I am often asked why I do not invest in my backyard and how I have managed to successfully buy properties out of state. In today’s snippet, I will share key lessons learned from investing out of state and key strategies for success.
First, let me address the first question regarding why I do not invest in my backyard. I reside in California, a beautiful and diverse state. I love living here and would love to be able to invest here as well. However, the regulatory environment (non-business and non-landlord friendly) coupled with the high price point of properties have quickly ruled out this option for me. My primary investment objective is cash flow. Therefore, unless I put a ton of money down or purchase a property all cash, it would be very difficult to accomplish that here. My dollars go a long way in other states, which are also landlord friendly. Hence why early on, I started investing out of state.
The first key strategy for success in investing out of state entails doing research on and knowing your market. In a prior snippet we discussed in detail how to evaluate a market. If you have a few locations that meet the core metrics of population growth, quality job growth, job diversity, and income growth and still undecided where to go, we offer a few suggestions – a place where you have family or other connections, a place where you have lived in the past and know, or a place where you want to retire. We also recommend to visit the market and get a feel for it before purchasing a property there.
Next comes assembling your team of key partners – boots on the ground, a property manager, a broker, a loan broker, insurance agent, CPA, and attorney. For those investing in residential real estate, you may recall the concept of the core four by David Greene (deal finder, property manager, contractor, and loan officer). Multifamily is not too dissimilar, except that since properties are larger and entail more work, the deal team is extended.
The property manager (PM) is one of your most important partners as they will not only take care of day to day operations (advertising, tenant screening, completing maintenance requests, reporting, and potentially overseeing rehab) but will also be quite involved with executing your business plan. In an upcoming snippet we will discuss how we select and vet PMs.
The broker is a key partner who will help you find deals, unless you choose to source direct from seller. To take a deal down you will need capital – your banker and/or mortgage broker is your biggest partner often contributing 50-70% of the deal. Getting a good CPA helps not only with book keeping, but will also make sure K1s and tax reports are released on time. Your real estate lawyer will help with negotiation of the purchase and sale agreement and your SEC attorney will help you stay compliant and create the legal entities needed for a syndication, draft the PPM documents, and complete the various state filings. Your insurance broker will help mitigate the risk of loss, in the event of natural disasters for example. Your contractor will help execute with the value add. Last but not least, your boots on the ground contact will help ensure the project is progressing on time, visit the property often, and thereby minimize the need for you to fly out there frequently.
How do you find these key partners? Referrals, online forums, conferences, mastermind connections are just a few sources we have tapped into in the past. This process does take time and sometimes it is trial and error. However, building a team that can support you is essential for your out of state investing success.
Last but not least, you will need to analyze a lot of deals – this too will help you learn the market and spot a good deal quickly when you see it.
If you are reluctant to spend the time and resources to identify a market, form and vet the team, identify and vet the property, you can also choose to invest passively and let the sponsor do the heavy lifting.
In the modern day and age of technology and connectivity, you are not restricted to investing in your back yard only – you have the freedom to choose to live where you want and invest where it makes sense!
Should you have any questions or want to learn more about real estate investing or for an overview of our target markets, please reach out to info@dbacapitalgroup.com.
Disclaimer: The information presented does not constitute legal, accounting, tax, or individually tailored investment advice. Past results do not represent or guarantee future performance.