‘Invest where you live.’ You have probably come across hearing this phrase if you have been in the real estate business for some time.
Long-distance real estate investing comes with its challenges, to say the least, and if you are a beginner real estate investor, we highly recommend that you invest where you live for your first rental property. Now, we are not explicitly saying long-distance relationships are destined for failure; some of them do last and overcome the hurdles. The same applies to long-distance real estate investing: some long-distance real estate investments can work and yield strong returns if and only if they are executed correctly and with the right team to manage the investment properties. It is true what they say: ‘It is all about the right communication’ and the right property management team in our case, especially for real estate investors investing in long-distance markets and/or investing in out of state real estate.
Related: What Are the Advantages of Real Estate Investment Analysis?
Top 8 Challenges of Long-Distance Real Estate Investing
1. Owning and managing an investment property out of state or long-distance is particularly cumbersome if a real estate investor does not have sufficient experience in and knowledge about real estate investing.
2. It is especially difficult to gain thorough knowledge and stay up to date with the ever-changing market conditions if the real estate investor is not living there.
3. There will be a time lag in noticing changes in the housing market dynamic and recognizing the nuances of change that could signal the need to sell your investment property before problems set in.
4. Investing in out of state real estate market is much harder to manage than in a local market, and it is also very expensive.
5. Hiring the wrong person and/or professional property management team to run the investment property a distance away could be a problem. Real estate investors have to trust others to watch and manage their rental properties.
6. Not investing time and due diligence in analyzing the housing market, the location, and the neighborhood before buying the rental property arises. Not performing the right comparative market analysis and looking into real estate comps to decipher the rental situation, the vacancy rates, the rental income, the crime and safety rates, nearby amenities, and key economic indicators is more common place in this case.
Related: The Worst Mistakes You Can Ever Make With Real Estate Investments
8 Major Tips for Profitable Long-Distance Real Estate Investing
1. Have your finances in order first and foremost
One common misconception in real estate is this idea of ‘investing with no money’. This is not entirely accurate, and if you are planning to invest out of state or a distance away, you must have the financial means to buy and manage simultaneously. Make sure to have enough savings if you want to take on long-distance real estate investing seriously and reap high returns in the long run.
2. Assess the worthiness of long-distance real estate investing
Find the right real estate investment deal yielding strong returns; the ROI in long-distance real estate investing must be worthy and more lucrative than your local housing market. If you can find a similar real estate deal yielding similar returns in your local housing market, it only makes sense to invest where you live. Otherwise, if the opportunity to invest out of state has merit and is worth the hassle, then by all means go for it.
3. Watch out for state laws pertaining to real estate investors and landlords
The main goal of long-distance real estate investing is to reap a good ROI and earn high net profits in return. Before you hone in on an investment property, make sure to pay attention to the State Laws and property taxes pertaining to your real estate business. If the taxes are too high, they might eat into your profits and make long-distance real estate investing bad news for your bottom line.
4. Watch out for trends of the market present and future
It is of utmost importance to tune into the housing market conditions and general trends of where you want to invest. Successful real estate investors do lots of due diligence and market analysis before they capitalize on the right location. Without investing in the right location, investors will not reap the full advantages and rewards of real estate, especially in long-distance real estate investing.
5. Do not discount the price to rent ratio
One of the easiest tactics to hone in on a prime location for real estate investing is to use the price to rent ratio across different housing markets to calculate the capitalization rate, the cash on cash return, the occupancy rate, and the rental income. The price to rent ratio gives real estate investors a good idea on where to buy real estate for profit.
Price to rent ratio formula:
Price to rent ratio (P/R) = Average list price/(Average rent x 12)
*Average list price and average rental income can be found on Mashvisor.com
Key notes on the price to rent ratio:
- Ratio between 1-15 means it is better to buy.
- Ratio between 16-20 means it is better to rent.
- Ratio of 21 or more means it is better to rent.
This year, San Francisco and New York scored a price to rent ratio of 45.9 and 38.0, respectively. This puts both cities at a high P/R ratio, which means homes are too expensive to buy and show low yield on return.
6. Find the right professional property management team
This is another important aspect of long-distance real estate investing. Invest in the right people and the right professional property management team to run your real estate properties on your behalf. Treat real estate like a business, and place high value in selecting the right people to run your business.
7. Due diligence, analysis, and staying informed
Don’t crunch numbers only on the investment property you are considering. Analyze your profit potential and estimate how your potential investment’s numbers fit into the local housing market.
8. Acquire sufficient experience and knowledge before investing long-distance
Again, if you are buying your first investment property, it is highly advised to invest where you live. As you build your experience and acquire the right knowledge and mentorship, you can branch out and consider long-distance real estate investing to diversify your real estate investment portfolio.
Related: The Top 10 Advantages of Investing in Real estate
Conclusion
The great thing about real estate investing is that there is no one-way path to success and riches. Savvy real estate investors find creative ways to real estate investing to reap long-term financial rewards and high ROI on their real estate investments. If executed correctly, long-distance real estate investing can be a very lucrative real estate opportunity with much better returns than your local market.
Our final advice to you; do not limit your investment opportunities, but one thing for certain, do your due diligence and study the housing market before you jump all in.
If you enjoyed reading this post, subscribe to Mashvisor blog for more interesting reads and real estate insight!