Your Guide to Long Distance Real Estate Investing: Know the Challenges
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Real estate investing is one of the best ways to generate passive income and build wealth for your future. But when the market in your neighborhood doesn’t offer good investment opportunities, your only option for real estate investing could be out of state. How can you make it work? There are good reasons to invest long distance, especially if the prices are more reasonable in a market near you. However, before you do, consider the challenges, so you know exactly what you’re getting into:
- You Don’t Know the Neighborhood: Every city has its own unique character, and in some places, the difference between a desirable neighborhood and one you want to avoid could be a matter of just one street. It takes special effort to overcome this challenge, so talk to property owners and realtors until the picture becomes clear.
- Laws Can Be Different: Regulations, fees, and taxes can differ from state to state, and even between cities in the same state. Worse, there’s sometimes a difference between what’s written in the law and what’s practiced in real life. Again, only communication with people on the ground can give you a clear picture of how things work.
- You Lack Contacts: If you’re interested in real estate investing, you’re probably already working on your network of contacts, like realtors, maintenance and repair professionals, lawyers, and property managers. One challenge of long-distance investing is that you may have to rebuild all these contacts and networks in a new place.
The Key to Making It Work
It’s possible to invest from a distance successfully. It just takes a little extra effort. Besides knowing the challenges you face and developing a plan to meet them, there are two key things you have to get right. You must identify emerging markets, and you must find the right property manager.
- Finding Emerging Markets: Real estate markets heat up and cool off all the time, and when you’re examining things from a distance, you need a reliable way to tell if you’re looking at an emerging market where you can maximize profits. Emerging markets have a few things in common—like a strong economy, steady population growth driven by job opportunity, and government investment. To tell if a market you’re looking at is poised to do well, learn how the market cycles work, investigate the jobs coming in, and check out what the government is up to. David Lindahl has written an excellent book on this subject that I highly recommend reading.
- Know Your Market Cycle: Markets go through cycles starting with recovery, then expansion (where vacancies decline and new construction starts up), to hyper-supply (when there’s new construction but increasing vacancy), and then into recession. If you can get in towards the end of the recovery phase, but before it becomes obvious to all that an expansion is in the works, you’ll get the most for your money.
- Study the Jobs: No matter how good a place might look on paper, if jobs aren’t being created there, it’s not a good bet. Look at job growth, new companies coming in, employment data, and what the local Chamber of Commerce is saying.
- Look at Government Planning: What’s the government doing to attract new business? What kinds of business are they trying to bring in? Consider their overall plan and be sure to investigate how much progress they’ve made so far.
Finding a Property Manager
Your property manager can make long-distance real estate investing a smooth, money-making procedure. They can also make the whole thing a nightmare. Once you’ve asked around among other property owners and realtors, you’ll have a few property manager names. Additionally, I recommend searching on the website of the Institute of Real Estate Management for a certified property manager (CPM). Make a shortlist and then weed them down by important criteria like:
- How close they are to your property
- Their experience with properties like yours
- What qualifications they’ve taken time and effort to invest in
Meet in Person
Nothing on paper (or online) can fully substitute for a personal meeting. Whether you’re talking with a company or an individual, there are certain important traits that good property managers share:
- A positive, can-do attitude
- Soft skills that make them good with people
- Good communication skills
- Familiarity with technology that streamlines the management process
- An organized, professional demeanor
Other Tips for Successful Long Distance Investment
If you identify an emerging market somewhere you go from time to time, note that and put it in the “pro” column as you make your choice among properties. Even if it’s just a place you like to go on vacation, part of your vacation could be tax deductible if you stop to check on your real estate.
Avoid high-risk properties. When you’re nearby, taking on extra risk is more manageable. But, when you can’t get to the property quickly, high-risk properties can be a burden.
Finally, consider rental properties in largely owner-occupied areas. These usually carry less risk, as the neighborhood is likely to stay desirable, and the local culture will encourage renters to take good care of the property.
Don’t let geography restrict your investment opportunities! All investment has risk, and long distance real estate investment is no exception. But it’s not inherently more risky than investing nearby. The key to long distance investing is understanding the challenges and putting in the necessary time to identify good markets—and of course, finding a great property manager. The sky is the limit.