Out of state investor’s guide to investing in Texas

At this point, the idea that Texas is the best real estate market for long term investors is a well-established reality. And as it gains more national publicity and exposure, we are receiving daily calls from interested investors that reside out of state: New York, Massachusetts, Las Vegas, South Carolina, Washington DC – you name it.  After they read articles about our Blueprint real estate investing strategy, they recognize the powerful impact that investing in high quality Houston real estate assets would have on their returns and retirement. Houston’s competitive advantage that springs from a strong job-producing local economy, affordable well located assets and attractive price to rent ratios has become hard to overlook.

However, from the viewpoint of an out of town real estate investor, it is one thing to recognize that the Texas market offers great investment opportunities. It is another to actually take that first step and acquire investment properties in that market. Inevitably, questions and challenges arise:

  • I don’t know the local market – How will I know which areas I should buy in?
  • How can I be sure that I will find a tenant soon after I purchase the property?
  • I don’t want to have to make a trip to Houston every time I buy a property –  that will cost lots of time and money. How can I avoid that?
  • I don’t want the tenant to call me in the middle of the night with a leaking sink. How will I manage these properties from far away?

Although they arise out of fear, all these questions and challenges are legitimate and every out of town investor should have an answer and a plan to address them,before they buy their first investment property. So we’ll take them one by one and provide those answers right here.

Knowledge of the local market is the crucial puzzle piece that, when absent, can derail a real estate portfolio and condemn it to fail. The entire Blueprint investment strategy hinges on the investor accumulating quality assets in great locations that will rent to great long term tenants and stay rented. These properties must be located in excellent school districts, nice and safe neighborhoods and offer easy access to freeways, shopping etc. That’s what attracts great tenants that lease for long periods of time, take care of the place like it’s their own and pay rent on time. We can help you get this right: Not only do we have vast knowledge of the market but we also share our expertise with you during your feasibility period  before you decide whether to move forward with the purchase. For every property we provide you with micro market statstailored specifically for that property, its neighborhood and the immediate vicinity. We show you what amount the property will command in rent (and why) as well as what the current market value of the property so you won’t overpay for the property. As part of a property proposal, we share with you all comparable rentals and sales for the neighborhood – so you can have the same data at your disposal as a professional appraiser. Last but not least, you will get a macro view of the overall market so you can see the trends of where the market is and where it’s headed during your investment time frame.

Every cash flow analysis starts with “Potential Rental Income” – for an important reason. Your ability to bring in rental income from a good tenant in a timely fashion is the foundation for the returns that follow. Falter here and the rest of the numbers are nothing but pro-forma, pie-in-the-sky projections that mean zip. So how can you be sure that once you close on your investment property there will be a tenant in place within 30 days or so? Those micro market stats I mentioned before will show you not only what’s the going rental rate for that area but also how long it takes an average property to get leased there. Before you buy, we make sure that those statistics show a market that has sufficient demand for the properties for rent in the area. And then, we pick great properties, make them move in ready and market them aggressively to bring in interested tenants. In 2012, we got 4-5 applications per property, leased out our properties in 21 days on the market (or less) and got two year lease terms on average.

When it comes to making trips to Houston, we recommend that each  investor who isn’t familiar with the Houston area, at least fly down once while in the process to purchase their first property. Usually a 2-3 day weekend trip is sufficient to view the property itself, get a tour of the different areas and get a feel for the town. During such a tour I will show you actual examples of investment properties owned by other investors so you can have a benchmark to compare. After that orientation trip, it is up to you if you want to come down for every property. Most our clients, come down the first time then close on additional properties remotely. Usually we are able to arrange for the closing documents to be emailed to you so you can sign them from where you live. Therefore, additional visits are an option but not required.

Property management is usually the elephant in the room for out of town investors. You can feel it after just a few minutes of our phone call that the “big question” is coming: How do I manage a property from thousands of miles away? There are two possible solutions to the long distance property management problem: Implementing a property management system or hire us to manage the property for you. In a nutshell, the first option minimizes the need for “active” management through systems for rent collection and repairs, a trustworthy broker that will help you find  and screen good tenants (I know a good one :-) , a handyman to handle miscellaneous items and an eviction service just in case. The second is self explanatory. The difference between the two is that investors who use our property management system save just over 30% of their cash flow before taxes that would have otherwise gone to management fees.

In closing, there seems to be a lingering stubborn idea that investors should avoid investing in markets that aren’t a short driving distance to their residence. While I understand the fear, I think it’s a recipe for disaster. If an investment is working the way it should, you shouldn’t have to drive by the property whether it’s located two miles or two thousand miles away. This illusion of control – that somehow the distance to the property determines it’s performance – leads investors to put their money in markets where it makes zero sense to invest. But at least, they get to drive by their money pit, right? You don’t apply this selection criteria with any other asset class. Do you only buy stock in companies where you can tour the facilities periodically? I rest my case. Take what the market gives you – don’t try to fit a square peg in a round hole and invest in way-past-their-prime markets just because they happen to be close to you. Pay attention to the fundamentals – economy, jobs, demand, supply, price. Work with a trustworthy adviser and implement systems to limit your risk. A decade from now you’ll be glad you did.

Are there any other concerns I forgot to address? Please let me know in the comments below or contact me. If you’ve been thinking about building a long term real estate investing portfolio we should at least talk. 713-922-2702 is my cell.

Orange Appeal

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