​6 Big Challenges of Out-of-state Investing

Being a newbie - and not uber-rich - investor in Los Angeles is sort of like being a minnow in a feeding frenzy of great white sharks. You might get a scrap here or there, but you’re just as likely to get eaten. So investing out-of-state became a very attractive option.

Fortunately for me, my hometown where my parents still live turns out to be a decent place to invest. So a year ago I bought a 7-unit mixed-use building in the historic downtown.

It has been a great investment so far, but I’ve learned a lot. And when a new BP member in the same situation recently asked me, “What did you find was the most difficult aspect of buying out of state?” I came up with six.

1. Getting Real, Unbiased Information

Probably the most frustrating challenge is the difficulty of getting good information. As you can imagine, when a realtor or lender or property manager finds out you're considering investing, they go into sales mode. So you're going to hear the most optimistic perspective on everything.

Even with people you trust on the ground, they aren't always going to be thinking like an investor. I was shocked to discover that my parents didn’t spend their time looking for economic, business, or population indicators of growth or decline!

To overcome this I just ended up talking to everyone who would talk to me. In addition to realtors, lenders, property managers, I made a contact at the Chamber of Commerce and they put me in touch with several landlords who owned similar properties in the same area. I googled the area and looked at any news that could be relevant. Was new business opening? Closing?

After enough talking I was able to get enough of a sense of the local conditions and trends to feel relatively confident. But it’s always a great idea to evaluate the motives of those who are giving you information.

2. You Need a Good Agent

This may sound ironic, but as a real estate agent it irked me to have to use a real estate agent! I’m used to getting my own commissions, dang it! And I know I’ll do a better job representing myself.

But this is where local connections can help you. My mom posted a request for agent referrals on facebook, and when 3 independent sources all recommended the same realtor I contacted her.

She turned out to be great, and even gave me a referral fee of 25% of her commission. She also put me in touch with my property manager, whom she had used to manage her own properties as well. A good agent can solve a lot of problems and be worth every penny of commission. (Shameless plug for agents, I know. But true. Go realtors!)

3. Don’t Trust Past Knowledge

Even though this was my home town, I’ve been gone a while. A lot has changed, and I found that I couldn’t rely on past knowledge to understand the lay of the land.

Streets that were good are now not so good. Some of the older, established upper-middle class neighborhoods have become even older, while the newer developments are attracting the new upper-middle class. Changes to local law, new ordinances, everything you’d know if you lived there can be easy to overlook when you haven’t been there for a while. Even the change of traffic patterns can affect a property’s value. So if you aren’t aware of new stoplights, parking restrictions, etc. you can make big mistakes in your property analysis.

Having past knowledge and thinking you know the area can be dangerous. It’s better to evaluate the location as if you had never been there before and analyze everything.

4. The Emotional Element

As my first big out of state investment I wanted to be more involved. I’m used to handling building projects in New York for my job, even though I live in LA. But I found it was a little different for my own property. I wanted to be hands on. And one of the most frustrating things was the minutiae.

You forget how many little decisions go into an investment. When you’re remote, every one of those involves a phone call, email, photos (and re-teaching your parents how to attach a photo to an email!), and another phone call to explain and discuss everything. It takes patience and thoroughness on both ends. And trust. Lots of trust.

Those little decisions can become big issues if you rush them or get them wrong. And with your first remote investment you’re probably going to be emotionally resistant to delegating them.

5. The Extra Costs

Don’t forget to factor in airfare, rental cars, hotel stays, and other travel expenses when doing your property analysis. Calculate them into your “closing costs” as well as annual operating expense.

You’re going to want to visit your property(s) at least once a year. More if there are issues. But even if everything seems to be going well, you should walk your properties. Even the best property manager is not going to look at your property as closely as you, or care as much.

You also want to stay current with what is going on in the area where you invest. Even if you follow the local news and business developments, you will learn so much more by visiting. You need to continue to build relationships with your local contacts. Take them out to lunch, pick their brains (if you’re a zombie, those are one and the same!). Keep your information network strong with face time. (I have no idea where the zombie comment came from.)

That’s part of why I invested where my parents live. I knew I’d have a great excuse to visit them regularly… and write off the visit! Of course it’s a great place to invest as well.

6. Good Management

Even if you have people you know and trust on the ground, chances are they won’t make good property managers. As tempting as it is to save the 10% management fee and let my mom and dad collect the rents, I know there would be major issues with it.

First, they’re too nice. They’d believe tenant excuses and be too lax in rule enforcement. I’m incredibly lucky to have such sweet parents, but as property managers they would end up babysitting tenant’s kids for free while the tenants went out to spend their rent money at the bar.

Second, they don’t know the first thing about tenant screening, evictions, and any other laws or regulations pertaining to tenant-landlord relations.

Third, it wouldn’t be scalable. Maybe if you bought one SFR and rented it to a sweet elderly person, mom and dad would suffice. But if you want to grow your business, you need a professional organization that is set up to manage lots of properties well.

Fourth, and maybe most importantly, you’re going to strain your relationship with the people you need most. Asking a family member or friend to manage your properties, no matter how simple the situation, is going to add stress and obligations to their life and to your relationship with them. When something goes wrong, you don’t want your relationship with primary contact in the area to be in jeopardy. I can get a new manager, but I can’t get new parents.

Getting a good property manager can be tough, but I would rank it as one of the highest priorities.

Being aware of these 6 challenges can keep you from making a bad out-of-state investment mistake.

Thanks for reading!