Mention long distance real estate investing in your local investor’s club and you’re likely to get some very strange looks. Keep it up and it won’t be long until you’re branded as someone who likes to buck conventional wisdom.
But how wise is conventional wisdom?
When your brain trust consists of local small-scale investors, then the advice is going to be consistent with their reality. So it may be good advice for what it is they do, but do you really want to do what they do?
When I first started investing in real estate, I heard things like:
- Invest near you so you can drive by the property and keep an eye on it
- Buy single-family homes and manage them yourself
- Be a one-person show and do as much management and repair as you can
- Sweat equity is important
- Fixing and flipping is an easy way to make money, they do it on TV
Local investors may think this way and maybe it works well for them. But what do professional investors think? Institutional investors, like major college endowments, pension funds, and insurance companies have large portions of their portfolios in real estate.
Does the dean of Harvard drive by the endowment’s real estate and check on rental property tenants? Do the teacher’s unions send teachers out to do repairs on the weekend? And is the CEO of Northwestern Mutual Insurance Company evaluating your neighbor’s house to see if the single property is worth flipping?
The answer to all of these questions is no, no, and heck no!!!
Instead, they get out of the way and have real estate professionals manage their rental properties. You can too. We’ll discuss this further in our guide to long distance real estate investing.
What is Long Distance Real Estate Investing?
Long distance real estate investing is when you invest in properties outside of your local community, with an emphasis on out-of-state properties . You can invest in real estate locally, but you don’t have to. You can find investment properties in the best real estate markets across the entire country. Either choice can work, but there are pros and cons to both.
If you have management expertise and plan on getting your hands dirty as a landlord then you’ll likely gravitate toward being an active investor.
Active investors who need to be onsite routinely for property management operations to go smoothly should invest in their local market. Just understand that if you aren’t going to hire professionals, then you should become one. Successful investing and operations require expertise in multiple areas. Some of these include:
- Submarket analysis
- Property financial analysis
- Ability to secure debt financing
- Regular servicing of that debt
- Adherence to federal, state, and local landlord-tenant laws
- Rent Collections
- Repairs and maintenance
- Creating and implementing a capital improvement plan
- Maintaining proper insurance
- Handling complaints and evictions
- Overseeing move-outs and move-ins
- Cash flow management
- Vacancy rates
- Cap rates
- Paying invoices
- Keeping books
- Filing property taxes
If you don’t have expertise in these areas, you should seriously think twice before moving ahead. After all, expertise matters. Would you let someone work on your car that has little to no experience under the hood? Would you let your neighbor remove your appendix if they aren’t a surgeon?
But even if you have the requisite energy and expertise to successfully manage investment properties, you might think twice given the time commitment. It largely depends on your overall goal. Are you investing to grow your nest egg and secure your future? Or are you investing to give yourself a job as a real estate agent and property management company?
If you already have a job and you have better things to do with your time than managing rental properties then passive investing is likely right for you.
Passive investors have more options. They take a hands-off approach to multifamily real estate by investing alongside professional real estate syndicators. Professional real estate management companies offer several leverage points to take advantage of. They can:
- Access professional Investments in high-quality markets regardless of their local real estate market
- Pool their money with other investors to buy bigger and better out-of-state rental properties
- Access larger properties and benefit from economies of scale
- Access professional management and their team of experts to maximize efficiency and profits
- Real estate passive income allows people to benefit from the investment without tying up their time with management headaches
What are Some Tips for Long Distance Real Estate Investing?
First, get out of your way. Fight the urge to think small. Fight the need to be in control. It can be scary handing the reins to someone else. But if you’re an amateur real estate investor, you’re likely losing money because of your inexperience.
Even those with more experience are still sacrificing their valuable time to operate their rental properties.
Instead, you can invest with professionals who do this for a living. Many of these people have years of experience and a college degree focused on apartment management and operations. They utilize their expertise to maximize returns which benefits investors.
Once you decide to explore long distance real estate investing using a professional syndicator, the next tip is to do your due diligence. The out-of-state properties syndicator you choose is as much or more of a factor in the profitability of your investment as the chosen property.
So vetting that syndicator is critically important. If you don’t have a system for doing that, you should check out our Private Real Estate Evaluation Framework. It’s designed to help you vet syndicators and find the right one for you.
Investing in a Real Estate Investment Fund
Another opportunity available to long distance real estate investors is investment funds. Instead of investing in one property in one local market, a fund can provide the additional benefit of diversification by investing in multiple properties in multiple markets.
Out-of-State Real Estate Investing – The Advantages of a Fund vs a REIT
Whether you invest in a fund or a real estate investment trust (REIT) you’re typically investing in properties that are in multiple locations. With a fund, you directly invest in properties using an LLC ownership structure.
Alternatively, an investment in a REIT is ownership in a company that owns real estate. That ownership comes in the form of stock. So if you’re looking for diversification outside of the stock market, you aren’t getting that with REITs.
If you look at correlation coefficients, you will see that REITs tend to be highly correlated to the stock market. That means when the stock market goes up, REITs go up. And when the stock market goes down, so do REITs.
Direct ownership of real estate through a real estate investment fund is different. Correlation coefficients have shown that direct ownership in real estate is far less correlated to the stock market. In addition to the diversification benefit that real estate funds have over REITs, there are a couple more benefits. First, just as the stock market is highly volatile, so are REITs. This is unfortunate because direct ownership of multifamily real estate is a highly stable asset class. And the higher Sharpe ratio of direct ownership vs REITs proves this fact.
Also, real estate is well known for its tax efficiency. The depreciation benefit alone can be material. Unfortunately, you can’t benefit from depreciation directly within a REIT. Funds, on the other hand, can pass that depreciation benefit to their investors for tax savings.
37th Parallel is a Trusted Consultant for Real Estate Investing
It’s our commitment to provide you with actionable information to help you learn about and invest in multifamily real estate. In addition to providing educational content, we also partner with individual and institutional investors to buy high-quality A/B grade multifamily properties in growing profitable markets in the South and Southeast regions of the United States.
Multifamily is all we do and our 100% profitable track record over more than 1 billion dollars in transaction volume speaks for itself. We offer investors a hands-off white-glove approach to investing in apartments. We take care of everything, while our investors collect checks and depreciation to minimize their tax burden. Let me share with you more of our process.
Our Investment Process
As a simple overview, our process looks something like this.
Market and Location Suitability
If long distance real estate investing sounds good, but you’re not sure where to start don’t worry about it. We handle nationwide market analysis for you long before we ever look at properties.
We utilize a thirty-point analysis to target out-of-state real estate markets. Things like population growth, job growth, diversity of job centers, landlord-tenant laws, income growth, and many more are all evaluated to find markets that can grow and sustain a healthy rental market over the long term.
Once we find quality markets, we analyze submarkets within those markets looking for areas that will allow us to provide a clean, safe environment for our residents. We want to be in areas with good schools, low crime rates, and proximity to groceries, entertainment, and restaurants just to name a few.
Once we’ve targeted quality markets, we will develop relationships and deal flow within those markets. Yes, we’re investing in physical apartment buildings, but the reality is that real estate is a people business. Every broker in our target markets must know who we are.
We’ve developed a reputation for doing what we say we’ll do within those markets. Developing those relationships can bring us things that other syndicators don’t get. For example, we frequently hear about a rental property that will be coming to market before they are listed.
It’s important to develop strong deal flow because our conservative underwriting approach requires us to look at hundreds of properties each year, just to acquire three to five of the best deals.
Protecting your investment dollars is our number one priority. We take it seriously and pass on a lot of properties. We won’t bring our investment community a property unless we believe that it will yield a double-digit annual overall return.
Once we acquire a quality property, it’s time to maximize its operations. There is a science to making things work ideally.
That’s why our operations team is headed by people with decades of experience. We have people with college degrees in property management and extra training credentials like the Certified Property Manager certification from the Institute of Real Estate Management. These are people who know how to maximize the value of any property in any asset class.
Collectively, our team has managed billions of dollars worth of real estate. They know how to get things done. And improving the property and instituting systems makes the experience of living in the property better for the residents. That increases retention and maximizes returns for the investor.
Liquidity and Distribution
With operations running smoothly, we can focus on a capital improvement plan that provides value for the residents and more income for the investors. Excess income gets distributed to the investors quarterly during the operations phase of the investment.
The growth of net operating income increases the value of the property. And depending on the exit strategy, there will come a time to liquidate that property. While past performance doesn’t guarantee future results, we are proud of the fact that to date, our average annual return on liquidated properties is 17.96%.
We’ve made money on every multifamily investment for our investors. And we’ve made money in good times and bad.
Contact Us for a Long Distance Real Estate Consultation
Everyone’s financial situation is different. And while our investments have benefitted numerous accredited investors, that doesn’t necessarily mean they are right for you. For that reason, we designate office hours for our team who are dedicated to answering your questions and helping you determine if investing in apartments is right for you.
Schedule a call today to learn more about long distance real estate investment opportunities with 37th Parallel Properties.