook working with them.

There is the issue, however, of whether you should work with one realtor exclusively (typically they will be your buyer’s agent) or whether you should talk to all the various listing agents who have the particular houses for sale.

In general, you’ll find it easier to contact the listing agents directly, but that also tends to be the harder route to go in terms of successfully buying something. Working with one specific agent and getting them to send you listings that meet your criteria is much more productive and will serve you better in the long run. On the other hand, it can be difficult to find a good agent. A good agent is worth their weight in gold, and it can take speaking to 20 or 30 agents before you find a good one. Plus as an investor you tend to be on a longer timeline than most agents expect; if you don’t buy, sooner or later they will move on to other clients.

On a completely different issue, buying condos versus single-family homes should be an issue you consider. Personally, I prefer condos in amenitied communities with things like a pool, tennis, etc. Buying a condo means you have to factor in the monthly condo fee, but that fee also takes a lot of maintenance issues off your plate, which is good when you are out of state. Single-family homes are generally the better investment, though. Keep in mind, however, that with a single-family house, sooner or later you’ll have to put on a new roof, take care of the landscaping, perhaps exterminate bugs – those are dealt with for you in a condo or townhouse. Over a long period of time, the cost of repairs versus those condo fees can be equivalent to each other

Step 4. Financing

If you are flush with money, cash flow, and credit, the subject of financing is probably not too much of a concern for you. You’ll be able to go out and get a mortgage of some type, and your main concern is getting the best rate and terms you can find.

If you are a typical buyer, probably with a middle income job, a family, and so forth, you are probably weak in one of those areas, so the subject of financing is probably much more important to you. To emphasize this point, a typical middle income buyer may find it reasonably easy to get a second home loan, but then run into a brick wall buying a third property. So, understanding the subject of finance is vital.

Owner terms – commonly referred to owner financing or creative financing is something every investor should study. Sooner or later you will run into a roadblock trying to qualify for traditional financing. At that point, if you don’t find alternative means to finance properties you’ll be stuck in the water. If an owner will offer owner financing where you make payments to him or her instead of wanting a cash sale, issues of your income, credit, or debt load may be irrelevant. It’s simply you and the seller at that point as opposed to you being scrutinized by a big money bank.

That’s not to say you won’t use traditional financing. There’s a place for that, too.
Mortgage brokers, who independently represent a variety of lenders, are often a best source for traditional financing. Simply put, if the broker can’t get you a loan, they don’t earn their commission, so there’s a good incentive there.

Banks, of course are natural sources. If you utilize a large national bank like Chase or Citicorp check to see if their mortgage department is licensed in the state where you want to buy. This can be more expensive than other routes, but there is a convenience factor because you can work from your local branch.

Local banks – that is, banks in the immediate area where you want to buy can be great places to find loans at good rates. Depending on the particular bank, they are often the most assertive lenders in the area, and often have decent terms and criteria – representing a bargain compared to other sources.

Step 5 – Don’t Forget the Details

Never forget the details you have to take care of when you have an accepted contract – these include surveys, home inspections, pest inspections, and appraisals. I have one important piece of advice - don't go with the affiliated companies of large banking operations. They are simply too expensive compared with independent services in the area. Countrywide, for example, partners with appraisers, title companies, pest inspectors, home inspectors, and so on. The fees for these “convenient” services can easily be double what you’d pay for the same service by selecting your own vendor.

Step 6. Closing -

You’ll need a title company to close. In some states the buyer gets to select the title company, in others it’s the seller’s prerogative If it’s yours, get references, and don't go with one affiliated with large mortgage company….again, too expensive compared to the overall market. That bedfellow arrangement is often nothing more than disguised greed waiting to take your money.

Part of the title company’s work is providing title insurance. Again, don’t go with the affiliates if you are using a large national mortgage company unless you are willing to pay a whole lot extra.

Step 7. Getting tenants

This is among the most important steps in the process. If you don’t get good tenants…and get them quickly, your investment will turn into a monthly money pit.

I do not recommend trying doing it your self. It just doesn’t make sense for you to try to secure and manage a tenant from hundreds of miles away. Some people do it successfully, but I am going to suggest you consider professional help in this arena. I’ve never understood why a landlord (even one with a local property) would try to undertake their own management to save $70 or $80 a month. Think about it -- where else can you get 24x7, legal, advertising, marketing support, etc. for about just a few dollars a month? I have a friend who owns several franchises. He pays his managers in the $30,000 range, and they don’t handle nearly the responsibility my property managers do. In my mind, professional property management is a secret bargain you need to discover.

First be aware that there is a different between tenant placement and property management. Most real estate agents who handle rentals are doing tenant placement. That is, they will find and qualify a tenant for you. For that, they will typically charge you 1 month’s rent. The problem is, you are left to manage the tenant, handle ongoing repairs, collect the rent, deal with potential eviction and a host of other concerns after the tenant is obtained. That’s not what you want.

What you really want is a property manager who not only can secure a tenant, but can handle the property on an ongoing basis. In my opinion you want to get the best property manager you can find because they have the best systems, contacts with reliable tradespeople for repairs, etc. A bad property manager is next to useless and can end up costing you money by being slow to get tenants, and sloppy with handling them, so get the best you can find. A good or bad property manager costs about the same amount, and that’s around 7-10% of rents.

In resort areas you may have the mixed blessing of short-term rentals. That’s a subject a bit too complex to go into in this edition, and I’ll save that for later. What I will note is that short term property management will be much more expensive than I’ve noted, and can run as high as 30% of your rents. It’s just the nature of the beast, and you need to decide whether to rent short-term or not.

A real blessing is when you can find an onsite property manager, or one that’s so closely affiliated with a community, it’s essentially the same thing. They have somewhat of a monopoly on getting tenants for that community, so they are usually the best game in town. It’s a double benefit if they also manage the home owner’s association because they really have their thumb on the full pulse of issues like maintenance.

Step 8. Handling vacancies and negative cash flow

You need to be properly primed to handle an out of state rental. Like any investment, thinking it will be rented 100% of the time is unrealistic. Consequently, you need to be prepared for the inevitable vacancies and likelihood of negative cash flow, unless it’s in more of a working class rental area. If you are prepared for that going in, you’ll do OK. If you don’t allow for that, you’ll get stung.

Keep in mind that the better the property is for appreciation, the worse it tend to be for cash flow. A resort property may not cash-flow at all, but might appreciate 10% per year. A blue-collar rental house may have decent cash flow, but little appreciation potential.

Given a typically priced and financed deal, a simplistic way to think of the financial realities of solid white-collar home is that in year 1 you’ll have a negative cash flow. In year 2 you’ll approach break even. In year 3 you’ll have a slight, but insignificant positive, and from there on you should see a small but increasing positive cash flow. That again is simplistic, but at least sets the stage for appropriate thinking. A little reserve cash will go a long way to your being able to hold on to that property.

So, it’s eight steps. That will give you a sense of what processes it takes to successfully invest out of state. As we go over the next few weeks, I’ll be taking intimate looks at each of those stages, providing much more depth, and supplying lots of resources.

You won’t want to miss a single edition!

Have a great day, and live your real estate dreams!