Out of state investing for fatFIRE?

Question

I live in a state with high real estate prices where the cash on cash return isn't any good, it's more of an appreciation game here. My goal is to make 100k a year "passively" (or at least achieve financial independence).

If I start investing say 40-60k a year into real estate in a low cost area (looking at Cleveland or Indianapolis), get a 20% cash on cash, it'll take me around 6-7 years to achieve that 100k yearly passive income.

I would prefer to do my own research and use zillow to buy properties instead of turn-key companies, since I think the cash-on-cash would be much greater. I would use property management companies to manage the properties.

Does anyone have experience with this type of goal? How do you settle on which market to buy in? I don't have any relatives or friends in any of the low cost markets.

I have landlord experience in my own market and have been able to achieve good appreciation, but the little cash flow just doesn't make sense for my goals.

Corby Goade · Answer

I live next door to you in Idaho and have lots of experience in markets like yours in Ashland. I'd suggest you rethink your strategy. Investing in apprecaiting markets will be much more difficult in the short term, but infinitely more profitable in the long term. There are really two types of ROI you'll see initially, depending on your market(appreciating VS cashflowing), as you've suggested, but the returns are likely different than you think they are. Here are the general highlights:Low cost, cash flowing markets: Immediate cash flow. Usually lower quality tenants, higher vacancy rates, higher Capex, maintenance and turnover costs. Lower appreciation, rent increases usually track wth inflation, so over time, your ROI doesn't increase and equity doesn't provide you with leverage. Higher Cost, lower cash flowing markets: Opposite of the above in basically every way. More passive, higher quality tenants and holding costs. Rent increases are based on supply and demand and typically increase at a much higher rate than inflation, which means over time, your ROI increases exponentially. Appreciation is typically more aggressive and reliable over time, so as your value silently grows, you can leverage and scale your portolio much faster, and as your ROI grows exponentially across your portfolio, not ony will you likely achieve FIRE more quickly, but you'll create generational wealth.I'm definitely biased because I've seen what this type of investing can do for my own family and have also seen so many investors pivot after seeing the reality of those high cash flow investments. One final thought- I'm defintely not suggsesting you invest in Oregon, WAY too tenant friendly, but there are markets out there that are landlord friendly and tick all of those other boxes. Best of luck!

Drew Sygit · Answer

@Ellie NarieWe think the Midwest is a GREAT place for OOS investors to consider! YES, we may be a little biased, but check out our blog here on BP comparing Detroit to other cities and Deep Dives on Metro Detroit cities & neighborhoods: https://www.biggerpockets.com/... Your biggest question shouldn't be WHERE to invest, but HOW you will invest! Many OOS investors set themselves up for failure because they don't truly take the time to understand: 1) The Class of the NEIGHBORHOOD they are buying in - which is relative to the overall area. 2) The Class of the PROPERTY they are buying - which is relative to the overall area. 3) The Class of the TENANT POOL the Neighborhood & Property will attract - which is relative to the overall area. 4) The Class of the CONTRACTORS that will work on their Property, given the Neighborhood location - which is relative to the overall area. 5) The Class of the PROPERTY MANAGEMENT COMPANIES (PMC) that will manage their Property, given the Neighborhood location and the Tenants it will attract - which is relative to the overall area. 6) That a Class X NEIGHBORHOOD will have mostly Class X PROPERTIES, which will only attract Class X TENANTS, CONTRACTORS AND PMCs and deliver Class X RESULTS. 7) That OOS property Class rankings are often different than the Class ranking of the local market they live. 8) Class A is relatively easy to manage, can even be DIY remote managed from another state. Can usually allot 5-10% vacancy factor and same for maintenance. 9) Class B usually also okay, but needs more attention from owner and/or PMC. Vacancy and maintenance factors should be higher than for Class A as homes will be older, have more deferred maintenance and tenants will be harder on them. 10) Class C can be relatively successful with a great PMC (do NOT hire the cheapest!), but very difficult to DIY remote manage. Vacancy and maintenance factors should be higher than for Class A or B. Homes will have even more deferred maintenance and tenants will be even harder on them. 11) Class D pretty much requires an OWNER to be on location and at the property 3-4 times/week. Most quality PMCs will not manage these properties as they understand most owners won’t pay them enough for the time required and even then it’s too difficult successfully manage them. ***Only exception is if an owner has plan & funds to reposition Class D to Class C or higher. https://www.biggerpockets.com/forums/776/topics/960183-what-they-dont-tell-you-about-cheap-rental-properties?highlight_post=5562799&page=3#p5562799 Also, SERIOUSLY consider - do you really have the time to be a DIY landlord or should you hire a PMC? Good luck with whatever you decide😊

Lionel Li · Answer

It's great to see different thoughts on this matter. It really boils down to the appreciation vs cashflow debate. I'm also in a high cost real estate market with little to no CoC return. I've spent a whole year trying to make my area + surrounding cities and states work before finding affordable OOS rentals as a possible investment. I've purchased the C-D (many C's and one D) properties in Indianapolis in those years, around the same time this predatory "turnkey" company in Indy scammed a ton of investors. I've purchased these properties that needed a lot of cosmetic work and BRRR'd them one by one. Now fast forward 4 years, those properties 7x'd my net worth, my net rental income is 85% *before reserves* of my W-2 take-home pay. Some people will say I got lucky, others will say I'm smart, but all I did was leave my ego at home, pretend I know nothing and leverage the experts in the market. My equity and cash flow today is directly correlated to the people that I've leveraged in Indy, the only thing I brought to the table was trust and grit to get through the tough times. I'd suggest you do it the way I did it (since you're a seasoned investor), start from ground up, learn the ropes in that market and don't do the turnkey route. In my opinion, turnkey is really for the investors that have little to no knowledge and don't want to put the work/time in at all. There's nothing wrong with that because everyone's situation and time commitment is different but, that would be wrong for you especially if you've already went through the process of owning rentals. I'd say your concern of cash flow is definitely valid. I don't think I would've been able to purchase as quickly as I did without it, I didn't have a lot of capital or a very high paying job that I'm able to leverage. You'll find that many investors that begin in the higher cash flow markets graduate into larger deals or deals with greater appreciation. I think when investors use cash flow to springboard them into more equity deals, it can create a lot more momentum than most people think.

Joe Hammel · Answer

Sounds like you're in a great position to make it all happen. We've seen lots of investors achieve FIRE in Metro Detroit, hence the name ;)Purchase: $80k-$130k Rent: $1200-$1500 ROI: 10-14% Cash flow: $250-$350/door Appreciation: Double digit (for past 10 years, will gladly send data) Location: C+, B- (suburbs and certain markets) We have over a dozen Fortune 500 companies just in Metro Detroit with huge Healthcare, Auto, mortgage, Amazon fulfillment, and more jobs. The bad reputation comes from OOS investors wanting $20k D market properties. We don’t buy those lol.

Brad S. · Answer

***************************************************@Ellie Narie I would pay attention to what @Drew Sygit posted, with regard to the different classes of properties and areas and I would also take to heart what @Don Spafford posted (quoted above). My experience is similar to Don's. My first rentals, were OOS and had amazing gross ROI's, 45% and 30% respectively. But, those returns would get wiped out very quickly with any moderate issue, even when accounting for V & C and capx. And flash forward 17 years later (a few years ago), and I finally sold them for a loss, due to the expense of fixing them up for sale and the time they took to sell. Even after all that time, rents didn't go up significantly and neither did values. I would've done better to pay attention to the specific class of area those properties were in. The houses were not bad and relatively newer, but the market in general, was a more secondary market I wasn't familiar with. They really ended up being more of a liability and I was happy to rid myself of those anchors, after all that time. Now, contrast that with another OOS rental I purchased around the same time as the others. The price was about 70% more than the others at the time and I had to put more down, about 3.5x as much down, but when I sold that one about 17yrs later, I sold it for about 70% over the original purchase price and 5x+ my original investment, along with more cashflow, less problems, vacancy, headaches, and shorter marketing time to sell, etc. This one was a better class property and market area and in a growing area. So, now I pay more attention to QUALITY of cashflow, rather than just the QUANTITY. I also would rather find a market area in the path of progress or growth (quality area), to have a better potential for appreciation. For example, In 2021, I exchanged a lower performing rental from an "ok" area into a brand new property in a good area with good population growth and potential. And the new rental benefited from this growth and unexpected Pandemic growth, of over 50% equity growth and more than doubling the cashflow, in the first year! And when I look up the current values of the first 2 rentals I mentioned above, their values (including rental) still seem anemic in comparison to the others, even with the recent run-up in appreciation. Bottomline for me, is to assess the quality, in addition to the quantity. I'd rather have 10 properties throwing out a consistent quality $1k/mth, than 40 properties giving me a precarious $250/mth. That said, I am sure there are other investors that have a better system for the lower priced properties and areas, and they are doing well - just not my cup of tea. Also, remember, there is a reason those cashflowing properties are cashflowing that much and it is usually due to lower demand (i.e. desire). If people want to live in a certain area, they are willing to pay more and sacrifice more to do it, and this partly drives up demand, which in turn drives up prices. This typically translates into more stability and greater appreciation over time. Then you can take that appreciation and spread it over many more cashflowing properties, than you would be able to with your work income alone. You may be better off buying a $200k property today, that may be worth $300k in 10 yrs, than buying two $100k properties, which may only be worth $125k each over that time period. Then again....I may be all wrong! LOL :P

Nicholas L. · Answer

@Ellie Narie are there any markets within driving distance of you in OR that are lower cost than Portland, that you're interested in?This question is asked all the time on BP and plenty of folks will throw out cities in the midwest (Cleveland! Milwaukee! Indianapolis! Detroit!) But if possible, I'd recommend finding a market you can drive to. That way you can go to REIAs in person, network in person, visit properties in person, oversee rehabs in person, etc. Even if it's a few hours away, you can spend the weekends doing it. And, you probably know this, but generating 100K in net income entirely on small properties in the midwest is going to be really, really hard.

Drew Sygit · Answer

@Ellie Narie contact @Joe Hammel and his team!

Paul Moore · Answer

Hi @Ellie Narie! It's pretty simple for me. But this is just my own opinion, please keep that in mind. I think everyone should focus on one thing and do it really well. If your goal is to be an active, full time real estate investor and do nothing else, then I think you've got good advice here to pursue your path. And I agree you should buy David Greene's book. However, if you have a career, a family, a life, and anything else you are focused on, then I think you might find this path turns into a very challenging scenario for you. You''ll be taking on debt and risk and hassles. And your returns might not be as high in reality as you project on paper. If your goal is $100k passive income, I highly recommend using your time to do due diligence on syndications and funds to invest in. Brian Burke's book The Hands-Off Investor provides a road map. Follow other communities like Jim Pfeifer's Left Field Investors who will provide guidance. I'm in my third decade as real estate investor and I've talk to literally thousands of people who have taken different paths within this realm. I am certainly biased, but the vast majority I speak with have come to similar conclusions. I wish you the very best of luck and happy investing!

Chris Clothier · Answer

Read David Greens' book on actively investing out of state. You can buy it on the BP bookstore. He wrote the book specifically for investors like yourself to lay out a step by step process for identifying properties and partners to help you hit your goals. It is a lot of work to be sure, but it can be done. I would start there.

Don Spafford · Answer

@Ellie Narie As mentioned by others, those low price markets sound good on paper. But reality does not match. I have dealt with that having properties in Idaho and Arkansas. The Idaho market is higher priced. I bought 1 fourplex in 2017 in Idaho and 2 fourplexes in 2018 in Arkansas. Basically the prices in AR were like half priced what they were in ID. So it was like getting 2 for 1. But, those properties really never cash flowed. There was so much turnover, evictions, repairs, etc that were needed that I pretty much just broke even every year. With covid and the eviction moratoriums, I had 2 tenants that went about 10 months without paying in 2020 and we could not evict, and when they finally were taken out, had to spend a few thousand to repair each unit. While my property in ID never had a single eviction, tenants always pay on time, take care of the property, and there has been high appreciation. I refinanced the ID property at the beginning of the year and pulled out 6 figures, basically about 5 times what I put as the initial down payment, so now it has infinite returns and still cash flows about $1200/mo. Took all of that refi cash and put it back into a development syndication where it will double that amount by the end of this year.I just sold those two AR properties because I decided they were not worth the trouble. Taking ALL of those proceeds and investing in syndications with RV Resorts which achieve the cash flows I was searching for (double digit) and will also receive great equity to basically almost triple my investment. And it is completely passive. Much better way to do it to still get the results I want without dealing with all the problems.That may be an option for you as well. Feel free to DM me. I am trying to be smarter about where I place my funds to grow them faster and easier without all the headaches.