Not all investors live in a “hot” real estate market. So how can investors take advantage of opportunities to invest outside their local area, potentially thousands of miles away?
In the case of Equity Trust's 2014 Self-Directed Investor of the Year, Arnold from Michigan, long-distance investing success is not only possible but available with the help of the internet and a sound plan in place.
Arnold has lived in Michigan for more than 28 years and has prior experience investing in real estate outside of an IRA. While attending a local real estate seminar he learned about the concept of self-directed IRAs and the ability to invest in real estate with tax-advantaged retirement funds. As he recalls, “in some cases I was losing money or breaking even on my investment properties due to the tax implications.”
Research is paramount to Arnold’s success
During his research of potential IRA custodians, Arnold approached his local bank and said he was interested in setting up a self-directed IRA to invest in real estate. “They didn’t know what I was talking about,” he recalls. He then contacted his current IRA custodian to transfer funds and open a self-directed IRA, but was told they did not offer that type of product. He learned most traditional custodians and banks do not offer self-directed IRAs.
After extensive research, Arnold decided to open an IRA with Equity Trust so he could begin his real estate investing in a tax-advantaged account.
The importance of the internet, ingenuity, and a strong team
Arnold grew up on the eastern seaboard and considers anywhere from Florida to Maine as his target market. He routinely scours the internet for investment opportunities and considers it one of his greatest tools. He is able to conduct his due diligence, analyze the market and location, and identify team members who can help make the investment happen.
During one of his searches, Arnold came across a property in Hilton Head, S.C. that was on the auction block for the third time in the last 60 days. He knew the area enough to know that this was an opportunity worth investigating.
Vetting an investment more than 1,200 miles away
Again, Arnold took to the internet. He found several real estate agents in the area and reached out to them by email and phone. As he recalls, “if the agent didn’t respond promptly and professionally I knew they would not be a good fit.” He eventually decided on a local real estate agent in the Hilton Head area, and asked her help investigating the property in question.
She was unable to enter the property but researched to find old photos and interviewed people who had been in the home recently. She also provided Arnold with rental market and sale price analysis, contacts in the area for property management and contractor services, and advised him on a reasonable bid limit for the auction of the property.
It was helpful to have someone as a local point of contact, but Arnold’s research was not yet complete.
Arnold used Google maps, specifically the street view feature, to look at the property, homes in the neighborhood, and to get a feel for the area in general. He was able to research local school districts, migration patterns, population trends, and demographic information. He found information on rental rates, vacancy rates, local home prices, and anything else he was interested in via the internet.
“I typically look for growing areas,” he explains. “If a city is growing or doing something that attracts people to live there, it’s worth a look.”
Armed with his research and a trusted local real estate agent, Arnold felt confident bidding on the property. His IRA was able to win the auction for less than the maximum bid he had decided on and purchased the property with his self-directed IRA.
Managing the rehab process with online resources
After the purchase was complete, his agent was able to enter the home, send pictures, and assisted Arnold in determining what was needed for the rehab. He then hired local contractors or department store employees to measure what was needed for each aspect of the project. “Most of them didn’t realize I didn’t live in South Carolina,” he recalls.
Here’s a summary of his rehab process:
Local contacts in Hilton Head handled the measuring for each aspect of the rehab and provided Arnold with the details for new carpet, kitchen cabinets, paint, granite countertops, bathrooms, and more.
Arnold visited his local Home Depot in Michigan to choose materials (drywall, paint, etc.) and received installation quotes based on the provided measurements. He then ordered the needed supplies from the Home Depot in Hilton Head near his investment property and paid local contractors in Hilton Head to install the items.
Equity Trust’s online account management tool, eVANTAGE, allowed Arnold to pay contractors and supply stores directly from his self-directed IRA.
After two months of long-distance management, Arnold went to Hilton Head to check on his investment. “By the time I arrived more than 60 days after the purchase, 95 percent of the work was done,” he says. All that remained were some finishing touches, appliances, and furniture.
Where do you think he found those? Naturally, it was the internet.
Arnold was proud to announce that all the appliances and furnishings in the home were either reclaimed or came from the secondary market, with the exception of the refrigerator and sofa. He was able to find stainless steel appliances at a discount through Craigslist and utilized the local contractors to find cost-effective rehab solutions.
Double-digit returns on a long-distance investment
With monthly rental income around $800-$900, Arnold would break even, but he decided to test the market. He posted an ad on Craigslist with a monthly rent of $1,500 and received only one call. When he lowered the price, the calls began to pour in.
He currently has a tenant with a three-year lease paying $1,250 a month, netting Arnold an approximate 33 percent return on investment (ROI) per year tax-deferred back into his IRA. Arnold is now faced with a tough decision: rental prices in the area have increased to $1,800 - $2,100 per month. With the improvements and appreciation he estimates he is now sitting on $40,000 of added value in the property.
He is currently deciding between holding the property, possibly raising the rent, and keeping the cash flow or selling the property.
Furthermore, neighbors of his investment property have contacted Arnold and thanked him for rehabbing an eyesore, filling the unit, and helping to increase the value of their neighborhood.
Not bad for an investor over 1,000 miles away.