6 Expert Tips for Out-of-State Real Estate Investing

David:
This is the BiggerPockets Podcast, show 909. What’s going on everyone? This is David Greene, your host of the BiggerPockets Real Estate Podcast, and we have a mini-sode for you today. Our goal is to give you the best information in the shortest period of time so that you can spend more time taking action, making money, and building that life of your dreams.

Rob:
That’s right Dave, and today we’re going to be giving you six tips for out-of-state investors. If you want to become one, if you want to do it better, then this show is for you. So let’s get straight into it.

David:
All right, let’s get into this. Tip number one, choose a market that meets your needs as an investor. Now, Rob, you are primarily a short-term rental investor, so you probably want to pick a market that you would actually want to visit. What do you look for in a market?

Rob:
When I got into this game, that was the dream. My whole goal getting into real estate was buy one house for every month of the year. My big grand goal is if I could have 12 houses that allow me to go to a different house every year, that’s the goal because not only with short-term rentals can I cash flow and cash flow quite a bit over a long-term rental, but other people pay for it and I get to take vacations at these places instead of having to spend two or $3,000 on an Airbnb.

David:
Yeah, great point. So you’re always in the sunshine. I think depending on what your strategy is, this is something you should think about. I’ve had that same thought. What if I just had Airbnbs all across the country and I stayed at a different property depending on what I was into when I just moved my family along, when I get one, to all these properties.
Now, not everybody thinks like that though. I tend to think about, let me buy in the market where I think I’m going to get the most growth. So I’m going to take more of a cerebral impact. I’m going to look at where are people moving to, where’s the opportunity, where are jobs moving, where’s growth going to happen?
So this all comes down to your strategy as an investor. If you’re looking to build long-term growth, you’re going to pick certain markets. If you’re looking to build cash flow ASAP, you’re going to pick certain markets. If you’re really can build a lifestyle type portfolio, you’re going to pick different markets. Anything to add there, Rob?

Rob:
So one of the other things I say in addition to places that you actually want to visit, because that’s not going to be applicable to a lot of the long-term rental investors out there, also try to find a place with the familiarity. For me, I went to school in Austin, Texas. I know that city like the back of my hand. So when you have a little bit of familiarity with a municipality, a county, a city, it’s a lot less scary to buy a house out there and it’s not quite as risky in my opinion, when you know the town a little bit.

David:
Again, this all starts with strategy. So check out Dave Meyer’s book on that topic. Pick your market and move along. Tip number two, find a market with strong fundamentals. I love this stuff. What do you think about that, Rob?

Rob:
Yeah, big fan of this too. Obviously, I have done a little bit of everything in the real estate space, but for me, I’m always looking for really strong tourist destinations. Now there’s vacation destinations like Orlando where there’s Disney World or Disneyland. There’s also lake towns, mountain towns, ski towns. I like investing in places where I know people are consistently going to go, but if you want to step that up a little bit further and be a little bit more recession resistant, I’m a big fan of investing in or around national parks. Simply because I call those mother Nature’s Disneyland, and millions of people will visit those cities every single year. I don’t have to market it. I don’t have to worry about too much of a decline in general.

David:
This is a great point. If you’re thinking like a traditional investor, you typically just look on Rentometer or the BiggerPockets Rent Calculator and say, hey, rents are X, my expenses are Y, problem solved. If you’re going to be a short-term rental operator, a medium term rental operator, you need to think about where people are going. It doesn’t matter how much you think that you can get on the property. You actually have to have people staying there. It’s much more like running a hotel or a hospitality business.
Now that’s going to help with the cash flow, but the value of the asset’s completely different. This is a whole new set of analytics you have to look into. What’s the housing supply there? What’s the wages there? Are prices going up? Are wages going up? Is there demand for housing or are there too many houses and not enough people? So you got the equity side and the cash flow side that live independently, and you ideally want to pick a market that has a good balance for your needs as an investor.

Rob:
Okay. That all makes sense to me, David. Can you put this in perspective for maybe someone more on the long-term side of things?

David:
Well, as a long-term investor, you’re looking at two things, supply and demand. You want to know how much supply of housing is there and what’s the demand of that housing and how much supply of rental properties are there and how much demand are there for those rentals. So rents will go up if there are not enough rental properties and wages are increasing. So that’s what I look at from the cash flow side. Then the value of the real estate will go up if there are people that want to buy houses and wages are going up so they can afford to pay more for the house. This is why South Florida has exploded in prices because business has moved in there primarily from Wall Street and New York, big money. With that comes high wages, but there’s a constricted amount of housing. Boom. We have an explosion in both rent and in both housing prices, because people in New York are used to paying those high prices.
Austin, Texas out there in your hood, Rob, I know you’re in Houston, but same thing. Tech industries moved in there. There wasn’t enough places to build more houses, rents went up, and values went up. So if you’re a multifamily investor, you’re looking at metrics like this very, very significantly and purposefully. If you’re a residential investor, it’s good to start thinking along these terms.

Rob:
Yeah. So let’s get into tip number three, which is to make sure you invest in a market that actually supports your goals as an investor. What does this mean to you, David?

David:
Well, there’s a lot of people that are investing in real estate because they just want to get out of their job. They’re looking at how much cash flow can I accumulate ASAP? Well, maybe they want to go buy somewhere like the Midwest, where there’s more properties that work with price to rent ratios that are solid. You have a higher chance of finding cash flowing properties and you could get them quicker and you probably have more BRRRR opportunities, because there’s a little bit less competition for you out there. It’s easier to get the houses. It’s easier to add value. There’s still people that want them, but there’s less than in somewhere like Southern California or Austin, Texas or Seattle, Washington, where you have these markets that have crazy demand.
Other people like me tend to think a little bit more like delayed gratification. I’m still going to work right now, so I don’t need cash flow as much. I make money through starting businesses. So how do I set myself up to buy properties in the best locations where they’re going to appreciate more over time and then when I retire from working, I have higher rents and higher values to make retirement easier.

Rob:
Yeah, I’m pretty much on that page too. I think for me, my goals are higher equity plays and areas that I know are going to appreciate. That’s not quite as important as cash flows as it was at the beginning of my journey. For you out there, if you’re listening, if your goal is just to get started, you don’t have a ton of money to buy these $500,000 or million dollar homes, that’s fine. That just means that you have to find a market that you can actually afford. Maybe something in the Midwest. Maybe something that’s a little bit more of a base hit. As you grow your portfolio and you can start pulling some of that equity out to reinvest into other properties, you can start looking at other markets that might be bigger hitters for your portfolio.

David:
You love to say bigger hitters. It’s like one of your favorite things.

Rob:
Do I say that often?

David:
You say it pretty often. Yeah.

Rob:
Now it’s my mission to say that as many times as possible on this show.
All right, stick around because we’ve got more tips for you and your friends and your family and your pups, your dogs, your friends, your second cousins right after the break.

David:
Welcome back, you beautiful investors. We hope you brought your pups, your dogs, your friends, your family, and everyone else. To recap, our first three tips for investing out of state are, number one, choose a market that you actually want to visit or that meets your needs. Number two, find a market with strong fundamentals. I like to put the fun in fundamental. Number three, invest in the market that actually supports your investing goals. Let’s jump back in with tip number four.

Rob:
Well, number four is really going to be a big hitter with the audience and that is to know that local law and regulations.

David:
This is a really big one, and I can say from personal experience, I’ve made this mistake somewhat recently. I had a 1031. I bought a lot of real estate out of the 1031. I bought into grade A locations. I bought really good real estate. I paid really good prices. I did everything that I knew to do well and I was very happy with how it worked out. In fact, at the end of the day after I bought all this real estate, I had added $1 million to my net worth simply from the difference of what I paid for the real estate versus what it was worth.
What I did not anticipate was how many people were angry about short-term rental operators and how the neighbors would gang up on me and get the city to hate me. So in many of these states where I bought properties, they were landlord friendly. They can’t come in and tell you that you can’t run a short-term rental. However, the local municipalities who control the permitting process can make your life hell, and that’s what happened.
So there was a bunch of tiny little laws. Just like when I was in law enforcement, the vehicle code is huge and we just pick and choose when you actually apply it. If you see a reckless driver, that’s when you pull them over for knowing a vehicle code violation. If somebody’s driving safely and they have a tiny crack on their windshield, that doesn’t mean they’re getting pulled over every time. The same can be true of these local laws and regulations. There’s often little things that you’re not paying attention to that cities can use to jam you up if they don’t want to be issuing permits, if the neighbors make a big stink about it, if you start the construction on a property and people complain about the noise, and that particular municipality is politically against short-term rentals.
So this is something that you need to be aware of because if you run afoul of the law, like I did in this case, they have more things that they can use to make your life hell. I don’t know that I’ve heard you get into this situation, Rob. I think that’s awesome that you have, and I wouldn’t wish this on my worst enemy. So your experience has been a little different.

Rob:
I researched quite a bit and typically there’s what’s actually written in the law or the ordinance for that city, but in relation to short-term rentals, and we’ll talk about long-term rentals here in a second, it’s not just a matter of looking what’s on the website and what the official language is. Oftentimes, if I want to find out the regulations for a city I’m typing in, let’s just use New Orleans as an example. I’m going to go to Google and I’m going to type in New Orleans Airbnb lawsuit, Airbnb court case New Orleans.
I’m basically trying to see what types of lawsuits or what types of court cases have come around the topic of short-term rentals. That’s how I find out what’s either brewing or what’s happening or what has happened, and then I also researched the actual code itself in the municipalities website and everything like that. So I think there’s kind of a two-tier approach, because something can be very legal on the website, but you can see that there’s regulations on the forefront, and when I see that type of stuff, I typically shy away.
Now I want to turn this conversation a little bit more to the long-term side of things. You mentioned the idea of landlord-friendly states. Obviously, that typically pertains to the world of long-term rentals. Is there a way to even find out if a state is a landlord-friendly state? You hear it pretty often back and forth, people that say, “Oh, I’ll never invest in California”. Is there an easy way to find out if a state is friendly or not?

David:
It’s not all the state. I think it’s the local municipalities where I found myself in trouble because in Arizona, for instance, where we bought our property, there are laws on the books that say you cannot tell a person who owns a home in Arizona what they can or can’t do with their own home. So if they want to run it as a short-term rental, there’s literally legal protection for homeowners in Arizona that they’re allowed to.
Then you get areas like Paradise Valley where the local municipality has fought with the state, even though there’s a law in place and try to say that those people can’t rent out their homes. So in Paradise Valley, or PV as they call it if you happen to live in that area, they only let you rent your house out that way for six months out of the year, which is going to blow up your numbers if you’re trying to be a short-term rental investor.
So that’s a case where you could have looked at the state laws and felt safe, went and bought into Paradise Valley, which would’ve looked like a great deal, because there’s way less competition. You’re seeing the ADR is really high because you don’t realize you can only do this for six months out of the year. You go buy this really nice property and then you find out that the local municipality is going to be the one jamming you up.
Now, long-term, traditional real estate investors, they don’t have to worry about this as much. The issue that you have to look at there is rent control. That’s what you really want to study. In some of the areas where we help clients like San Francisco, Oakland, you can buy properties. They’ll you rent them out. I don’t know of any municipality that stops people from renting out properties, especially if they’re on year-long leases. The problem is when they prohibit how much you can raise the rent by, and you have a tenant in a property in an area like San Francisco where market rents are $6,000 a month and the properties cost two or $3 million, but you can only charge that tenant $1,200 a month because of rent control protection.
So if you’re planning on being a long-term real estate holder, which most of our listeners are, you probably want to avoid the areas where they have super strong rent control prohibitions and you want to understand what those are at a very high level before you buy. If you’re going to be house hacking though, it’s not as much of a worry because most of these municipalities don’t hold you to the same standard if it’s your primary residence that they do if it’s an investment property.

Rob:
Yeah. One final tip here for everybody, just going one step further than local law and regulations. Look at your HOA. There are lots of HOAs out there and gated communities and stuff that may not even let you rent to a tenant for less than six months. I come across this all the time. HOAs can be prohibitive to your rental journey as well. So make sure you look at your CCNRs, which stands for Credence Clearwater Revival. What does CCR stand for?

David:
Covenants, Codes, and Restrictions.

Rob:
There you go, and your HOA bylaws and all that good stuff. All right, let’s hit number five.

David:
Number five is make sure that you have boots on the ground and a way to verify that they are doing the work that you need them to. In long distance real estate investing, I talk about the importance of having a competitive advantage, and boots on the ground certainly gives you that. When you have people there that can check on your property, it makes things a lot easier.
Case in point, I’ve got a property just north of Fort Lauderdale in Florida that I’m dealing with the city, like I was just telling you about. We’re finally after 22 months, getting to the point where they’re willing to clear up the tags that they put on the property. Side note, this is stuff that was in the property when I bought it. I didn’t even do any of this work and they came in and they jammed me up. There was a BiggerPockets listener that was able to go to the house yesterday and go take a video of the property that we could give to the people on my team that are trying to figure out how are we going to design this thing.
That’s a massive benefit that if I was like, what am I going to do? Am I going to fly all the way out there to do it myself? So when you have contractors, handymen, design people, resources like that, it makes long distance investing so much easier.

Rob:
This goes back into what I was talking about with tip number one, which is having some familiarity. For me, I feel comfortable investing in Austin, Texas because I have a network there. So that goes into this whole idea of boots on the ground. Is there someone in this city that can help you pick up the slack? Is there someone you can pay? Maybe it’s an uncle, maybe it’s an old roommate, maybe it’s a buddy that lives in this town. You could say, “Hey, will you go check on this renovation for me, or will we just drive by this property to make sure that my pipes didn’t burst during the freeze?” That kind of stuff gives you so much peace of mind as an out-of-state investor.

David:
Yeah, that’s a great point. So look at where you can either build a team or where you already have pieces that you can use to assemble a team and prioritize markets where you have that competitive advantage.

Rob:
Awesome. So let’s move to the last tip here, and that’s the go and visit your property or properties yearly. Now, this to me matters a little bit more on the short-term rental side. I find that when I go and finally vacation at my properties, I’m always working and just trying to fix it and working on every aspect. It’s because I don’t feel like we have enough of a checklist or routine maintenance.
I’m always disappointed. I’m always like, why am I working so much at my own properties? It’s probably because we could be visiting these properties and sprucing them up and inspecting them and maintaining them a little bit more often. I imagine that there’s probably a little bit more deferred maintenance on the long-term rental side of things, right, David. Or are you usually generally impressed with the state of your portfolio many years after owning it?

David:
This principle applies to everything in business.

Rob:
Yeah.

David:
That’s why you have to make it a routine habit, just like you said, Rob, of checking in on whether it’s a property or it’s a business or it’s a task in that business at routine times, because you find that things weren’t like you thought in your head. I know you visit our Scottsdale property sometimes. I do too. I don’t think I notice it quite. You have a level of detail that maybe I don’t when I go look at the property. You see things I don’t, but what are some things you’ve seen when you visited our property that weren’t what you were expecting?

Rob:
It’s usually something like a broken chair that the cleaners didn’t throw away. It’s like in eight pieces and they’ve kind of put it together in this Jenga, Tetris-y way that makes it look like it’s working. Then you breathe on it and it falls apart. I’m like, why didn’t they just throw this away? So it’s usually deferred maintenance on furnishings, anything of that nature.
So I’m going to take tip number six a little bit to the next level. I’m going to say maintain quarterly visit yearly. It doesn’t have to be you that visits it, but have someone come in and inspect and tighten the screws a little bit on your property, because if you don’t, it will end up being a lot more costly once the items actually break, whether it’s furniture or just very basic maintenance things in your home.

David:
Now if this is a traditional rental, you’re probably not going to check it until a tenant moves out. So you might have somebody in there for three or four years and then they leave and it’s like, what on earth has happened here? Which in that case, I have my property manager walk the property every single year. We typically do it at a slow season when they don’t have as much going on. They take a video of the property and they show what the appliances look like, the condition of the bathrooms, what the faucets look like. Then they get the HVAC and the garage.
It helps you see, one, are too many people live in the property that are not on the lease? Two, are there holes in the wall? Do you have a mold issue going on? Are there leaks? Is there problems with the roof? Because those are problems in and of themselves you want to know about, but a roof leak isn’t the end of the world unless it happens for four years and you don’t know about it.

Rob:
Oh, I have a bonus tip before we wrap up. Can I give the bonus tip? It’s a tip seven.

David:
Ooh.

Rob:
We’re going to still title it six, but tip seven is go and buy David’s long distance investor book. You can head on over to the BiggerPockets bookstore to buy that. You can use promo code Rob10. Just kidding, just kidding. Go buy that. Seriously, that is the bible for out of state investing, long distance investing. If you want a guide for how to build out systems and processes and who to hire and when to hire them, this book will teach you everything you need to know.

David:
Thanks for that, Rob. I appreciate it. Anything else you want to add for our listeners that you’ve learned in your experience that they should consider when picking a market and investing in other markets?

Rob:
Yeah, don’t cheap out on the people that you hire to manage your property. Every time I negotiate someone’s rate, they end up doing the negotiated rate version of the work versus what I want them to do.

David:
That’s some great advice right there. Sometimes you win the battle, but you lose the war.

Rob:
Mm-hmm.

David:
Thanks, everybody. If you like today’s episode, please go give us a five star review wherever you listen to your podcasts. We love and we need those. Let us know if you’re watching this on YouTube in the comments, what you think about these mini-sodes. Do you like them, is there any tips that you think we left out, and do you want more content like this? This is David Greene, for Rob “Little Hitter” Abasolo, signing off.

Rob:
That’s a little tiny baseball bat hitting a baseball out of the park, baby.