Questions To Ask Yourself Before You Choose To Self
If you answered no to any of these questions, then you should strongly consider hiring a professional property manager regardless of your proximity to your investment property.
How To Invest In Real Estate As A Foreigner
From a historical standpoint, even before becoming its own independent country, the US has always been the exception when it comes to land and real estate. It used to be the case that settlers received a land grant upon crossing the Atlantic, assuming that they didnt owe anyone money.
Hence, from before its foundation, the US has been overly centered on real estate.
Compare that with the likes of Europe, where it was mainly aristocrats and merchants that controlled the land. Then, when communism came along, the bureaucrats were the power that divvied up the real estate.
In other words, in the US there has always been a culture of trading and selling real estate on a much freer basis. Whereas in places like Eastern Europe, most sellers have been living in the house theyre selling for their entire lives.
Because this land speculation culture does not exist, there just hasnt been a need to develop the necessary infrastructure to buy and sell a property quickly and transparently in many countries overseas.
For the most part, you have to depend on real estate agents who, in turn, have mediators that go into their communities and find deals for them. Each and every single one of them gets a piece of the pie.
Because properties have historically been so difficult to acquire in these locations, the assumption is that the one with the property is the one that controls the negotiation. Hence, all these little add-ons will be tacked onto your bill.
Get Started On Your First Investment Property
When it comes to choosing an investment property, there are several things to consider in terms of how the home can provide a return on investment. Now that you have a few methods for making that decision, it may be time to start your real estate investment journey. Speak with a Home Loan Expert today to find the best financing solution to get you on your way.
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What Are The Downsides Of Investing Outside Your State
- It takes a lot of research to get to know the market. If you dont live in the area, you likely wont know much about the market. Even if the market looks good now, is it a fluke? Is the market usually mediocre? You also may not know the area what areas are desirable or what schools are best?
- You wont be able to see it much. Suppose you are a hands-on investor who likes to periodically visit your investment. You feel uneasy about being far away from your investment, relying on a third party to tell you how its going.
- The laws may be different. You may be familiar with the laws in your area regarding rental homes and real estate, but they may differ in other states or localities. If you arent aware of the rules, you could break them and be subject to costs or liability. If you work with a qualified property management company, theyll understand the rules in the area and help ensure you follow them.
- You may have to buy a property without seeing it. Unless you travel a lot, you may have to buy a house without seeing it. Today, the real estate market is especially hot, and homes sell fast. If you dont move fast, you could lose the deal. This often requires buying a house without seeing it.
How The Savviest Investors Are Investing Out Of State
The only downside of this investment vehicle is that most people cant afford the downpayment. Even in less desirable areas, these assets are millions of dollars and continue to increase in value as inflation drives up market rents everywhere.
The best solution to this is by working with other investors to buy into these assets together. A real estate syndication is a group of investors that pool their money together to buy one more considerable investment. This allows out-of-state investors to invest in out-of-state real estate without having the burden of being hands-on or putting up too much money alone.
A typical structure for real estate syndications involves a few General Partners and Limited Partners. The General Partner is the person who puts in all of the work, finds a good property manager, and locates the best multifamily deals where significant value can be created. They typically receive a management fee for working on the deal and equity participation in the asset.
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Investment Purpose And Profit
Before investing in real estate, you need to know why youre making the investment and what sort of investment its going to be. There are many different ways that you can profit in the industry, and it depends on your goals, finances, and the amount of time you can afford to put into the project.
You can profit off of property without actually owning any by investing in property construction or property management stocks, or by investing with a group like a REIT.
If you own a property already, you can invest in your own home and make improvements while you live there to boost its appreciation.
Are you looking for a short-term or long-term investment? How much profit would you be expecting to make the high-value investment worth it?
Automate As Much As Possible
Automation improves out-of-state rental property management by reducing the amount of manual work a landlord and tenant have to do.
Some renters are used to doing nearly everything online. Giving tenants the option for paying rent and making maintenance requests online can improve cash flow and keep tenant turnover low.
Landlords who sign up for a free account with Stessa, a Roofstock company, can make their lives easier by automatically tracking income and expenses, monitoring property activity online in real time via the owners dashboard, and exporting tax-ready financials. While Stessa doesnt file landlord tax returns, it does the next best thing by providing an exclusive TurboTax discount in the Stessa Tax Center.
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Current State Of Foreign Real Estate Value
Foreign investors play a significant role in determining and driving the value of the real estate, and the effect is not limited to expensive homes but trickles down throughout the market.
The correlation can easily be observed in some of the infographics below and in average real estate prices, but the direct impact varies region to region.
State Of Foreign Investment In Real Estate
Donald Trump has caused foreign investment in U.S. real estate to plummet by 36%. This is due to stricter visa clampdowns, tariffs, and xenophobic rhetoric. The primary driver of the decline is the drop in Chinese investors who had been the largest investors for the past seven years.
Following the trend in the cooling market mentioned above, foreign investment has seen a sharp 70% drop in the first half of the year if you compare 2018 to 2019. This is largely due to the fact that the most attractive properties for investors, such as top-tier office spaces and rentals in suburban areas, are in short supply.
Brexit absolutely crippled the U.K. real estate market in terms of financial investment as shown by the 2019 values dropping almost 28% from 2017 foreign investments, with foreign investors even using the term Brexiety. Now that the future is starting to seem more secure and were slowing getting more answers on whats to come next, it may see growth.
Profits From Real Estate Syndication Investments
There are two basic ways in which the general partner and limited partners gain financial returns through syndication investments. They make profits from property value appreciation and from rental income. The passive investors as limited partners are not directly involved in the administration or management of these activities.
Any rental income from syndicated real estate is issued to the passive investors by the sponsor. Distributions may be made on a monthly or quarterly schedule and are arranged in preset terms. Since property values typically appreciate over time, investors can receive higher rental payments and larger profits when properties are sold.
Rental income or profits distributions to investors are issued according to when the investment matures. While some property syndication investments mature within six to twelve months, others may not mature for ten years. All investors then receive a share in the total profits.
Sponsors frequently claim a profit at the start of each investment deal for property locating and acquisition. This acquisition fee is usually equal to 1 percent of the investment equity funded by the limited partners. In some instances, this fee may equal from 0.5 to 2 percent.
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Commercial Residential Real Estate Loans
Available only to investors who have a few properties under their belt already, these loans can be obtained much quicker provided you can prove you qualify.
With shorter terms and higher rates of interest, some have called this a hard money loan, but the lenders prefer the designation mid-term loan. The profitability of the property youre investing in and your own property portfolio will be the deciding factor on the terms offered.
The Best Way To Invest In Real Estate Out Of State
If youve decided investing in real estate out of state is right for you, the next step is making it happen.
Sure, you could do it the traditional way and hire a real estate agent and view properties, but its not feasible if the market is a long distance from where you live. Unless youre investing in an area with a large number of DOM, a house will likely sell before you get out to see it.
Instead, here are your options:
- DIY. Look at the multiple listing service listings yourself using a site like Zillow, call real estate agents, and arrange for virtual viewings of the home. If you like the house and want to buy it, you can do most of the work from your own home but you may need a real estate agent you can trust with such a big job.
- Network. Build a network of real estate professionals around the country, so you know you have eyes and ears all over the place. When you find a property you are interested in, you can rely on your opinion and expertise when deciding if you should buy the property.
- Use a marketplace. Using a marketplace like Roofstock, which specializes in buying and selling rental properties, you know youre getting top-quality service. Roofstock does the research for you and can even certify some homes listed on their website, which makes them eligible for a 30-day money back guarantee. Many Roofstock properties come with renters already in them, too, making it easier to get started on your investment journey.
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Open Local Business Accounts
While you may not be obliged to file an in-state LLC to own real estate in a state where youre not a resident, you may decide for tax or asset protection reasons that you want to create an LLC to hold your investment properties. Fortunately, its not difficult to do and in many cases, can be done online. Your Realtor should also be able to assist you.
You will, however, need an in-state resident agent if you file an LLC. A quick Google search will reveal plenty of options for resident agent services in all 50 states.
While you can open a business bank account for your real estate investments in that state, youll probably find it more convenient to simply open the account in your home state instead. Before deciding whether to create a local LLC or bank account, talk to your Realtor, or an attorney, familiar with asset protection for real estate investors.
Why Invest In Rental Property Out Of State
There are four key reasons why investors purchase rental property out of state:
- Invest in geographic areas with population and job growth is strong
- Diversify a rental property portfolio with markets that best match your investment strategy
- Focus on the type of returns youre looking for, such as maximum cash flow, high appreciation, or total yield over the targeted holding period
- Operating expenses are lower in markets with fewer regulations, lower property taxes, and landlord-friendly laws
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Should I Buy A New Build Or An Existing Resale Property
You should consider buying new build properties over an existing resale property only if youre a seasoned investor who already owns a property or two. If youre a first-time investor, then you should consider resale properties as the more viable option. This is due to the mortgages available and the amount of money that needs to be put down upfront.
Real Estate Investment Trusts
Real estate investment trusts are funds that you can buy shares from on the open market. Unlike private real estate projects, REITs are traded just like stocks. Like stocks, REITs are essentially liquid — as long as you dont mind losing money if you have to cash out quickly.
You wont have to worry about property management or any of the day-to-day issues with REIT investing, but you should be concerned with the leadership of any REIT and how their money is being spent. Like with other fractional real estate investments, you want to be sure their debt is low, that they have a fair amount of equity they can tap in case of a market downturn, and that they have a long-term vision for their properties.
REITs are very transparent and have to disclose a lot of information about their income and expenses, making them a great way for first-time real estate investors to add a little real estate exposure to their portfolios. The risk with REITs is the same as with any kind of stock — the company could fold or you could lose considerable money due to someone elses mismanagement. Be sure to really explore the REIT before you make a buy.
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Does The Area Have A Low Median Or Average Home Price
A median home price represents the middle of the road, while an average home price is calculated by adding the prices of sold homes and dividing by the number of homes that have been sold. Together, median and average home prices tell the story of the market. Remember that an affordable market will have an average or median home price that is 3 or 4 times the average income. A non-affordable market will have average or median prices that are 10 times higher than the average income. Ideally, you want to purchase out of state rental properties that are in affordable markets so that you can increase your cash flow and anticipated ROI.
Real Estate Will Be The Weakest Stock Market Sector
The real estate sector has been a major underperformer this year. Through Oct. 28, the S& P 500 has declined by about 19% in 2022, while the Vanguard Real Estate ETF is down by 29%.
It’s not that the underlying businesses are doing poorly. For the most part, real estate investment trusts, or REITs, are designed to remain profitable and predictable in any environment. But rising rate environments are generally a negative catalyst for income-focused stocks like REITs.
I’ll spare you a long economics lesson, but the general idea is that when risk-free interest rates rise , the yields of “riskier” investments like stocks tend to rise as well, which causes share prices to fall. Since investors are expecting the Fed to raise benchmark rates by another 75 basis points in November and by at least another 50 basis points in December, I wouldn’t be surprised if the real estate sector has a weak finish to the year.
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It Can Take Time To Invest Out Of State
It takes time to establish any team, but can take even longer if youre not on the ground. It also takes time to choose the right market, and really learn the ins and outs of that market.
Youll need to dig around for information on the best rental areas, what kind of returns you can expect, where you should flip, and what areas you should stay away from. You wont have a high level of familiarity with the area, which means youll need to put in more time to even begin investing out of state.
Statistics Pertaining To Real Estate Syndication
Statistics from 2019 show that upwards of 120,000 property investors in the U.S. invested through syndications during that year. On average, the value of a sizable multifamily property offering equaled three million dollars. While limited partners funded from 80 to 95 percent of the initial capital needed, the sponsor funded from 5 to 20 percent.
The average preferred return for investors was 8 percent in a range of 5 to 10 percent. Sponsors received an acquisition fee ranging from 0.5 to 2 percent, and the average acquisition fee issued was 1 percent. Sponsors also received a property management payment of from 2 to 9 percent.
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