6 Out of State Real Estate Investing Mistakes
Learn from the Mistakes of Others so You Don't Repeat Them
Many Real Estate Investors who want to get started live in an area which is not conducive to cash flow real estate investing. They’ll often look out of state for other options and areas where cash flow may be easier to find, or the laws may be generally more landlord friendly.
Unfortunately, it’s not as easy as just buying a property in the Southeast or Midwest and handing it off to a property manager! You need to avoid making these critical mistakes in order to succeed as an out of state real estate investor.
Let’s dive in!
1) Not Understanding the area
Ever heard the phrase “Location, Location, Location?” New out of state real estate investors are often tempted to go a bit short on their learning of the cities they’re considering, skipping or glossing over the finer details of various submarkets in their target cities.
Then, when they get a deal to consider, they have to depend on the broker’s statements about how up-and-coming the area is. Or worse, they rely on the seller’s statements about the potential upside!
Don’t fall into that trap! Take time to learn your target city well, so that you understand the details of where you’re buying. You’ll need to know where the Class A, B, C, and D areas are.
When you look at a deal you need to have a good idea of where it is, who the typical tenant base is, and whether there’s upside potential.
It sounds like a lot of work, but remember this is your money you’re playing with. Focus on one market, don’t just look anywhere & everywhere.
2) Skipping Physical Due Diligence
Independent 3rd party opinions on the quality of a property are a must have. The need for this service increases exponentially if you live in another area and cannot physically tour the property yourself first before closing.
There has been a trend of out-of-state investors who are flush with cash being sold investment properties and convinced due diligence isn’t necessary. Do not be fooled.
"Only needs light cosmetic repairs! Move in ready!"
If you’re buying an investment property from a distance you need a professional’s opinion on its physical condition. Don’t just take the seller’s word for it.
3) Just Handing it Off to a Property Manager
Property managers can be a great asset for real estate investors. We own several thousand units and every single one of them is managed by professionals. We could never do all of that work on our own.
The problem comes when you don’t manage your property manager.
Personally, when I got into real estate investing, I never wanted to manage a property (whether my own or someone else’s). I found a way to accomplish that, and you can too. Just don’t make the mistake of thinking that just because you hired a property manager that you can just totally step back.
4) Not Budgeting Properly
Real estate investing can sometimes come with unexpected expenses – heat pumps, plumbing, appliances, roofs… sometimes these things break and need to be repaired or replaced. Those repairs & replacements are rarely cheap, and it’s best not to be caught off guard.
Plan for major repairs in your budget. Consistently set funds aside and plan for the unexpected. Profit First for Real Estate Investing is a great guide to get you started and budgeting for profitability in your real estate investments.
5) Not Having Multiple Contractor Options
Contractors are key to real estate investing success, but unfortunately those experiences are rarely perfect.
The problem is:
- Great contractors don’t have a hard time finding work, so they can be tough to get when you need them. Their services can also be quite a bit more pricey.
- Mediocre contractors rarely stay that way. They can either improve, or severely decline in reliability & quality.
- Bad contractors’ work tends to be poor quality, bad timing, unreliably performed, or some mix of those 3. More hassle than it’s worth.
Aim to have a few contractors in your digital rolodex as an out of state investor. Networking with other investors in your target area is a great way to start building that contractor list.
6) Only looking at On-Market Deals. Go off market!
On-market refers to properties that are listed on the Multiple Listing Service (MLS). Unfortunately, the best deals rarely ever make it to the MLS. When a good deal winds up on the MLS it’s quickly snatched up by cash buyers with a presence in the market.
So what’s the solution?
Go off market! That means building deal flow that is not accessible by the general public. Off market deals will often times need renovations & non-conventional financing, but that’s where you can create massive value.
Where to find off market deals:
- Brokers’ pocket listings (broker relationships)
- Wholesalers
- Direct mail
- Through your network
Conclusion
Out of State real estate investing is a great way to build passive cash flow, but there are risks involved. Fortunately, you can mitigate those risks by doing adequate due diligence, properly managing, and budgeting for the unexpected.
