In this episode, Cynthia Meyer and Veronica Woods discuss the benefits of investing in real estate in another state, the key items to consider before buying, and when diversifying markets makes sense.
In this episode of the Rental Property Café™ Video Podcast they cover:
Benefits of out-of-state rental properties [00:00:58]
Researching out of state markets [00:4:00]
Who should be included in your out-of-state rental property team? [00:09:05]
What to do first before you make an offer on an out of state property [00:14:29]
Do you have to incorporate before buying a property? [00:18:13]
When does it make sense to invest in real estate out-of-state? [00:21:35]
“The more local people that you have on the ground as part of your team, I think the more successful you can be as an out-of-state investor.” - Cynthia Meyer
“Until you are able to use the same resources across multiple properties and could max that out, you're going to spend more money on duplicating these teams disparately across the country.” - Veronica Woods
About the Rental Property Café™:
The Rental Property Café™ podcast offers a real estate tool kit for busy professionals who are building a real estate portfolio. In each episode, co-hosts Cynthia Meyer & Veronica Woods explore ways to grow a successful real estate business while growing your career.
☕ See more financial planning guidance for real estate investors from Cynthia Meyer on the Real Life Planning blog: https://reallifeplanning.com/blog
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[00:00:08] Should you invest in rental property out of state?
[00:00:10] Hi, I'm Cynthia Meyer.
[00:00:12] And I'm Veronica Woods.
[00:00:14] And this is the Rental Property Cafe, episode 19, Investing in Real Estate Out of State. And it's something that I do personally. And I know Veronica, you work with a lot of investors who invest out-of-state. So what are we going to be talking about today?
[00:00:28] Yeah, and just talking to folks who are anxious about, should they continue investing locally or should their first investment be local or should it be in another state or two hours away, plus away from where they live. And we just really wanted to give people the things, the action steps, that they should think about before taking the plunge of looking at properties far away from where their comfort zone is.
[00:00:57] Yeah. There are a lot of benefits to investing out of state. Certainly they're benefits that my husband and I take advantage of in our real estate business. The first is, taking advantage of a more affordable market. Particularly if you live like I do, in a state like New Jersey where a rental returns are not fantastic. Or maybe you're in California where you know, rental returns because of the high price of housing in general are not that fantastic. You may consider investing out of state to improve your returns or to get in at a lower dollar amount because properties are cheaper.
[00:01:31] Yeah, I agree. So Philadelphia from New Jersey, definitely throw out the number, see people's eyes go wide, like really? I can do that for that amount.
[00:01:41] Yeah so we invest in the Midwest and when we were originally deciding on a target market for real estate, and again, we started investing during the Great Recession and we looked at four different markets. Three could be considered lower cost markets and one was a more expensive market. And the one that we landed on has really been a wonderful experience for us and is still a relatively affordable market compared to the coastal markets, if you will.
[00:02:12] The other reason is to diversify your risk. While no real estate investor can be completely diversified, because every real estate market is local, certainly having properties, smaller sub-portfolios of properties in different parts of the country can help diversify your risk.
[00:02:29] So for example, if you have all your rental properties in the Tampa Bay area, for example, and there is a hurricane, you may have damage and claims on all those properties all at the same time, may be some vacancies, so getting out of just one market in particular can help you diversify.
[00:02:47] Yeah, of course. Real estate investing in general could be seen as diversifying...
[00:02:54] That's true.
[00:02:55] against their, the stock market; 401k. So, real estate in general, adding to your investment mix is a good idea. So it's important to think about it that way as well.
[00:03:06] Yeah. And then just jumping back to The idea of possibly increasing rental returns or better returns, again, taking someone who is a resident of a higher housing cost state and looking to invest in a lower housing cost state that may improve their total rental return or the return on every investing dollar that they make in real estate.
[00:03:32] So what are some of the action steps that we should consider?
[00:03:35] We've come up with five.
[00:03:37] Yeah. And guess just jumping right into it like we do, the most important point is, or the first starting point is to research the market. So I'd be curious how, out of all the markets across the country and you and your husband lived on both coasts and how did you come across researching the Midwest or the Detroit area? How did you land on that?
[00:04:00] So , well, as you know, we're kind of mathy in our financial relationship and so we were living overseas at the time. We were in Bermuda for my husband's work and we started to pull together during the Great Recession, we started to pull together an analysis of markets where at the time, the homeowner rental relationship was upside down.
[00:04:23] What that meant was that it was cheaper to buy a house than it was to rent a house at that time. No, that's not the market right now in the United States, but that's what it was like during the Great Recession . And so we initially looked at running some numbers, so we looked at comparable real estate prices for the price point that we were looking at, and then we researched rents as well for those types of properties.
[00:04:48] And we initially looked at San Diego, Atlanta, Las Vegas, and the Detroit Metro area, and the funny thing is that all of those markets would've been great markets to invest in. We'd been Californians, so we initially thought, oh maybe we'll go for San Diego first, but we didn't move fast enough, and prices moved away from us, and we eventually landed on the Detroit metro area.
[00:05:11] We felt that the US was not going to let the auto industry go under, and in fact, that's what turned out to be. It's been a wonderful experience.
[00:05:20] Yeah. I think people should, I know you guys are really data driven, there is a lot of people who are putting lists together of the rent, the ownership ratio that you mentioned, the states, the areas are more landlord friendly So there are a lot of metrics that you can think about to figure out whether maybe a top five markets to even investigate deeper. Because you start big and there is, I don't know how many metropolitan areas considered larger metropolitan areas in the country- and then narrowing down maybe to three or four. And then you can take a deep dive and look at the specifics of the locale. But I think that's important to think- to start off of like where is there going to be a demand of people who may not be able to afford to buy at a certain level and those are good opportunities.
[00:06:12] Yeah, I totally agree, Veronica. And when I talk to clients now who are looking to get started as real estate investors or looking to diversify beyond their own market in a higher cost state. Certainly, we both have opinions about markets that we like.
[00:06:27] We've talked about your market in Philadelphia. We've talked about Memphis, Indianapolis, parts of suburban Columbus, certainly the Detroit metro area is still a great market. Just thinking off the top of my head, the kind of the area between Charlotte, North Carolina and Columbia, South Carolina seems to be pretty interesting.
[00:06:44] But there are lots of great real estate markets. We are not experts on all of them. But you can go on BiggerPockets, for example, and just read what people are writing, where are people investing, and then you can go on local sources, Zillow or Roofstock or Trulia or realtor.com, and just start to poke around a little bit and see what seems interesting to you is I think a good place to start.
[00:07:07] Yeah. I also would say like the the Redfins and some apartment specific rental databases- we'll probably put it in the show notes.
[00:07:15] Oh, Rentometer. Yeah.
[00:07:16] But no, so Rentometer is a good for a localized search, but I'm saying there is- I'm blanking on the name, but they always put like the top list and a lot of data just on the blog form for people to do like the high level investigation. Rentometer is great when you're diving in two bedroom and this zip code, you know that, that's a great source definitely in terms of investigation, that's a good source as well.
[00:07:43] Only thing I would say is, sometimes there'll be investors who are saying what's hot and sometimes you can be late to the party.
[00:07:53] That's true.
[00:07:53] You just have to be careful of people just saying the market and then you flock to it. "Oh, I hear everybody's talking about Baltimore." Which Baltimore is still probably considered...
[00:08:02] Baltimore is still good. Yeah.
[00:08:03] ... a good market to invest in, but you need to take it a few steps further and guess we'll get into that next.
[00:08:09] Yeah. And of course you've heard Veronica and I say this many times, you always have to run the numbers on any individual property properly before you even make an offer.
[00:08:18] The other thing that I ask clients when they're considering out-of-state investing is, where do you want to go once a year? Do you have relatives in the area that could help you if for some reason, your property manager was not able to help you? Do you want to get on the plane and go to that target area once a year and visit and look at your rental properties and inspect them?
[00:08:42] The other thing to think about is, the tax situation. If you're a very high earner, you may be looking at first, no state income tax, or low state income tax.
[00:08:52] Yeah, I think maybe we should segue into the local..... do think in your head that you can just pop up once a year and that's going to be enough to manage the property or manage all the things that goes along with running a rental property business? They're probably wrong.
[00:09:05] So I think after you pick a locale you may have a next step and just interviewing people who are going to be part of your local team. Ultimately if you don't have people to help you execute, you're not going to get the results that you're thinking about. So maybe it's easier for you or you find the team faster in one market than the other, and that may kind of lean you toward, okay, maybe I should focus on Detroit cause I've already kind of started the ball rolling with a good property manager and realtor so I think I'm going to have some deal flow and maybe I should focus there. And a lot of times, that's how people land on the first market to invest in.
[00:09:44] I think that you're so right about that, Veronica. When Steve and I were first looking, we picked contemporaneously. We picked from the same firm. We picked an investor-friendly realtor, excuse me, investor-friendly realtor and a property manager, a professional property manager at the same time. And we actually went out to look at properties with both of them together. Now, over time, we've kept the same property manager, but our former realtor retired so we have a new realtor now. But making sure that you're going to run the numbers with a property manager- it's very likely that you'll have to use one or that it's a best practice to use one if you're investing out of state. It's not like you can get up in the middle of the night and fix the toilet if it overflows.
[00:10:28] Now and beyond that, it's important to note some municipalities will not allow you to not have a local contact. Now, whether there is...
[00:10:36] Good point.
[00:10:36] ...formally a property manager. In Pennsylvania area, a lot of towns require a local address. So that is another reason why to be in compliance with being a rental property owner leads to getting a property manager. I do think what you said about having a property manager up front is a best practice. A lot of times people think I'll get the property and then find a property manager, but there is insight to assumptions that the property manager can give that's going to be different than someone who's just does the rental market. The average realtor may not study the rental market as closely if they don't really do rentals. Most people do one or the other. So having the property manager give you some insight on how easy is this going to be to rent. Besides the rent amount, wouldn't you want to know that before plunging hundreds of thousand dollars in the asset and know, " Oh, this is always going to be hard to rent."
[00:11:34] Veronica, I love the property manager that we use in our real estate business. I'm a big supporter of those clients who are investing out of state is using a professional property manager. I think it's the best way to build and scale your real estate portfolio if you're not managing your real estate full time. But having that property manager on the front end to help you decide whether or not something might be a good rental for you is super helpful, but it's also helpful in just, he or she is going to bring their own team into the relationship. So you don't have to look around for contractors or the best local appliance store that can deliver quickly or somebody to redo the floors or the plumber or what have you. A property manager brings a professional team with them and that can really be a time saver.
[00:12:25] No, that's important. So sometimes you don't have to have the burden of going that we were talking about five or six people, the key core team. You don't necessarily have to seek all of those yourself. Often it's one or two, and then they're bringing the rest to the game as you evolve or as the need comes up.
[00:12:43] Along with a lender who may just have access to people who want to support a neighborhood a little bit more. So it's kind of like a relationship thing. I kind of have a bias toward local lenders versus national lenders. National lenders can get it done and there is definitely some reasons why it may be a a good idea to use a more national lender, but there is some nuances that the local guys know that sometimes can help you get through the process faster.
[00:13:12] And just dovetailing on that you may need a local attorney in that state that you're targeting. You need an insurance broker; an insurance agent. A mortgage broker or a local lender as Veronica suggested. All that local knowledge will help you if you are not familiar with the area. So the more local people that you have on the ground as part of your team I think the more successful you can be as an out-of-state investor.
[00:13:40] And most of the time you do need a local attorney. If you have any landlord tenant issues, you don't want someone drafting contract lease terms that are relevant to Connecticut and you're in Pennsylvania. They are different. Even neighboring states. I have to keep in mind between New Jersey and Pennsylvania. You know, the rules around security deposits, for example, are different. On a micro level, Pennsylvania's a big state, so there is I don't know, 40 different counties or something. Each county has a different way of practice. So you want someone that can go to court for you in that specific county.
[00:14:15] And many real estate investors are- particularly when they get started, they're super DIY. They're very hands-on. They want to manage their doors themselves. And it's a little bit of a different game when you're investing somewhere that you can't drive to when you need to get on a plane and go to.
[00:14:29] So getting an understanding of the local laws, that's our third consideration here. It's so important. Like you mentioned, the security deposit rule in Pennsylvania, it's so important that you research the local regulations before you consider bidding on a property; things like rent control and rent stabilization, for example. Or rules around short-term rentals. Or just rules around how much notice you need to give somebody before you renew or terminate.
[00:14:56] And back to the team. Instead of just googling it and maybe misinterpreting something you read online- going to the experts who do that day in, day out, the attorneys, property managers. Just reiterate that you will be a disadvantage if you wing it and make a mistake with local compliance. And now there is more beyond just kind of contract stuff, there is like a lead paint testing, changes in laws. I'll speak to Pennsylvania and Philadelphia.
[00:15:25] A certain age home, you have to have a lead dust test done to be in compliance with the city regulations. This is something like 10 years ago it wasn't a thing. So if you're just got advice from somebody who's been a landlord forever and then just not on top of the changing regulations, then you could find yourself at fault.
[00:15:47] And you need to know in addition to things like that, just your documentation needs to be compliant, right? Instead of just pulling a generic lease form off the internet, many states have rules about what has to be in a compliant lease with the tenant or any other notices that have to happen back and forth as part of your real estate business.
[00:16:06] There is a lot of stuff to consider if you really want to do everything yourself. Maybe, out of state investing is not the best kind of first option for you because you just have to overcome so many hurdles to have a quality rental property business. I can think of stories where I've come in after the fact where somebody thought they could manage on their own and stepping in and it's tough when a city inspector expects you to get something done in 48 hours and you're...
[00:16:38] Three states away!
[00:16:39] ...three states away. Are you going to show up at court on Tuesday? Oh no, I didn't think that through. So you don't want to be in that situation. You want to be comfortable with delegating to other people. I think it's a requirement if you want to invest out of state safely, for most people.
[00:16:57] Yeah, I think that makes a lot of sense. And just in general, we've talked on the video podcast before about the idea that at a certain point, even if you are a hands-on investor, if you are building a real estate business while you're also building another career on the side, at some point, delegating to professional management is a decision that most people make.
[00:17:19] Getting in on the ground floor with your team can be a helpful way to build and scale more quickly.
[00:17:24] Exactly. We should talk about running the numbers again. So running the local numbers and running the numbers with a team. Even if you don't use all the team upfront, you won't have the argument, "I can't afford to hire a property manager", if you ran the numbers upfront. Or I can't afford to get an attorney, I'm just going to use legal Zoom. Running the numbers maybe at some point once a year or some regular basis, you may need to access that attorney and making sure that you're still profitable in that regard.
[00:17:55] Yeah, we can't emphasize this enough is to run the numbers before you make an offer to check in on your actual results after you've turned your numbers into your accountant for your tax filing, for example. Run them regularly to make sure that the property is still profitable, that the ratios that you expected to obtain, you're actually hitting.
[00:18:13] Sometimes people think they have to incorporate before they buy a property. For some people that may be true, that they want to form a limited liability company an LLC, in their target state before they buy.
[00:18:25] Lots of it depends around that question. If you're going to do that, you would need to identify a local attorney and get that all done before you make an offer on the property or at least before you close on the property. But for some investors who are getting started, they may decide not to initially incorporate into just manage their liability risk with an additional umbrella liability insurance.
[00:18:49] What has your experience been, Veronica? What do your clients often do? .
[00:18:52] It's a mix. Some besides liability, there is like a financing thing to consider. For a lot of newer investors from a cheaper debt perspective, it is better- it will be cheaper to buy the properties in their own name and take advantage- especially if it's a small, multi-family.
[00:19:11] Obviously, if it was a commercial then it's another ballgame. It's definitely a commercial loan. There is a 10 property limit for...
[00:19:18] Buying conforming loans.
[00:19:18] ... holding Fannie Mae style loans, and those are generally the cheapest for investors. So even like a husband and wife, the husband gets 10, the wife gets 10, and at least there is a consideration of maxing those out first, or at least getting started there first before taking out debt in the LLCs name.
[00:19:38] There are some restrictions around if the debt is in your name, then the property needs to be in your name. A lot of people may turn to transfer the ownership from their personal property to deeded over to the LLC, eventually. So obviously there is a lot of considerations beyond liability.
[00:19:56] The naming of the LLC is sometimes an issue. There's some words that if you have in your LLCs name, it kind of triggers further investigation from the state. So all this, even the name could get you hung up.
[00:20:11] Yeah, good reason to have an attorney if you're going to pursue a corporate strategy. And so there is a lot of "it depends" around this question that is a high earner or perhaps they have a lot of stock options in a company that's going to go public or something like that, that obviously, that liability protection is something you want to think about right from the very get-go.
[00:20:30] Great conversation to have with your financial planner if you have one; your attorney if you have one. So it really depends on the individual investor whether or not they can appropriately manage the liability risk with insurance alone or if they have to look at a corporate structure and how that's going to affect their financing.
[00:20:47] Certainly, if you're an all cash buyer, it's pretty easy to buy a property in an LLC. But again, as Veronica mentioned, if you're financing, there are a whole lot of other things to consider.
[00:20:56] But I would say it's probably not the first thing you do. I've talked to people like, "All right, I want to invest in real estate. Let me create a LLC." That's not step one.
[00:21:04] Yeah. No, step one is like getting really clear about what you want to do and what you hope to accomplish before you even start researching markets.
[00:21:12] So what about the economies of scale here? We recently had a conversation with somebody who was thinking about diversifying into alternate markets, right?
[00:21:24] But hadn't really fully taken advantage of the current market that they were in. When do you think about diversifying into a second market?
[00:21:34] Yeah. Interesting question. I don't know if there is like a specific rule of thumb, but I would say, one or two rental properties, you have not maxed out your your economies of scale. Scale, we're talking about your property management team, your...
[00:21:50] ...contracting team. Even across a metro area, let's say contractors specifically, may not do from the northeast corner to the southwest corner. You may need to have different groups of contractors work on your property.
[00:22:03] Now, I'm not saying you have to buy everything on the same block, but until you are able to use the same resources across multiple properties and could max that out, you're going to spend more money on duplicating these teams disparately across the country.
[00:22:20] I have a client who has two properties here, two properties there. Maybe they have 10 properties and they're in four different states and it's a little harder for them to manage. So I asked them, did you think about, focusing in the beginning? They didn't have like a shotgun approach from the beginning.
[00:22:36] They really didn't think about where maybe they would get to maximize a specific market up front. They are coming in on the backend and say, "Oh, maybe we should buy more here." And they're spending more money in the process of this trial and error of testing markets with assets on the ground...
[00:22:53] ...versus thinking about it upfront.
[00:22:55] It seems to me that we often see two ends of the spectrum. We see somebody who thinks, "Oh, I can't ever invest outside my immediate geographic area." And that's not true in the age of the internet. You can, right? You can pick a target market elsewhere and with the right inputs, right? You can be successful in that.
[00:23:16] And then we have on the other end of the spectrum, we have somebody who has one property in state A and one is state B and one is state C and one is state D. They don't have economies of scale, right? They don't have enough leverage in terms of maximizing the resources that they already have in a single market and they aren't taking advantage of opportunities that come up through working with local professionals. It just makes it more likely they're going to hear of good local opportunities, right? Somewhere in between there is a good balance.
[00:23:45] Just to finish this up here, Veronica, as somebody who helps out-of-state real estate investors invest in your Philadelphia area, what else would you say to somebody who's thinking about being an out-of-state investor?
[00:23:57] I guess going back to the team- really looking at like a longer term partnership with them as opposed to somebody who can just be transactional. I think it's really even more important that you pick people who are going to be business partners for you, not the cheapest for you.
[00:24:15] Do you pick the property manager that has business in six states? I think I saw something in the BiggerPockets- and then they're thinking maybe they could have a more consolidated view of their properties that. But the reality is, even a lot of those national players that have local operators, they are running pretty fragmented.
[00:24:36] Fragmented, not in a bad way, but because it takes so much specialized local knowledge to be able to offer the best service in each market, they do allow people to fine tune their local offering and services. So you don't want to necessarily get the cheapest, you may not necessarily want to go the biggest; really thinking about them as a business partner is really important so that you can sleep at night and know that you're doing the right thing. You've picked the right team for your property.
[00:25:07] I totally agree with you 100%. Our property manager in our real estate business plan has been a really important part of building and scaling the business and we're super grateful for her. Having that team member so important. So important.
[00:25:21] Thanks everybody for visiting with us today and talking about investing out of state. If you have comments or questions, please leave them below and don't forget to subscribe for future additions of the video podcast.
[00:25:37] That's it for the Rental Property Cafe.
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