You’ve been thinking about investing in rental properties for long term passive income for quite a while. You put some money aside for the down payment and you feel that it’s time to pull the trigger.
In this post, I’ll lay out the criteria which in my opinion you should follow.
Top 6 Factors to consider when investing Out-of-State or Out-of-Local Area
- Seek Properties with High Return on Investments:
- If the numbers don’t work where you live then look elsewhere. Everyone wants to look for investment properties where they live. You can probably manage them better and keep an eye on the property; however, you must know your financials and your markets. If you live in a market that is overheated and producing a negative cash-flow, you will be paying out of your pocket.
- The American real estate market should not be considered as one market, but as thousands of markets, it could even be that in one big city you could find several different markets.
- A wise investor should know how to analyze the markets and know the Return on Investment for that market. The goal of investing is to meet your financial goals and not hurt it.
2. Do Not Become Emotionally Attached:
- Never get emotionally attached to any property, it’s all about the numbers.
- I’ve worked with real estate investors for over 20 years. Through my investment firm, New Dawn Investments, I learned that people tend to get emotionally attached when considering investing in property. They invest with the perspective of a homeowner and treat it as if they are going to live in the property. A big mistake.
- You MUST adapt a business mindset when you are investing in property. It is a business and you want to make money! So you must put an emphasis on the Return on Investment, Cash Flow, and Appreciation. It’s about how much money you invest and what is the passive income.
- DO NOT put emphasis on the color of the kitchen tile or the size of the backyard etc.
- If you buy a property just because it’s appealing to you, you are setting yourself up with an Alligator. An Alligator is a term that we use in Real Estate which is a property that eats up your profits and your savings..
3. Always use a Real Estate Investment Firm or a Realtor who specializes in Real Estate Investing.
- A Real Estate Investment Firm is a real estate brokerage company that specializes in market analysis. They have specialists who are agents that consistently analyze markets, understands the pros and cons in that market, property types, industry, price per square foot, employment rates, type of tenants, etc. They will provide you with the best choices in markets, high return on investments with cap rates of 7% or more, and properties in that market. A one stop shop.
- Now there are many realtors in the markets; however not all are created equal. So if you decide to not use an investment firm, then you must analyze the markets yourself and contact a local Realtor to help you view those properties.
4. Strong and Diverse Industries
- You must invest in markets where the industry is strong and diverse. What I mean by industry is Healthcare, Oil/Gas, Hi-Tech, Low-tech, Biomedical, etc. In these type of cities there are higher migration rates of people moving in then people moving out. So finding tenants will be much easier.
- Markets with more than one industry are more lucrative to invest. You might be able to find a property in a small town that may give you a great Return on Investment, but that small town is dependent on one Industry. It is higher risk to invest in that town because tenants will be harder to find and it does not have a high migration rate. Much worse if that industry goes out of business then the economy of that town would suffer and people would move out making it harder to sell or to rent. The best example of this was Detroit, Michigan. When the automobile industry fell, people practically had to give away their properties. Now as a Real Estate Investor it worked in my favor because when they decided to rebuild the area, I was able to fix and flip over 100 properties in one year. Michigan has slowly rebuild its economy and diversified its industry, but it has taken and is still rebuilding.
5. Look for areas that are considered “Emerging Markets”.
- Emerging Markets are areas that are in the outskirts of major cities. For example if you live in Houston areas such as Humble, Conroe, etc. are areas that are within commuting distance to work places from a major city like Houston.
- Emerging Markets have investment properties with low purchase prices and rents that are comparable to the city for much more square footage.
In these emerging markets you must look for predicted equity to be accumulated. In these areas the demand to buy is not as outrageous as it is in the city and affordable to purchase as well as affordable for tenants to rent.
- Properties that are located in good school districts and low crime rates
6. High migration rates
- Some big cities throughout the US have been suffering from negative migration rates and have limited population growth. Issues that may affect migration rates are climate, environmental issues, high real estate prices, not enough industry to support the economy, bad school systems, and more.
- You have to invest in areas with a history of positive migration rates for at least a decade.
If you take your time to do thorough research chances are that you make fewer mistakes and become a successful investor rather quickly.