Buying out-of-state rental properties goes mainstream
New businesses help people overcome the hurdles of finding, securing, and managing rental properties in far-flung locales.
Back in August of 2010, I bluntly told people to buy Las Vegas real estate. I noted that the median home in Las Vegas — a 3 bedroom 2 bath detached property — cost less than $500 per month to own while rents averaged over $1,000. Here is what I told everyone who would listen:
“Anyone thinking of investing in Las Vegas, now is the time … because the price-to-rent ratio is outstanding, and unless you are buying in the worst neighborhoods, I don’t see how prices could go much lower … and the rental stream makes ownership there very rewarding. I am bullish on Las Vegas real estate because I perceive it as the best buy-and-hold value we will see in our lifetimes.”
When I went out to Las Vegas, I needed to overcome the biggest hurdles every investor in residential real estate away from home needs to overcome.
First, I needed to find the right properties.
Second, I needed to acquire the properties once I found them.
Third, I needed to find competent management.
If any one of those elements is missing, the investment fails.
My journey was not without its trials. Las Vegas is a wretched hive of realtor scum and villainy. Three different realtors attempted to steal money from me and the investors I represented, and I went through two management companies before I found the good one I use now.
Shevy watched the success I had in Las Vegas and duplicated my efforts in Orlando. He’s already secured properties for several local investors in that market. But like my experience in Las Vegas, the window of opportunity closes quickly, and although good deals abound in the Orlando area, the deals aren’t as good as they were a year ago.
What Shevy and I learned is that establishing a beachhead in a new market requires a lot of work. It takes far more time and effort than most people can put toward the venture. Further, it’s a difficult business model to sustain because markets change, and opportunities can dry up quickly.
Despite these challenges, some upstarts are up to the task.
By David Randall, October 7, 2016
Even with a good salary as a data scientist at a San Francisco technology firm, Yang Guo, 30, knew he couldn’t afford a home in the Bay Area, among the priciest U.S. markets.
He still wanted to own property in addition to stocks, however, and soon found a way to buy cheap rental houses in faraway cities – and to outsource the associated hassles to HomeUnion, a three-year-old startup in Irvine, California.
The firm is among a small crop of new companies, including competitors Investability and Roofstock, that offer ways to buy, renovate and manage properties in markets that command relatively strong rents compared to their low home prices.
These companies face the same issues Shevy and I faced when setting up new markets. Of course, it’s a little easier when venture capital puts up the money to cover the cost of pioneering these markets.
The risks remain the same as any landlord faces, from vacancies to broken appliances to the potential for a rent- or home-price downturn. …
The companies are pulling in money from clients in costly coastal markets that is boosting demand and home prices in the lower-cost cities they target. “In the last 12 months, I’ve seen more cash buyers from California than I’ve ever seen in my career, and I’ve been doing this for 25 years,” said Anne Callahan, a real estate agent in Cleveland, Ohio, where the average rent for a single-family home is up 4.2 percent over the last year, according to Zillow Research.
Ultimately, the influx of new cash from these investment groups will extinguish the opportunity they set out to exploit. I’m hopeful the service they provide will endure, but over time, the activities of these companies will equalize prices across many of these markets, just as the REO-to-rental funds did.
Earlier this year, Guo bought and fixed up a small home in the suburbs of Birmingham, Alabama that he found through HomeUnion. He purchased another home in the suburbs of Columbia, South Carolina – spending about $60,000 on the pair.
Now, from his apartment in San Francisco’s trendy South of Market neighborhood, Guo collects monthly checks from tenants he has never met in properties that he has never seen, all located more than 2,000 miles away.
“There’s too much risk with buying property in the Bay Area,” Guo said. “As long as the cash flow is coming and hitting my bank account, I basically don’t care about seeing them in person.“
I never met any tenant in any of the properties I manage. I don’t know their race, ethnicity, religious affiliation, their likes, dislikes, their children, nothing. I only know their money is green, and it either comes in reliably, or they get replaced with someone new. What benefit would I gain from meeting these people?
Buyers like Guo are attracted to less glamorous regions where home prices and rents have risen at modest rates in the housing recovery. They’re eyeing steady income rather than rapid home-price appreciation.
Good idea, wouldn’t you say?
“It’s all people from the coasts coming to us and saying, ‘We want to find a way to buy properties out of state,’” said Don Ganguly, the chief executive of HomeUnion. …
He takes some of out every paycheck and earmarks it for real estate, hoping to build a portfolio of at least 10 rental properties for less than what it would cost to buy a single home in the Bay Area.
“There’s nothing like the competition that you see in San Francisco,” he said.
It’s nothing like you see anywhere in California.