The thought of investing in real estate and even out-of-state can be daunting to new investors. But with some knowledge and the right mindset, you will gain experience, and the process will be exponentially easier.
After the first unit I wrote about in the post below, my GF and I went on and bought 1 more single family and 2 more duplexes in Indianapolis.
Here are six lessons that we learned along the way, and I hope that they can help you bootstrap your own investment journey.
1. Don't over analyze
I studied real estate for more than one year before committing. Looking back, some of the time was very helpful, some of the time I was just hesitating between different markets.
Learning the ins and outs of real estate is definitely worth it. For example, learn to understand vacancies and capex, learn how to calculate cash on cash or even IRR, and studying market and neighborhoods.
However as a software engineer, I might have spent too much time trying to come up with an optimal best in the best markets, neighborhoods and deals, but real estate doesn't work that way (and that's how Zillow Offers fell apart).
Among the top markets you pick, you will thrive with most of them, so just pick one that you are most comfortable with. For the deals, as you analyze more and more of them, you will get a feeling whether they are good deals or not.
2. Pulling the trigger is the most important step
Imaging you are doing skydiving and bungee jumping, the first step is always the most difficult step. But knowing that you are mostly safe once you jump, you should do your best and pull the trigger. The experience afterwards will be wonderful.
Once you picked a market that you are comfortable with, do not hesitate and procrastinate. The more delay, the more doubt you'll have. You should immediately start to network with your local investors, get pre-approved, interview different agents and property managers.
Once you've pulled the trigger, just trust the process knowing that so many other investors have been following and have been successful.
3. Starting small
You don't have to start small, but it would reduce your risk to start with a cheaper house in better conditions.
The benefits of starting small is obvious, because my first house is around 200k, comparing to most houses in the bay area where I live worth more than 1 million, I don't have much to lose. Worst case scenario, I lost all my down payments, but let's be realistic here, even if the house is burnt down, property insurance will still cover most of that.
Your risk (and your profit) isn't going to be a lot, and that's a good thing. You closed your first deal, and that's the most important thing!
Now move on to the second and make more profits.
4. Scale Scale Scale
By the time we closed our first deal, we realized that the process is really the same for any residential rental: find the deal; crunch the numbers; make a competitive offer; inspection; close; get it rented out and profit!
The month after we closed, I spotted 3 deals that I know are good. We made 3 offers and we surprisingly managed to close on all three.
For a rental without too much rehab, you will gradually build a sense of what a good price is for each neighborhood, as well as the rent estimates. If you have enough for down payments, you can just monitor MLS (and Redfin, Zillow) and keep making offers. You will be able to grow your portfolio faster than you can think of.
5. Control the process
There are more to it than just giving your key to your property manager. Follow up with your property manager about what items need to be completed for the unit to be rent-ready, when the work would be completed, and when the unit is listed.
Ultimately, the units are yours. You shouldn't need to be hands-on or even micro-manage. Rather, be a good team manager. Make good goals and plans. Routinely check the progress of your team members to make sure that they can complete their projects.
6. Expect the unexpected
Septic tank is full right after closing? Some animal bit off the AC unit line? Dryer was stolen? Worse thing can happen and there are all sorts of tales on the internet. But these are what happened to our properties and then some.
As a savvy investor, this is exactly why you should be conservative in your calculations and leave enough for capex and maintenance. In the end, it's nothing but some extra expenses. Don't be afraid of these unexpected headaches, as long as you are prepared.
Conclusions
Investing in real estate out-of-state isn't hard at all once you actually get started. Do enough due diligence, and trust the process, and good luck!
