Investor Blog Articles

Investing in Long Distance Rental Property Part 1

8 Tips Every Out-of-State Investor Should Know:

Since it’s not always possible to invest in positive cash flowing investment property in many parts of the county, real estate investors often seek out investment property in markets that do provide positive cash flow. For some investors this means they must invest in a property that is not local to their primary residence. Investing in long-distance rental property can be very rewarding if done correctly and can also be a disaster is done incorrectly. I’ll share 8 tips on investing in long-distance rental property.

1). Choose the Right Market:
Whether local or long-distance, investing in rental property is a long-term strategy, especially in today’s market. The idea is to buy low, hold long-term, realize appreciation, and sell high or hold indefinitely, all the while collecting positive cash flow. Nothing is more crucial than investing in a market that has long-term potential despite the current market condition. For example, my properties are in Pontiac, MI. While MI is currently a depressed market, Pontiac is centrally located in Oakland County, one of the wealthiest counties in The U.S. The state is investing in the film industry, bio technology and other things that I believe will have a positive economic impact on the state in the years to come.

2). Invest in Cash Flow:
When considering which market is ideal, always invest in cash flow today and appreciation tomorrow. Nothing is more detrimental than a negative cash flowing property. It is possible in several markets to acquire fully renovated investment properties for under $50,000, realizing a $200/mo positive cash flow even after financing!

3). Choose the Right Neighborhood:
Once you have a market narrowed down, one of the hardest things is learning the neighborhoods. Since you are not local to the area, you do not know which parts of town may be better than others. Since my niche is lower income rental housing, I make it my business to rate the neighborhoods on a scale of 1 to 10 as follows:

-war zone (1-2), poor (3-4), fair (5-6), good(7-8), excellent (9-10)

I personally find that I do best in the “Fair 5-6″ to “Good 7-8″ areas. Definitely stay out of the war zone and poor areas and I find the “excellent 9-10″ areas don’t provide the cash flow I’m looking for. Sometimes, it’s worth giving up a little cash flow to be in a better-rated neighborhood. For example, consider the following 2 properties:

property 1: sales price $40k, rent $750, cash flow $285 (after financing), neighborhood rate 5

property 2: sales price $50k, rent $825, cash flow $185 (after financing), neighborhood rate 7

Which would you choose? Property 1 requires less capital and has greater cash flow but property 2 will have greater appreciation and probably less turn over because it may (not always) attract a higher quality tenant.

At any rate, when investing in long distance rental property, make it your business to learn the neighborhoods. The best way to do this is to get a map of the area and start asking which areas are better than others. Highlight the map and soon you will know what areas you want to have property in. Build relationships with people you trust that know the local market.

4). Choose the Right Property:
Invest in desirable property. My rule of thumb is to always ask, “would this property be easily rented?” First of all, I prefer single-family homes over all other types of investment property. I believe single-family homes will always be in high demand because people prefer a yard and they are easy to acquire and sell. I stay away from 2 bdrm homes. They rent for less, are harder to rent and have less long-term appreciation. I stay away from anything under 900 square feet, and I avoid odd floor plans like small kitchens, walk-through bedrooms, etc. Also, pay attention to the surroundings. For example, avoid busy streets, or a property next to a noisy commercial property.

To learn about tips 5-8, please read, Investing in Long-Distance Rental Property Part 2

Jerry Norton is co-owner of Equity Services, LLC. His company provides investors with fully renovated, positive cash flowing investment properties for under $50,000.

To learn more about how to invest in long distance rental property, visit our site and download our FREE tools “Rental Income and Expense Tracking worksheet” and “Cash Flow Analyzer.”

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