Today’s post was written for us by Rich from Rich on Money. Like Dr. Hartman who grew up to be a cardiologist, Rich was appropriately named at birth, possibly even unconsciously directed toward the path to wealth.
Today, Rich shares his thoughts on passive income generation through long distance real estate investing. If real estate interests you, this post gives some really stellar tips for success.
My name is Rich.
I love real estate.
I grew up in Southern California. I remember thinking about buying real estate as a kid. I was twelve years old. I thought if I could buy a house then, I would be able to sell it when I was eighteen and have enough money for a car! I was always fascinated by how fast real estate appreciated in certain places, especially near the beach.
Real estate is tricky for me. I’m in the military, which means I move every two to three years. Ten of the last sixteen years I’ve been overseas, including currently.
What kind of real estate investor moves every two to three years?
That will never work!
I’ve found a way to make it work for me. Over the past three years, I’ve purchased several buy-and-hold rental properties with cash. The income they provide has made me financially independent. Most of these purchases have been made from overseas.
Maybe some of my methods could be useful to you. I’ll summarize my advice in three main points:
- Fire people that suck
- Find the right management company
- Find the right real estate agent
Simple.
1. If you are not getting the service you need, find someone better (fire people that suck)
I’m an introvert, the kind of person who wants to find ways to avoid tackling problems head on.
That doesn’t work.
Through experience I’ve found the key to dealing with poor service from anyone is being brutally honest about what you expect and then giving them a chance to fix it. End the business relationship if they don’t or can’t give you what you need.
With my first rental property in D.C., I went through two different management companies. In both cases, I clearly explained the problems I was seeing with their service and made it clear I would get rid of them if they didn’t shape up.
In one case, their bids on work were coming in way too high. I sent a handyman I hired independently over to check on the work they were doing. Turns out they were ripping me off, so I got rid of them.
Here’s another example. My first real estate agent in D.C. was awesome. I decided to use him again to buy a second investment property. He was so busy with the crazy seller’s market of 2005, he decided to send his new rookie agent in his place. I clearly explained that his expertise is what I wanted. He made some weak excuses and sent his new guy anyway. I fired him and found someone better.
2. A property management company is more than just management
If I had to pick the one thing you must do right if you are going to be successful with buy-and-hold real estate in a city you don’t live, it’s having the right management company. First I’ll talk about why they are so important, and then I’ll provide tips on finding the right company.
Location, location, location
In Alabama where I currently own real estate, I have an idea where to buy based on the advice of my investor-friendly real estate agent. I also lived there for nine months while attending a military school. On top of that, I network with other investors in the area.
But the MOST important part of buying a house in a good location is checking with your management company. I always give them the address of the house I’m considering buying. They tell me if they think it will rent well.
Sometimes they have rentals on the same street, even next door. I’ve found rentability varies widely not just by neighborhood, but by which street in that neighborhood. Go too far down a certain street, houses stop renting well. This can make a big difference in your bottom line. Nobody will know this better than a management company with enough houses and experience.
House inspection
Before I buy a house, I get a professional inspection. This is helpful, but the most valuable information I get about the house comes from my management company.
They know what kind of problems to expect based on their experience with houses and renters over several years in that particular city.
The most important thing my management company does is actually inspect the house themselves, take pictures, and then call me to talk about what they think about repair costs and suitability for a rental. Sometimes they object to a house based on features they believe renters won’t like.
I’ve recently changed my mind three times on accepted offers based on their warnings. I consider that a blessing.
Referrals
Your management company is your best referral source. If you want to meet other investors, they can introduce you to those they work with. If your real estate agent isn’t cutting it, they may have a better one for you. They know lots of outside contractors to refer you to. I’ve actually gotten leads on properties to buy from them.
Caveat: Everything I explained above will apply only if you have a great property management company.
So Rich! How do I find a great one?
Do some detective work.
First, get as many referrals as you can from multiple sources. Use the forums on BiggerPockets, find investors who advertise rentals on craigslist, ask real estate agents, contractors, and mortgage companies.
Once you have some candidates, start digging for info. Talk to the owners of the management company on Skype. This is more personal than a phone call.
Ask lots of questions about how their fee structure works, how evictions work, and how they charge for finding renters.
Ask how many properties they manage, how many they own themselves, how many investors they work with, and how long they’ve been in business. I like companies that own several properties themselves. Shows they’ve got skin in the game.
They should be comfortable sharing this info. If they seem evasive, that’s a bad sign. They may be hiding their lack of experience.
Check their online presence, social media, and the better business bureau (BBB).
Ask for references. Get permission to speak to some of the investors that work with them. Also get permission to speak to some of the renters themselves.
You get my drift. Do some investigating to make sure they are the real deal.
Remember: A good management company is worth it’s weight in gold, and a bad one will cost you a lot of money.
3. Find an investor-friendly real estate agent
The real estate agent is your second most important team member for out-of-area investing. They get paid good money for helping you find a house. Make sure they earn it. Use the same advice above. Ask for referrals, and check their online presence.
Most real estate agents don’t understand how to work with a real estate investor. They don’t understand how many offers we make, how important buying a house cheap enough is, and the kinds of features we care about in a house. It’s best to find an agent who already works with investors. If not, you’ll have to “train” them to do what you need.
Your real estate agent has to be comfortable being uncomfortable. They will be making lots of low-ball offers to see who is motivated to sell. Some agents just won’t do this. They’re too “embarrassed”.
They have to be willing to look at lots of properties and take tons of pictures.
My real estate agent wasn’t perfect when I started using him, but as I explained what I needed and why, he made the necessary adjustments.
They should always follow through on anything you ask them to do. If you find yourself reminding them too often, let them know that is not acceptable. If they don’t shape up, find yourself a better agent.
The Rest
These are not as important as the three points above, but it’s a bonus if you can do these as well.
You’ll want to find and network with other investors in your area. They tend to be a friendly bunch, but don’t expect them to roll over and give you a list of every contractor they use. You may need to offer something useful before they will open up to you.
Like-minded investors can be found through the BiggerPockets forums, craigslist ads for rentals, real estate investment meetings (there may be an online presence of this), and referrals from management companies, real estate agents, contractors, etc.
It’s good to have a list of some trusted contractors. I’ll admit, I haven’t cracked the code on how to do major renovations while living far away. I’d want to be there in person for big projects. Let me know in the comments if you’ve cracked the code on this.
A last word of advice. If you are investing from afar, that doesn’t mean you never need to go there. There is no substitute in the world for meeting people face-to-face. Skype is second best, but it’s not near as useful.
I recommend traveling out in person to meet both your management company and your real estate agent before you actually buy a house. After that, travel out to see them and your houses as often as you can. Remember, the trip is a business tax write-off.
So that’s how I invest from afar. If you have advice to contribute, please add it in the comments section.
I’m happy to answer any questions. Comment or email me.
If you want to read more about how I do real estate and investing, check out my first blog post, My Wife Knows Money.
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I think your smart to invest in geographically diverse real estate. Being tied to one local market in my opinion is a mistake since real estate is location based by nature. I’m not someone that would directly buy real estate since I don’t want to deal with the direct headaches, but at some point I could see us buying a vacation home to rent out when we’re not there. I can also see us participating in crowd sourcing real estate or reits. Depending on the size of the portfolio I expect some of the things you’ve written here still apply.
Fulltimefinance recently posted…Show Me Your Friends
Thanks for the comment fulltime!
It’s hard for me to imagine ever buying a vacation home. I’d rather buy another rental making me money, then use that money to rent someone else’s vacation home!
I think your smart to invest in geographically diverse real estate. Being tied to one local market in my opinion is a mistake since real estate is location based by nature. I’m not someone that would directly buy real estate since I don’t want to deal with the direct headaches, but at some point I could see us buying a vacation home to rent out when we’re not there. I can also see us participating in crowd sourcing real estate or reits. Depending on the size of the portfolio I expect some of the things you’ve written here still apply.
Fulltimefinance recently posted…Show Me Your Friends
Interesting post! As someone who lives in a HCOL area where real estate is insanely expensive, owning properties from a distance is probably the only way to go.
Certainly something to consider in the future.
Thanks for all the great tips Rich!
Mr. Tako @ Mr. Tako Escapes recently posted…Who Wants Free Entertainment?
I tried real estate in DC for awhile. While my tenants were easy and I never had a vacancy, the return on investment sucked. Gotta go where the money is!
Great post on how to effectively use real estate management companies and some of the challenges you’ve experienced working with them. For my rental, I manage everything myself. but, as I consider buying other properties (perhaps) I am certainly interested in outsourcing at least some of the work . Thanks for sharing!
Freedom 40 Plan recently posted…Is Your Car Buying Strategy Making You Richer or Poorer?
Nothing can beat having a good rental company do all the work for you. If you buy right, you build that management fee right into your profits, and still come out way ahead.
I have to admit not being able to touch a property makes me a bit nervous. Although I’m sure it shouldn’t make me any more nervous than owning a REIT. Great explaination and I’ll definitely be heading over to BiggerPockets to check it out.
Mustard Seed Money recently posted…Guest Post: Think Save Retire
I have bought, renovated, and rented out many houses now without ever seeing them in person. It gets easier. I love it!!
I currently own 6 properties in Lancaster, PA, which I manage myself. I’m considering managing some property for an investor, we are currently discussing details and they type of property he’d be interested in. I agree that having a good team is essential, as I’ve had a few bad contractors, and I’ve overpaid for some other projects. I like how you kept your advice simple and on point, real estate investing doesn’t have to be complicated.
Thanks Leisure,
I commend you for managing those 6 yourself. I managed my one townhouse in DC for about 10 years and it wasn’t too bad.
In response to your advice about finding a management company who owns some properties themselves to show they have skin in the game, Aren’t you worried that your management company will direct the best tenants to the buildings they own?
They don’t make any money from you unless your property is rented out.
Ooooh, this is great to know. I would be nervous to do long-distance real estate but I know many people do it successfully. It’s all about having a reliable team and hopefully scoring non-crappy tenants.
Mrs. Picky Pincher recently posted…How to score great meat if you don’t know a rancher
I have a long distance real estate and have been lucky thus far. Haven’t had the dreaded phone call at 2:00 AM that the hot water heater broke or that the heaters have gone out, my old condo is in Chicago. I’ve done it for two years and I honestly have done it because I moved for a job and the place is more like an anchor than it is a profit generation machine. I’m with Mrs. Picky Pincher where I’d rather be rid of it even though I’m not really losing money on it, it doesn’t help me get my SWAN on. I’m definitely gravitating towards REITS with solid dividend track records. Great post though, I appreciate the insight/difference in opinions.
Duncan,
I hear you. Your situation is different than what I’m doing. You are more of a reluctant landlord. I’m picking locations and buying at low prices with renting it out for passive income as my only goal. My return on investment is better than s&p500. Also, I pay cash for these properties, so I’m worry free.
I am (at least thus far) too lazy to do the homework needed in order to diversify into real estate. I own REITs, and that is as far as I’ve been willing to go. I enjoy being a real estate voyeur though, and hearing stories like yours. This is my version of a reality show : )
Mrs. BITA recently posted…The Complete Backdoor Roth How-to
Great tips. I bought a rental property long distance also since I live in NYC and it’s too expensive here. I got referrals from the BP forums and found a company that was highly recommended. I definitely agree that the PM is the most important. There have been some maintenance issues but it doesn’t seem like they’re overcharging. Of course I am really not that knowledgeable about how much it should costs either so that can be problematic.
Thanks for this! I’m just starting to look into different types of real estate investing, and there’s something very attractive to me about buy-and-hold rentals with a property management company. Of course, like Mrs. BITA above, I’m also thinking a bit about something even more hands off, like REITs 😉
Stephonee recently posted…Save Your Savings!
Yes! More people need to know this is possible and not that hard. It is probably even easier than doing it in your own city because it forces you to pay professionals to do a lot of the work. Yet the returns are still incredible.
Thanks for sharing the tips Rich.
Brian – Rental Mindset recently posted…Rental Property Umbrella Insurance – Am I in La La Land?
Brian!
Thanks for the comment. I know you’ve done well. Keep up the great posts at your website!
I’ve always shied away from rental properties as I hate the idea of having to deal with tenants. I’ve always thought that if I rent out my current home someday, I’ll hire a property management company to handle tenants and repairs. Never thought of the headaches that come with a bad property manager. Maybe I’ll stick with stocks and real estate crowd funding 🙂
Go Finance Yourself! recently posted…The $900,000 Decision: Trading Money for Time
We are thinking of dipping our toes in real estate investing once we retire. I had originally thought about buying a vacation home and renting it out while we aren’t using it, but I’ve come to realize that’s not a very profitable approach. As you mention, finding a good property management company seems to be critical. Thanks for the advice on finding a good PM.
Mr. Need2save recently posted…The Decade of Big Decisions
Buying vacation homes doesn’t make financial sense to me. Airbnb is my personal collection of other people’s vacation homes that I can use whenever I feel like it!
Shawn,
Good times in Ecuador. It almost seems like a dream.
I remember you have quite the portfolio. You’ve done well for yourself. What makes you want to sell? Someone else might take you up on that!
Take care!
I get these questions all the time. I invest in Portugal, and I live in Germany. Its a bit complex, but nothing a good property manager can’t do!
Great points. More investors should consider geographically dispersed real estate and get over the reluctance to having someone else manage the property. The management cost is a tax write off and well worth the expense. I have purchased rental real estate from afar, and it’s worked out great. Takes a lot of the emotion out of it that comes from being in the area and actually seeing the property. Inspectors and management are generally objective. I wish I would of had this approach 10 years ago.
Excellent post Rich. When you are analyzing potential properties, how big of a factor does potential rent come in to play. Is there a minimum cash flow estimate that you are looking for. As I understand it, you only buy properties with cash (i.e. you don’t get mortgages). If that is still the case, do you always keep “investment property money” in a quick/liquid account or do you take money from your investment/brokerage accounts. Thanks again for the amazing article.
At least 10% roi. I don’t have any mortgage expenses. All cash. I used to pull money out of my index funds. At the moment, I have $$ sitting in cash, as I sold my property in D.C. that was paid off, but not performing well as a rental. Knowing what the rents will be is everything.
Rich
Very interesting post! These are great advice for people who are thinking about investing from distance! I also like your first advice, very subtle and to the point! Thanks for sharing!