Many real estate investors have been flocking to some of the less
expensive or newly appreciating parts of the country and plunking down
their hard earned cash in order to get into the game. In this Special
Report, we are going to take a look at what you need to know before you
invest in real estate that’s out of sight.
One of the mistakes
that many real estate investors can make is to confuse what seems like
inexpensive investment property with investment property that is a smart
buy. This happens especially when real estate investors are used to the
high prices of hometowns such as Los Angeles, New York City and
Washington D.C. Real Estate investors that hail from these cities must
take off their hometown “real estate goggles” and heed the advice of
local experts in the cities they are considering for investment.
Ron
Akin, owner of Sunridge Management in Dallas Texas, says, “I have seen
real estate investors come to Texas from places where the property is
expensive, like California, and they get so excited to see apartments
selling for $22,000 per door when they are used to $80,000 – $120,000
per door. The key is to understand that what seems inexpensive for your
home town does not mean it is inexpensive for our town. There is a lot
more to consider than the price of the property before you purchase in a
new market.”
Once you leave the comfort of your own town to
venture out to exciting new real estate destinations, real estate
investors need to be aware that if property prices are lower it is also
going to mean that rents are most likely lower. Sometimes rents are so
low that properties won’t cash flow even if they do seem “cheap”.
Another consideration is maintenance and management expenses. When
buying out of state you are going to be at the mercy of someone else
watching your building and you aren’t going to have the ability to do
things as inexpensively as you would if you were close to your property.
“Here in L.A. I have access to a very large, very reasonable labor
pool. In New Jersey, where I own investment property, the available
labor pool is extremely limited and at least two to two and a half times
as expensive,” says real estate investor Sandy Shaud.
When you
are considering investing out of town or out of state, one of the first
things to do is find a local investment real estate agent. It is crucial
to be aware of all of the special considerations of your potential new
city. Joanne Ferraro of Prudential Fox and Roach in Margate NJ says,
“Our city has restrictions on renting, like how many occupants you can
have per unit and also restrictions on how you can’t terminate a tenant,
even if their lease is up. Unless you get assistance from a local real
estate agent, there is no way you can know all that you will need to
know as a new property owner in our town.”
If you are considering a
larger purchase like an apartment building, have a few professional
property managers check out the building and the rents and expenses to
see if they are realistic. Ron Akin says, “I have seen a lot of cases,
especially sales of buildings that were managed by private owners, where
the number of vacant units or the monthly expenses were not the least
bit accurate. A good property manager can review the building and the
books and give you their neutral opinion on whether a property can give
you the cash flow you are looking for.”
Another consideration is property taxes. Property
taxes can vary greatly and have a great impact on your bottom line. The
latest run up in real estate prices has been great for many real estate
investors net worth yet bad for their monthly cash flow. If you own
property in an area that reassesses property values every year, you
could see a big jump in your tax liability since your property value has
gone up. Sandy Shaud says, “My property taxes in California are set
permanently at 1.25% of the purchase price of my property. In Dallas,
where I have a large apartment building, my taxes are about 3% and
reassessed every year. Three percent is a huge bite out of my monthly
operating budget.”
Finally, you want to look at the tenant base
and vacancy rate of your potential new investment town. You can buy
plenty of inexpensive rental property all across the country, but will
you be able to rent it out for at least a break-even cash flow? Again,
this is where your local real estate agent comes in handy. They can tell
you the going rents and how difficult it is to find tenants in the
neighborhood you are considering.
Another consideration is the
type of tenants you will most likely attract depending on where you buy.
“I have an investor who bought a property for $55,000 and it cash
flows, but he wants to sell because he is having trouble dealing with
the tenants. He bought in a rough part of the city and the occupants of
his property are of a different mindset,” says Megan Weil of Prudential
Fox and Roach in Philadelphia. “Frankly, he is scared to deal with
them.” Sometimes it works out better to buy a more expensive property in
a neighborhood where you will be dealing with like-minded tenants, even
if the cash flow isn’t as good.
There is a lot to consider before
you jump into a real estate investment outside of your home town. Many
seasoned investors will not buy out of town or out of state due to the
increased expenses of managing a property from afar and the lack of
control. Randy Bach, a CPA from Encino, advises, “I tell my clients that
they shouldn’t buy out of town unless they have the time and money to
visit their property at least once a year.” Hormoz Azizzadeh, a long
time investor in Los Angeles says, “I won’t buy rental property out of
my area as it is too expensive and difficult to manage from far away.”
However,
many new real estate investors need to start in less expensive areas,
as they don’t have enough money to buy in a more expensive town.
Investor Sandy Shaud says, “It is possible to have a successful real
estate investment outside of your own home town. Just be prudent, do
your homework and personally inspect the property and neighborhood. I do
not recommend buying property from a meeting or on line without a
personal visit.”