Out of state deals can be the biggest headaches and result in terrible financial losses. However, successful commercial real estate investors can find their most profitable, cash-flowing deals out of state. Here are 6 guidelines to help you recognize a good, cash-flowing out of state deal.
#1: Know Your Why
There are 3 main reasons why purchasing commercial real estate out of state is so attractive to investors:
Affordability
Properties out of state are more affordable, which means a higher return on investments, greater cash flow, and faster growth. For example, a 12-unit C-class apartment building in San Francisco will cost you roughly $7.5 million, but a 12-unit C-class apartment building in Dallas, Texas will cost you roughly $1 million. This is a huge difference in affordability. Let’s say you have a goal of building a portfolio of 1,000 apartment units in five years through syndication. This would be extremely difficult to achieve in California or other states with a similar market due to affordability. On the other hand, this goal can be achieved in a more affordable state like Texas.
Diversification
As an investor, it makes sense not to have all your real estate holdings in one area. That means searching out good, economically sound, and growing areas. When dealing with commercial real estate, there is no such thing as a national real estate market; it’s all about sub-markets. Just because one area in the US is at the top of the market cycle, doesn’t mean every other area is. It’s wise to diversify your assets into economically stable areas.
Increased Deal Flow
To create more opportunities of finding commercial real estate deals, you may need to expand your search areas. If you are an investor in a high-priced area like California, to increase your deal flow you may need to start looking inward to states like Florida or Tennessee.
#2: NEVER Buy a Property You Have Not Seen
It is never smart to purchase a commercial real estate property without seeing it first. Commercial real estate is a significant financial investment, and it would be foolish and irresponsible to invest so much money into a property you haven’t physically seen.
One of the reasons purchasing commercial property you have never seen is risky is because there are no consumer protection laws. When purchasing residential real estate, most states require the seller to provide a property disclosure with a list of anything wrong with the property. If the seller lies on the disclosure and you find out after closing, you have legal recourse. In commercial real estate there are no property disclosures required by law, it is purely buyer beware.
Avenues to Invest Long Distance Without Traveling:
If you want to invest in commercial real estate out of state without traveling, there are two alternatives:
1. Invest through Syndication: Syndication is the process of pulling money together from multiple sources to purchase a property larger than the investors could afford by themselves. With syndication you are a passive investor and receive a return on investment. I have a Video and blog post on, “The Basics of Real Estate Syndication”.
2. Invest in a REIT (Real Estate Investment Trust): A REIT basically buys large commercial properties and forms a company that sells shares to investors. You act as a type of shareholder in the company, like a stock. Check out my YouTube video on REIT to learn more about them.
#3: You Need Smart Guiding Principles
1. You need at least 10% cash on cash return: Having less than 10% puts you in danger of having negative cash flow. Also, a property with vacancies or needed repairs puts you at risk of just breaking even or having negative cashflow. This is not a problem you want to have from far away.
2. Hire a good property management company: You need to lead your search with the property management company. Which means it is important to hire a property management company that is well vetted, experienced with commercial property, and has a good reputation.
3. Invest where the population is healthy and growing: It is fine to invest in a more rural area, however the surrounding cities must be healthy and growing. These larger populations help support the smaller communities, providing it with a healthy flow of renters. Do not invest in a small rural town in the middle of nowhere with no big cities to support it.
4. Invest in cities that are investor and landlord friendly: Cities that have expensive eviction costs are not beneficial to commercial real estate investors.
#4: Purchase a Commercial Property that is Big Enough
When investing long distance, you need to purchase a property that produces enough income to afford a professional property management company. You cannot manage it from afar yourself, especially as a beginner. A beginner investor doesn’t have the necessarily skills needed to manage the money, maintenance, and marketing.
Some people try self-managing to save money but being cheap can be very expensive. In fact, some of the best deals out there are from out of state owners who tried to self-manage and failed. Despite the property’s enormous profit potential, because of poor management the owner wants out. These investors are not in good shape and are motivated sellers.
#5: Have Realistic Underwriting
Evaluate the Deal Thoroughly: One of the most miscalculated numbers that causes failure in commercial investing is property expenses. Property expenses are monthly operating costs and also include capital expenses like roofs, parking lots, siding, and major property updates.
When you assess a property that has failed, you can usually find the point where the owner miscalculated because they didn’t have an experienced advisers to guide them. You can overcome this potential problem by getting a mentor who is willing to share their knowledge.
Have Expert Due Diligence: It is of utmost importance to do your homework on the property physically, financially, and legally. This is crucial when buying any commercial real estate, but it becomes even more important when buying long distance because you are unfamiliar with the area.
Due Diligence Tips:
- Be at the property during the inspections.
- Your property manager is at the inspections.
- Familiarize yourself with the property market by conducting a rent survey. You can do this yourself or have your property manager do it. This will help you understand the landlord laws, trends, vacancies, and expenses.
- Develop contractor relationships.
#6: Advantages of Buying Commercial Real Estate Long Distance
- More Deals
- Increased Profits
- Greater Cashflow
- Grow Your Portfolio Faster
- Create Valuable Relationships.
BONUS TIP: Don’t Invest Beyond Your Knowledge
Commercial real estate investing requires a team and as a beginner it is very risky to strike out on your own. Having an experienced coach or mentor to help you step by step will keep you from making common mistakes that can derail your investments.
