CA Investor - investing out of state

Investor · Minneapolis, MN · Member since 2017 · 86 posts · 34 votes

9y

I just listened to a podcast on this EXACT question today: The Real Wealth Show with Kathy Fettke, episode #556. If you can't listen to podcasts on your phone, you can go to her website realwealthnetwork.com to access the podcast. All FREE! :-)

1 Reply

David Faulkner

Investor · Orange County, CA · Member since 2015 · 2k+ posts · 3k+ votes

9y

Seems like that might have been a good thing to figure out BEFORE opening up the LLC, but now that you already have it open, my advice would be to close it down, buy under your own name with easy conventional financing, and take out a reasonably sized umbrella insurance policy. BTW, if you stay in your local market, you wouldn't need 50-100 doors to retire, not that you really would be retired managing 50-100 doors anyhow, or managing a out of state property manager and cleaning up their messes on your 50-100 doors. But, to answer your question, 10x4-plexes = 40 units ... portfolio loans from small banks or commercial loans beyond that. Happy investing!

6 Reply

Eric Upchurch

OP

Investor · Sacramento, CA · Member since 2016 · 57 posts · 53 votes

9y

Properties in the Bay Area won't cash flow at even 1%. $1,000,000 PP won't rent for $10k monthly. Closer to $4,500-$5,000. CA isn't the place for me to execute this strategy. I'd eat up 200k just to have a house break even each month. Rather take $200k and buy 10 homes out of state that cash flow $400 net monthly. As far as managing the properties goes; I won't be fielding calls late at night. PMs will be handling it. Otherwise I would definitely not be "retiring". Q: what is your strategy? Thanks!

2 Reply

Jan H.

Investor · Saint Johns, FL · Member since 2015 · 141 posts · 100 votes

9y

@David Faulkner did not suggest to invest in the Bay Area, but within CA (he's not a fan of out of state). You can find deals 1-3 hours driving from the Bay that cash flow (Central Valley).

Honestly, if this is your first investment, I would strongly advise you going out of state, UNLESS you have a very solid team in place to manage things.

1. Why would you use a CA LLC for investing out of state anyway? It doesn't make sense to me, sorry.

2. Banks DO NOT lend to LLCs. Been there, done that. You have to take out loans on your name, and your own credit.

1 Reply

David Faulkner

Investor · Orange County, CA · Member since 2015 · 2k+ posts · 3k+ votes

9y

Originally posted by @Eric Upchurch:

Properties in the Bay Area won't cash flow at even 1%. $1,000,000 PP won't rent for $10k monthly. Closer to $4,500-$5,000. CA isn't the place for me to execute this strategy. I'd eat up 200k just to have a house break even each month. Rather take $200k and buy 10 homes out of state that cash flow $400 net monthly.

As far as managing the properties goes; I won't be fielding calls late at night. PMs will be handling it. Otherwise I would definitely not be "retiring".

Q: what is your strategy?

Thanks!

You have to look at the long term picture, not the short term. As for cash flow, what are the rates of rent increases on those 10 or 50 or 100 homes out of state? If it is lower than the rate of inflation then that means you are losing purchasing power each and every year and your cash faux is really just your purchase price being trickled back to you in slow monthly installments until CapEx eats your lunch and you realize you can't sell them for what you have in them. With Bay Area or nearby, cash flow day one can be tough but possible, but that cash flow grows with time higher than inflation and you increase your purchasing power each and every year. As for PMs, managing a bad PM is more work than managing tenants, and most of them are bad ... finding a good one is also a lot of work, and if you can't find a good one out of state immediately (odds of this are high) you will have to carry the properties in the meantime or you are sunk.

My strategy is quality over quantity ... acquire enough high quality RE so that if they were free and clear it would meet my retirement income needs (plus margin), then once I have that aggressively pay down those mortgages, and when they are free and clear I'm done ... I'm in the seventh ending of successfully implementing this strategy, and can tell you it doesn't take 50-100 units to do it in my market, and even fewer in yours, probably way less than 10 ... which portfolio do you think will grow in value over time more above inflation? Which set of tenants do you think are more likely to pay on time and treat your units well? Which portfolio do you think would be easier to manage?

I've tried the out of state for cash flow thing too BTW, so I speak from direct personal experience on both fronts. You can do as you like, but since you asked this is my perspective after the last 15 years of investing both in and out of state.

1 Reply

Arlen Chou

Investor · Los Altos, CA · Member since 2014 · 942 posts · 1k+ votes

9y

@Eric Upchurch I would argue that your statement on the surface is correct but overlooks the potential in the market. You have not found any that are at 1%, but there are many that can be driven to 1% in a short period of time. I have 8 units in Mountain View that I purchased in 2013 that are at 1%. 2 in North Oakland that were purchased in 2015 that are over 1%. I recently purchased another 6 units in 2016 that are at .008% at time of purchase. They will be over 1% soon. All of the units had positive cash from at the time of purchase.

It is a completely different discussion if you are talking about the financial barrier to entry. This is substantially higher in the Bay Area vs out of state. If this is the real issue, then start OS with the plan to build up equity/cash/knowledge/credit so you can get into the BA market. But to go out of state you need a really good/great ground team. You should talk to @Account Closed. He has a great game plan that follows this line of thought.

5 Reply

J. MartinPro Member

Rental Property Investor · Oakland, CA · Member since 2011 · 3k+ posts · 2k+ votes

9y

@Eric Upchurch,

Books in hand. LLC fees paid. Now what?

I agree with @David Faulkner. Typically better to get conforming mortgage (Fannie Mae guaranteed) outside of an LLC. Yes, they can evoke the due on sale clause if you transfer to an LLC. Happens occasionally, but not frequently. Don't get caught with your pants down! I agree, just buy in your own name, and get an umbrella.

Other option for LLC is if you're buying multifamily (5+ units) or commercial properties. All the commercial lenders allow (and frankly, expect) you to finance the property in an LLC.

*Specific strategy #1: Most multifamily investors find a building with rents that are below market, then increase rents and rehab to get to a higher rent level, then do cash-out financing on that new income.

If you're buying 1-4 units, the financing is better outside of an LLC. But if you get a commercial loan on your 1-4 units instead, you can use an LLC. Just don't try to jam all your properties through the LLC because it's the hole you already have to jam something through. Do what makes sense..

@Arlen Chou is right that you can still hit 1% in the Bay Area if you're going to work on some sort of transition type play. Usually there is some issue that needs to be solved. You can still get it in Richmond if you get to market rents. And Arlen gave you some specific examples. Generally, same story as the multifamily. Need to get to market rents.

Good luck with whatever you choose! Go to some local meetups and see what others are doing! :)

1 Reply

Eric Upchurch

OP

Investor · Sacramento, CA · Member since 2016 · 57 posts · 53 votes

9y

@David Faulkner @J. Martin

Thanks for the info. Think I'm getting there. Great to know about 5+ multi-financing and that actually makes it much easier to think about. I'd like to 1031 several SFRs to a multi eventually (or just buy multi through the LLC as suggested). Think I will start with umbrella insurance, then buy a few more OOS (thanks for the acronym @Account Closed) in my own name, deed the title to a revocable land trust (trustee is not me, beneficiary is my CA LLC), then assign the beneficial interest into my LLC. Only thing I have to do now is get my name off my CA LLC by using a different registered agent. Waiting to see how much that costs (dang). So weird how you can set up an LLC but you're completely open to the public on the SOS website unless you pay for a registered agent separately (assuming big companies use in house counsel). Only other option there would be to dissolve the LLC, then set up a new one in, say, WY so the manager/members are completely anonymous. I'd still have to register that entity as a "foreign entity" so CA can still get its $800.

So, that sounds like a huge pain, though it's probably pretty straightforward and only a handful of documents, but man it makes me feel like just taking a gamble! Almost. I've been house-hacking in the Bay Area since 2012 and don't want to chance losing my personal $$.

Can anyone tell me what type of umbrella insurance lets you rest at ease? Company? Type? General cost? Maybe I can avoid the whole "structure" like David and others.

1 Reply

Steven Gesis

Investor · Miami, FL · Member since 2015 · 1k+ posts · 390 votes

9y

Originally posted by @Eric Upchurch:

Hey BP,

I have a CA LLC (yay, $800/year!). I'm wondering if someone can give me an actual example of "what to do" or "how to do it" as I start buying investment properties out of state. I WON'T take it as legal advice, I'm just wanting specific examples of what folks are doing. WON'T HOLD ANYONE LIABLE.

I want to get/keep my properties in the LLC, but how do I buy them in/through the LLC in the first place? I have enough to pay cash for a property in say, GA, but is that the only way to buy through my LLC? To plant the cash in it, then buy the property outright? I'm assuming very few, if any, banks will LEND to a new LLC with no credit or assets.

Or can I finance personally (80/20) then transfer into my LLC? Avoid "due on sale" with land trusts or maybe discussing with the bank that this is my plan (look for one that is ok with it)?

Or should I pay cash personally, then transfer into my LLC (definitely possible since no banks are involved). Then I'd want to refi the LLC-owned property to get most of my money back. Anyone do this? Easy to refi a seasoned property in a LLC?

I also know that you can only get between 4-10 mortgages. So how do I ramp up to 50, or 100, which is where I plan to be?

Thank you for any SPECIFIC help.

Hi Eric, I would encourage you to begin with : A Simple Guide for Buying Out of State Turnkey Investment Property

Next: LLC, not that bad... they are certainly expensive in CA. Purchase in personal name, using conventional 80/20 fixed rate 15yr/30yr. financing - acquire 5-10 units, move them into a portfolio under your LLC with a SFR Portfolio lender - problem solved! :) This can all be done in a relatively fast pace. Also, keep in mind you can portfolio properties that scattered city not only in one city, but across multiple cities and states. Also, note, that if you have another adult in your household (spouse) you can each have up to 10 personal conventional notes - this will give you the ability to acquire 20 units at a time and move them to portfolio commercial loans into your LLC.

This should resolve all your questions. If you would like any information about portfolio lenders please feel free to PM me. (NOTE: I am not a lender or mortgage broker) Just have strong experience in the space.

Happy Investing!

0 Reply

Matt Sanford

Investor · San Francisco, CA · Member since 2017 · 24 posts · 12 votes

9y

Question for this thread:

What are the top 3 exit strategies for OOS turnkey properties.

For example, lets say a "coastal" investor buys a place in a lower priced mid-west market. And in two years the stuff "hits the fan" and the economy turns (higher vacancies, lower jobs, loan rates go up, other bad turns?)....how would an investor exit that?

2 Reply

James Wise

Real Estate Broker · Cleveland Dayton Cincinnati Toledo Columbus & Akron, OH · Member since 2013 · 30k+ posts · 20k+ votes

9y

Originally posted by @Eric Upchurch:

Hey BP,

I have a CA LLC (yay, $800/year!). I'm wondering if someone can give me an actual example of "what to do" or "how to do it" as I start buying investment properties out of state. I WON'T take it as legal advice, I'm just wanting specific examples of what folks are doing. WON'T HOLD ANYONE LIABLE.

I want to get/keep my properties in the LLC, but how do I buy them in/through the LLC in the first place? I have enough to pay cash for a property in say, GA, but is that the only way to buy through my LLC? To plant the cash in it, then buy the property outright? I'm assuming very few, if any, banks will LEND to a new LLC with no credit or assets.

Or can I finance personally (80/20) then transfer into my LLC? Avoid "due on sale" with land trusts or maybe discussing with the bank that this is my plan (look for one that is ok with it)?

Or should I pay cash personally, then transfer into my LLC (definitely possible since no banks are involved). Then I'd want to refi the LLC-owned property to get most of my money back. Anyone do this? Easy to refi a seasoned property in a LLC?

I also know that you can only get between 4-10 mortgages. So how do I ramp up to 50, or 100, which is where I plan to be?

Thank you for any SPECIFIC help.

Generally speaking most states have cheaper LLC's than California so if you are buying property in say Ohio I would recommend getting an Ohio LLC if you are going the LLC route. Much more cost effective.

Now as for the classic should I or shouldn't I question about purchasing property in an LLC.

If you are going with residential properties and want to use financing you will need to use your personal name. You can get up to 10 30 year mortgages doing this. This is an awesome tool that every real estate investor should utilize.

Outside of that I would use an LLC for everything else. This includes cash purchases, properties purchased with partners and of course commercial properties as commercial lenders have no issue writing mortgages in the name of an LLC.

0 Reply

Joe VilleneuvePro Member

Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes

9y

States like MI and Ohio are great cash flow states, and are very popular for OSB. They flip in their state, and buy in MI/Ohio using their profits all cash. Repeat, repeat, and....repeat.

The problems (short list) are:

a - No Market Knowledge
b - No PM in place
c - Dealing long distance with tenant, rehab, etc...
d - Replacing tenants
e - Potential of buying a property that's isn't as "billed"...a dog.

The solution is to buy from a TK Provider that remains in the deal as Managing Partner. What you are doing is becoming a member of the LLC (local to the property) that owns the Property. This way, all of the above "problems" are gone, and the OSB can feel confident that the deal is a good one. Why? The original TK Provider, is staying in the deal at a lower return, and they remain responsible for all management. They retain a vested interest, which validates the deal.

This is why we've converted over to this model from straight TKP. This also is a much better alternative to buying from OS Wholesalers. This is better than buying from In State Wholesalers for that matter.

It also opens the door for those with little cash, since the new cash partner can be more than one, and also for those low cost properties that you can't get financing for.

You can also use this as an alternative to the BRRRR strategy, since it eliminates all the issues getting the loans...including the "number of" limits, since there are no loans involved.

1 Reply

Linda LabbePro Member

Investor · North Bay, Ontario · Member since 2015 · 709 posts · 262 votes

9y

Hi all we use the buy sell idea in these areas all the time works well and do it with a good team on the ground since I am in Ontario... with eyes on the ground it can be done easy and stress free

0 Reply

Mimi H.

Investor · Mountain View, CA · Member since 2014 · 120 posts · 51 votes

9y

I'd second or third other people's commentary on being a first time investor and buying out of state. It always sounds great to say my PM is going to take care of it but IMO there are a lot of crappy PMs out there. Also, be aware of local law, if it's a tenant vs landlord friendly area, and eviction policies, they vary greatly geographically.

0 Reply

Eric Upchurch

OP

Investor · Sacramento, CA · Member since 2016 · 57 posts · 53 votes

9y

Thanks again for all the input. Does anyone here think CA is a tenant-friendly state? Is anyone concerned about a tenant who just stops paying rent and how that would work in CA? What would happen? I've heard some bad things about CA in that regard. Also, I should add that I already have one property in GA that cash flows. Have had to evict one tenant (PM handled everything) a few years ago. Renting it for the last 7 years. Licensed PM in place that keeps me informed when anything abnormal takes place, good contractor network for repairs, etc. Other than that one event and small things here and there it's been quite simple.

I get that there is more appreciation to be taking advantage of in CA with investments, which is why I've been doing multiple "live-in-flips" in the Bay since 2012, but seems to me that there could be more advantage to buying multiple OOS investments (depreciation, interest, maybe some appreciation) rather than maybe being able to afford one CA investment at the TOP of the market cycle, where we are now - just because it's "local". I'm certain it would be 1) expensive to purchase without OPM, thus using up most of my capital, 2) very difficult to get 1% positive cash flow, and 3) pretty risky to buy now, at the top of the cycle.

If you have millions to spend, I get it. CA/Bay Area all the way, but if you have an initial investment of maybe $100-150K can you see how OOS sounds more appealing, perhaps?

0 Reply

Victoria S.Pro Member

Investor · Miami FL / DMV · Member since 2016 · 70 posts · 27 votes

9y

@David Faulkner I like your thoughts about thinking long term, and including how ones daily life will be affected by investment choices. I'm curious as to how this relates to cash flow and leveraging for you. If 1% is "best" then where is the cash flow for growth? Did your time in out of state provide this or other separate conditions?

1 Reply

Josh Cuthbertson

Professional · Redding, CA · Member since 2017 · 123 posts · 81 votes

9y

Redding is 3.5hrs north east of the Bay area. We have a great rental market. :)

0 Reply

David Faulkner

Investor · Orange County, CA · Member since 2015 · 2k+ posts · 3k+ votes

9y

Originally posted by @Victoria S.:

@David Faulkner I like your thoughts about thinking long term, and including how ones daily life will be affected by investment choices. I'm curious as to how this relates to cash flow and leveraging for you. If 1% is "best" then where is the cash flow for growth? Did your time in out of state provide this or other separate conditions?

I don't generally look at if it is a "1%" deal of a "2%" deal or anything like that. One of my "0.75%" deals was one of my best performers and my "1%" deals in CA consistently cash flowed better than my "2%" deals out of state ... it is therefore a truly useless metric in my opinion and experience, especially when taken in isolation ignoring other very important aspects. Where is the cash flow for growth you ask? 2 words: rent increases. This cash flow is in addition to appreciation (both forced and market), mortgage pay down, and tax benefits, which all also add to profits, help growth, and spend just the same as cash flow though there are different methods for tapping them. It's all green and I'm agnostic as to where the profits come from as long as they are not coming through ill gotten, immoral, or illegal means. Personally, I'm not as highly leveraged as some preach on here, but that is mostly my personal preference for steady, less volatile, but lower growth ... quality over quantity for me. I've known others very successful with more leverage than me in CA, and they all had respect for its power (to do both good and harm) and were strategically smart about when, how, and how much to apply even though their comfort level was a bit higher for it than mine ... these folks would rather end up with a larger portfolio of levered up assets where as I would like to retire with a smaller portfolio of free and clear, high quality, easy to manage assets that pump out cash for me consistently and with enough margin where I can sleep well at night and continue to save and invest if I choose, and we can both succeed with these different strategies. It is only when you combine leverage with ignorance that you get some really "interesting" results like we saw in 2009 :)

2 Reply

Account Closed

Investor · Santa Clara, CA · Member since 2014 · 138 posts · 54 votes

9y

Eric,

I think you should consider investing in multi-family (apartment complexes) rather than buying SFH's.

You can invest as a passive investor in someone deal through your LLC, and there are no restrictions on a number of deals you can invest into.

I host a meetup on this subject so if you are interested feel free to check it out -

meetup.com/Los-Gatos-Real-Estate-Networking-Meetup

0 Reply

David Thompson

Investor · Austin, TX · Member since 2013 · 933 posts · 1k+ votes

9y

Hi Eric,

I believe out of state investing is even better through syndications in niche areas you are interested in focusing on. We like value add apartments in strong markets. Below blog on why I like investing in large apartments and how to vet a sponsor. More than happy to share some past deals and educate you on opportunities just so you are aware of what's out there from an out of state perspective, cash flow and forced appreciation. This also does not preclude you from continuing to be active with some part of your real estate investing portfolio. I think active local and passive out of state fits a lot of folks I talk to who don't have the time or experience to deal with properties in different markets but understand the benefits to being passive but also geographically and niche diversified. You essentially partner with experienced operators that only do this and not part timers.

https://www.biggerpockets.com/blogs/9145/53820-why...

https://www.biggerpockets.com/blogs/9145/53959-vet...

0 Reply

CA Investor - investing out of state

CA Investor - investing out of state

Most Popular Reply

23 Replies