Up until about 5 months ago, all of my investment properties were in Washington State. As our market has shifted and investors are paying irrational prices, I decided it was finally time to look for out of state rental properties. It was a tough choice for me to make as everything local is so controlled and we have our entire team here to execute on a plan. I knew it would be difficult to re-create what we’ve done locally, and now I am sharing the steps of how I was able to do that.
Step 1: Decide on an area to invest
I’ve spoken about this before, and every investor would likely have different criteria for the areas they would want to invest in. I was looking for long term stability, population increases over the last 5 years, good job growth, low crime, good schools and moderate weather (no Arizona/Nevada/Minnesota/Illinois/Michigan). I wanted to stay out of the boom and bust areas like Florida, California and I wanted the properties to be affordable so I mostly avoided the coasts all together. This left me with the South and Midwest.
From there I picked larger cities and started doing individual analysis on them. I narrowed down my choices to Indianapolis, Nashville, Little Rock, Birmingham, Kansas City and Oklahoma City.
I had been to Memphis before and did not like it, and I felt it may have been too popular with investors because of all of the press it had gotten so I didn’t want to be in a situation where there was an over supply of rentals. Just my opinion, but I could be wrong…
It was tough work at first, but I moved to step two and if I was successful with step two then I would start making offers.
Step 2: Build Your Team
This is by far the most difficult step. My team needs to consist of a good investor friendly realtor, a phenomenal property manager, and a great contractor/handyman.
I started building my team in all of the cities listed above, though almost immediately I was able to put together a great team in Nashville and Indianapolis. The other areas had so-so agents so I decided to put those areas on the back burner and focus on these two cities.
I usually try to find either the realtor or the property manager first, and once I find a great one I ask them for referrals to the others. Great people know other great people, so if they’re not able to refer you, you may want to keep looking.
I’ve found that calling the property management companies first, telling them you are an out of state investor looking to pick up 5-7 properties over the next year and you’re looking for referrals to great agents to help source deals is the easiest way to get started.
When I get names of realtors from the property managers I call them and ask what kinds of returns they are seeing in the market. If they don’t know what I’m talking about, I pass. Cap rates are fine too, I just want them to understand how to calculate the return on investment so they can filter deals.
I also ask them where the best areas of the city are to invest, and where the gentrification line is. I want to be as close to that line as possible so that I can expect some appreciation, though I must also be able to get the cash flow I want.
I tell the realtor that I’m looking for a 15% cash on cash return, and that I would be willing to do some repairs to get those returns and the more repairs the higher the overall return will need to be.
I then ask the property manager and the realtor for referrals to contractors/handymen so we can line them up as well.
Then I test out the agent and the property manager. I ask the agent to send me their best 5 deals and I run those by the PM. If the PM agrees with the numbers and it meets my return criteria, you’re good to go.
Step 3: Develop A Good Rapport With Local Team
You will not get to the top of the investor deal flow list right away, realtors and PM’s want to see you writing offers and buying properties before you will get their best deals or their off market properties.
Constantly showing appreciation for the local team is important, and the more they feel good working with and for you the more they will try to continue the relationship.
I now get a good amount of off market deals from my team in Indianapolis because we’ve built a great relationship in a short period of time, and they know if they send me a good deal I’ll buy it.
Step 4: Add Additional Deal Sources
I know many investors want to go direct and work with wholesalers instead of realtors. Honestly, I think this is a mistake.
Wholesalers are not realtors so you’ll often times have to figure out the paperwork on your own, and they are notorious for over inflating the prices on properties. Their main goal is to make their cut on the property and move on. There’s also no protection for an investor when you work with a wholesaler directly. Of course I’m generalizing here, I know not all wholesalers are bad but for someone just starting out I think you should stay clear, at least until you have someone vetting your deals.
When you work with an experienced realtor, they will save you time and money. Plus, realtors have a fiduciary duty to their clients and like attorneys, are required to carry Errors & Omissions Insurance, which means if they do something they shouldn’t or do not disclose a material fact that would affect the property value or your use, you can sue them. Plus, 99.9% of the time the seller pays the realtor’s commission when they’re representing you as a buyer, so basically you’re getting a free negotiator who knows the contracts, the area, they can offer referrals, and you can sue them if they do something majorly wrong.
So, once you’ve gotten your dream team in a location, I believe it does make sense to add yourselves to the wholesalers list and get additional deal sources going. I would just never consider a property from a wholesaler without my realtor and PM’s buy off.
Step 5: Visit the City You’re Investing In
If you haven’t already done so, I think it’s wise to visit the city you’re investing in. I did just that in Indianapolis after the rehab was done on my duplex.
Some investors may want to visit first, and that’s okay too.
The point of visiting is to get more comfortable with the area, which does make it easier to decide on which deals to buy. Plus, it’s great to meet the team in person.
So that’s it. That’s my step by step strategy for sourcing out-of-state deals and getting great properties. When I decide to venture off into a new area I just repeat steps 1-5 and do it all over again!
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