The Top 5 Cities For Long Distance Real Estate Investing

Are you a real estate investor who lives in a state where profit margins are razor thin.  A state which has high insurance, taxes and utility costs, and just not overly….shall we say, ‘friendly’ to us landlords?

You like where you live and don’t necessarily want to move, but you’d like to be a good steward of your business, so why not Look into long distance real estate investing?

Let’s face it; there are just better states to do business in, heck there are even better cities, towns and neighborhoods to invest in.  

When deciding where to park our money for potentially a significant amount of time, it’s just prudent to do some research in order to find out if your money will be treated well when it’s there.  

What is Long Distance Real Estate Investing?

Long Distance Real Estate Investing is investing where you have a better chance at a higher return on investment.  If you live in a ‘hostile’ business environment meaning; that particular state or locality doesn’t nurture your investment, then consider a new state, city, or locality for your future real estate investments.

Just because you get your Amazon Packages in Manhatten, doesn’t mean its financially viable to park your investment money there.  Now, I’m not picking on New York, it’s a fine place, but let’s be honest as a real estate investor, it’s monumentally more difficult to get yield in New York City, than say Tuscaloosa, Alabama.

Here are three ‘red flags’ which may reveal your jurisdiction is not ideal for Real Estate Investing.

Tax Policy

What is the philosophy here, are taxpayers vilified?  Are they considered to be “not paying their fair share”?  Are the local politicians looking to raise taxes, or lower them.  If the answer is ‘raise”, this may effect the performance of your asset.  I prefer investing in low tax, pro-growth localities, where my asset can be left alone to grow.   

Covid Policy

Who would have thought that a policy on how an infectious disease affects tenants would have any bearing on where a real estate investor puts his/her money?  But it does, and in a BIG way!

If a tenant cannot be removed when they haven’t paid rent in 1 month, 3 months, 6 months, due to an Eviction Ban, then how is the owner supposed to make ends meet.  Contrary to popular belief, most landlords are not large hedge funds with thousands of properties, but rather mom and pops running small business operations. 

So, when the tenant is not paying, this becomes a huge stress to the owner.  And, if the owner cannot pay the mortgage, its becomes a lose/lose for both the owner and the tenant.

At least four states and Washington, D.C., will continue to ban evictions: Illinois will do so until Sept. 19; California’s ban will last through Sept. 30; and, New Jersey and D.C. will still curb the proceedings until January 2022. New Mexico also has an eviction moratorium in effect, and an expiration date hasn’t yet been announced.

Source:  CNBC.com

To be completely transparent, these states and the District of Columbia, have since lifted Eviction Bans in 2022, but whose to say this won’t happen again?

Crime Rates

High crime rates as you may have guessed are not only bad for the residents, but they are also less than ideal for Landlords.  It causes insurance rates to rise, it makes finding a suitable tenant more difficult, and worst of all, it can lower property value quicker than Usain Bolt in a 50 yard dash.

Study this before making a significant monetary investment, you will thank me later.

 

Things to know before buying a rental property out of state

Not only must you do a thorough analysis on the ‘local’ real estate market when buying a rental property, you must also take a deep dive into the numbers, such as:

Is the property currently being rented?

This is helpful because it provides a history of the property’s performance.  If the property has been rented for the last 20 years by the same tenant, chances are the rent rate is low.

Landlords typically reward long term tenants with below market rental rates.

If the property has been rented for the last 20 years, to 5 different tenants, the rate should have a current ‘Market Rate’ on it, and have experienced a gradual increase with each new tenant.

If not, question the reasoning behind this. 

What is the going rental rate per square foot in this market.

Is there room for a rental price increase?  This may be able to be used as a tool for negotiation during the purchase.  If the rents are below market, a buyer could say,

Rents are typically X per square foot in this zip code, and you’re getting 10% below this”.  Then use this as leverage to work the price down.   Call the landlords of other rentals in the area, and ask what they are renting their property for.  If their’s is a good comparison, use its rate as a benchmark.

When doing out of state real estate investing, it’s best to have ‘boots on the ground’.

Having a trusted contact, or a team you’ve worked with in the past is required for out of state real estate investing.  Before we bought our out of state rental property, we had “our boots on the ground person” to keep an eye on it for us.  

Ours is a husband and wife team; he manages the property, is able to do small projects, and has access to plumbers and electricians, while she cleans the property when each Short Term Rental (STR) tenant moves out. 

It’s best to establish this type of relationship before making any purchase.  Oh, and pay them well, because what you’re really paying for, is to become a ‘Priority’ to them, which can be extremely valuable.

For more information on what numbers to look at to properly evaluate a real estate deal, check out Coach Carson, he’s a wealth of real estate knowledge.

 

How to find an investment property in another state

Start by developing a relationship with a local real estate agent.  I reached out to a couple agents in Michigan a couple years ago, when I was looking for a STR opportunity.  I ran across a very nice lady who had been a realtor for a long time, and had just decided to start her own brokerage.

Her starting her own brokerage was key because;

She was hungry, responsive, and had excellent ‘follow-thru”.

To this day, she still sends me opportunities in the area, and if I ever go to buy a rental in Michigan, I will certainly consider using her services.

Reach out to agents in the area you want to invest in, and start developing relationships.  Most agents are eager to help, so much so, you’ll likely have to narrow your relationship building to a few you feel a connection with.   

For more key tips on finding real estate deals in states other than your home state, check out this great interview Grant did on MillenialMoney.com 

Here are 5 of the best states to buy rental property in and why.

Tennessee

Business Friendly, low property taxes, No state income tax and lots of growth taking place because of Ford’s new Blue Oval Plant being built in Stanton, Tennessee.  The area between Memphis, Tennessee and Jackson, Tennessee will be experiencing immense growth because of this $7 Billion investment.  There is already a housing shortage in this area, and Ford hasn’t even begun swinging hammers yet! 

Indiana

The price to rent ratio is one of the best in the nation.  Property taxes are on the lower end of the spectrum, and Indiana has a law about Security Deposits.  As a landlord you are able to keep the tenants security deposit for up to 45 days after they move out to ensure no damage has been done.

Arizona

Nice weather!, Oh, I forgot we are doing long distance real estate investing!  For starters, Arizona doesn’t have any ‘natural disasters, such as Earthquakes, Hurricanes, or Tornadoes, which keeps the cost of Property Insurance down.  

Arizona also has a couple Landlord-friendly eviction laws that make a difference, such as:

• Landlord only needs to provide a 5-day written notice to tenants who are defaulting on their rent or not maintaining the property, in order to evict them.
• There is also a 10-day written notice for tenants who have violated the rental agreement.

Alabama

Some of the lowest property taxes in the country, and the best landlord laws in the lower 48.  Alabama also has no cap on the amount a landlord can charge in late fees.  They also have a smooth and swift eviction process.  Alabama is typically seen as welcoming to businesses, and is less bureaucratic.

Kentucky

Kentucky has a notice of default period of only 7 days.  So, if your tenant doesn’t pay in 7 days you can proceed with eviction.  The shorter default period the better for Landlords. 

 Also, Kentucky has lower than average property tax rates, and outside of the random Tornado, Kentucky has a low threat of natural disasters, which can save you on your property tax bill.

In conclusion, as a real estate entrepreneur, Seek value not vanity.

There isn’t much vanity or excitement with owning a rental property in Huntsville, Alabama or Frankfort, Kentucky, but you know what is there?  Value!

There are prospective tenants who are grateful for an opportunity to rent a house, rather than an apartment.  Many of these folks are honest, blue-collar people with a good job and a long-term outlook with regard to staying in your property.  People who, in many cases would treat the property like it’s their own.  

These people make for good, long-term tenants.

Compare the overall ‘Return on Investment’ of real estate investing in Huntsville or Frankfort to Los Angeles, San Francisco, or New York, and you will soon realize value.  This opportunity for value will forever change your investing philosophy to where Long Distance Real Estate Investing may end up being the sole “arrow in your quiver”.