How to Succeed in Out-Of-State Investing

While buying real estate property that is close to home gives you the advantages of knowing the area and familiarity with agents and brokers, it isn’t always the most profitable option for real estate investing. That’s why buying out-of-state real estate, particularly multifamily properties, has become a popular option for savvy investors. Many multifamily investors find out-of-state markets – often located in ‘landlord-friendly states’ with ‘investor-friendly laws’ – offer excellent investment opportunities. But, what does it take to find suitable properties for out-of-state investing?

This is the topic of my discussion with Logan Freeman, co-founder and principal at FTW Investments. As a real estate investor, developer, and broker, Logan has become an expert in representing sellers and buyers (many are out-of-state) of multifamily and commercial real estate specializing in off-market properties. He spoke about the four elements that are crucial for successful out-of-state investing and the role that brokers play in finding suitable investment properties. Let me share them with you here and if you’d like to listen to the full podcast episode, click here.

Why invest out of state?

While investing in-state may seem like the most obvious choice at first blush, here are the common factors that entice multifamily investors to invest out of state.

  • Affordable properties: Some investors in high-cost cities simply can’t afford to buy properties within their locale so they look to other states for lower-priced properties that will suit their business plan.
  • Higher returns: As income profitability is tied with location, investors will find out-of-state rentals that will give higher ROI, rental income, cap rate, and cash on cash returns than properties within their state.
  • Diversification: Buying properties in various locations and markets is one way to diversify your real estate portfolio and keep business running in times of a crash in one market.
  • Investor-friendly laws:  Every city or state has real estate laws and regulations, some more hospitable for investors and favorable for multifamily rental operators. 
  • Economic and population growth: Cities or states experiencing a surge in population and job growth attract real estate investors. 

Even with the above advantages, buying property in another state is not without its downsides. Given that you’ll be out of state, it will not always be possible to see properties with your own eyes before buying. So, how do you do it right? You’ll need to lean on a localteam that knows the market you’re investing in.

How do I find out-of-state deals?

The services of real estate brokers or investor’s agents are valuable in finding suitable properties for out-of-state investing. As a buyer, you need to have access to a broker who has built a business by cultivating relationships within the community or market you’re buying in, and therefore has access to sellers.  An experienced and trustworthy broker will not only help investors find cash-flow properties but will also help negotiate for the best terms. They may also have the capability to influence sellers in their choice of who to sell their property to. Brokers not only provide access to off-market seller opportunities but also give additional information that can assist buyers in making informed decisions. Having someone on the ground that you can trust will make buying a rental property out of state much easier.

“It’s can be scary for out-of-state investors to be placing capital into a project that they’ve never even seen. Many of my investors have never seen the property. So, your focus is on building that trust and rapport,” says Logan. It’s crucial to build and maintain a strong relationship with brokers if you want to succeed in out-of-state investing. 

Essential Elements of Out-of-State Investing

What do property investors need to know before buying a property out of state? Logan recommends four elements to consider in order to do it right.

#1 Have clear expectations

As with any real estate investment, you need to set specific investment criteria when looking at out-of-state properties. “I ask the buyer, ‘What are you going to need to feel comfortable to move forward on this purchase?’  I don’t want to waste the seller’s and the buyer’s time. So, you need to have clear expectations going in,” says Logan. 

So, be very clear about your investment strategies, give information on how you will fund a potential deal, and educate the broker on the type of properties that you are interested in. Be ready to do your homework, too, by conducting in-depth research online and working with your broker to assist with your due diligence and property inspection before making an offer. The more information you communicate to your broker, the better you qualify yourself as a credible investor who has the financial capabilities to close a deal.

Regardless of how you approach your multifamily deal, the key is to be upfront with your broker or agent and do proper due diligence. 

#2 Good communication 

Good and constant communication between parties involved is another crucial element for  successful out-of-state investing. Give feedback whenever a broker sends you information about a property – even if you decide that it’s not the right deal for you. Providing honest feedback helps brokers zero in on properties that best fit your criteria and expedite the process of buying out of state, saving you time and money.

Besides, constant communication nurtures relationships, which is the foundation for building trust. You need to communicate frequently through phone calls, texts, and emails in order to keep your relationships with brokers healthy. Your effort to respond is always appreciated by brokers, says Logan. So, always answer emails and texts. Not replying will make you seem uninterested, so before you know it, brokers will stop sending you information on potential deals. It’s sound advice that helps in all business dealings.

#3 Value broker’s time and effort upfront

“Put some effort upfront and spend a little bit of money to show brokers that you’re real and serious to find a property,” advises Logan.

Many investors offer real estate brokers a consulting fee to show that they are serious and that they respect their time and effort. In addition to having them send you prospective off-market deals, brokers can be your consultant of whom you can ask questions. They are your eyes, ears, and feet in your out-of-state investment. Some brokers can review potential deals, run rental or sales comp reports, and would know how to navigate more complex agreements. Highly-regarded brokers work hard to build an excellent reputation within the market or the industry itself.  

In short, they play a vital role as a medium between yourself and your clients. Consider brokers as an extension of your team and someone integral to your growth as a company. Think about how you can entice them to work with you and integrate them into your business plan. Give them the motivation to continue helping you build deals.

That said, it’s wise to keep in mind that different markets have different dynamics in compensating brokers. So, find the one that suits your requirements while maintaining mutual integrity and a healthy respect for ethical boundaries in the business.

#4 Follow through and fulfill your commitment

If you’re a serious out-of-state buyer then you’ll follow through on your initial efforts to evaluate the deal, make an offering, and fulfill the commitment to complete the deal. Brokers are more interested in helping buyers who can ultimately close deals, says Logan. It is not always about how much money a broker can make from a deal, but more about your integrity and your commitment to seeing the deal through. 

“A buyer has to do the whole process of proving that they can perform. So, to vet buyers, I ask – “Where do you own other properties? Have you syndicated before? Do you own anything outright? How will you fund the deal?” Sometimes, I ask a local bank to assess the buyer and see if they’re the real deal,” says Logan.

“Out-of-state investing means you’ll operate based on trust. And the only way to do that, I’ve found, is to do what you say you’re going to do, be honest, be ethical, and you get everything out upfront.”


Final Thoughts

Investing out of state is in many ways similar to buying locally. The greatest difference? You will lean heavily on trusted individuals or a team that will do work on your behalf. Screen local brokers, agents, property managers carefully and start building relationships based on trust and integrity. You’ll find that the benefits of out-of-state real estate investing outweigh the risks.

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