Out-Of-State Investing Paranoia?

Question

Hey, I'm looking to start investing in real estate and a little unsure of where to start. I want to do long term buy and hold investing of rental properties so that I can have an additional stream of income at retirement. My Goal is to buy 5 properties and have them paid off in 30 years (Very mediocre but easily achievable for me). I live in Seattle and was looking at investing outside of the city (Everett, Marysville if you are familiar) but am curious about out of state investing as the numbers often work out better.

To get to the point of my question, how is a beginner supposed to invest out of state? I was looking at investing with a turn key company (Norada?) as it seems like a good starting point, but I get nervous about essentially trusting a company and then a property management company. Is it better to find a deal where it will barely cashflow (after vacancy & maintenance reserves etc) in a place where I know? Or go afar and try to buy something out of time. I might be able to do one trip to look at it but I can't go back and forth due to work, anyone else paranoid of investing out of town? Thanks

Bill Gulley · Answer

Investors need to define their involvement in RE first, time, money, management, supervision, maintenance, are all areas of RE that need to be considered in holding RE as an investment. There are certainly those with enough money to hire competent advisors to basically invest for them, their due diligence is in qualifying that advisor and ability to have recourse for bad advice.

That is not the majority of beginning RE investors.

While there are reputable wholesalers and turn key managers not all are. The risk of being scammed is there and there are turn key operators that can overcome the usual due diligence generally performed by those new in RE.

Often, things may go well at the start, but the faith is placed in a long term relationship as much as it is at the time of sale. Things happen that are really not under the control of any manager or investor, stuff happens and that devotion in a project or to a property can easily change over time.

If I am a small investor who owns one SFD in Tampa under management I had better realize that while I have some control over that manager I probably won't be his most important client and I really need to accept that fact. I can't really expect him to devote most of his day to my problem, I can't rely on him to rent my property first just because my mortgage payment is due. No property management team on the face of the earth can possibly treat a one unit owner as they do an owner with 50 or 100 units who carries more clout in getting things done. If that larger investor pulls units, it could put a manager out of business.

Saying you have a large team to rehab locally I'd say is a marketing embellishment and totally not the case with small rehabbers. Making it sound as if you need a large crew is just misleading. You can rehab many properties in a timely manner with 3 guys, I've done it many times. Depends on the work to be done and many rehab types can build a complete house.

You can't really learn for yourself the basics about a good investment property by yourself. I don't have time to learn the economic aspects, housing inventories, neighborhood information, vacancies and rent levels along with other aspects about Tampa for just one property and then go learn about DeRidder. La, then off to Memphis, then to Appleton, Mo. that's just nuts, so, for the basic information required you're probably researching what you can and speaking to a few others you don't know and getting the sales pitch from your seller/manager. Really......

The first thing to know in RE investing is location, buying out of your area as a newbie, that's the first thing you know nothing about. So, you think it's a good idea to listen to the folks selling the property.....oh here's a list of local experts...(all part of their team). You need to track down your own experts in each market of each investment, does that sound efficient?

If you are rather new, go find an easy rehab locally that you know, that you can watch, where you can watch a local manager or vet your own tenants. Where you can go in and work on the place saving your money, that out of town garage door fix, there is the contractor there peeling your wallet with the manager who ordered the extra work, and who knows what little fees they can throw in, work order, repair supervision, final inspection, disbursement fees, accounting fee.....the list goes on.  You really need to be seasoned in property management to know how to avoid getting stripped with an out of the area investment. Not a beginner place to be, IMO.

Now, after you are better seasoned, know the game and what games can be played, you can certainly look to reputable managers and operators in other areas, there are some. And, it is too bad that these honest ones must overcome the scammers who deal in their niche, like those that:

Buy a 6K property and put 12K in it,

Then put a team member in there as a tenant and run a few months of checks through showing $700 monthly rents

Then advertise the 60K house at a steal of a deal for 40K

Close the deal

Rent for three months and then your tenant moves out! On to the next place....

That's just one thing to look for, newbies can easily be had.

And that's the kind of thing the good guys have to overcome. Sorry good guys, but they need to be aware of the realities out there.

Start local, you don't know what you don't know.  :)

Ali Boone · Answer

I live in LA and only buy out-of-state turnkey properties. What you have to realize is that no matter what teams or turnkeys providers or whoever you are working with, the due diligence is up to you. I wrote an article- maybe this can help...

http://www.biggerpockets.com/renewsblog/2013/04/20/due-diligence-turnkey-property/

There is very little in a turnkey that you can't check up on. I do recommend some providers over others for trust and quality, but regardless of reputation or anything, check on everything yourself and know exactly what you are buying and you will be 10x better off!

Cliff Earle · Answer

Luke, I'm going to take the opposite side here from my fellow BPers.
	
	I think it really depends on two factors: where you live and your risk views.
	
	Where you live determines which local markets you have access to.  For example, I live in Los Angeles, and trying to invest for income is a tough game...and with a limited budget, nearly an impossible one.  I'm not too familiar with the Seattle market, but suspect it is fairly high priced as well.
	
	The second is more advanced.  I've always felt that part of managing investments is ensuring diversification, and that *where* your investments are located is part of this analysis.  For example, as I live in LA, I'm already dependent on that city for my job, and my home is also based there.  In addition, I run a small business there.  The *last* thing I want to do is create another source of income that depends on that same location's fortunes.  I don't know how much of your income is tied to Seattle, but it's a risk to consider.
	
	As for out of state investing, I've used turnkey providers with success.  The key difference is the additional due diligence required.  Go visit and speak to the sellers in person, and look at their properties.  Ask for references -- more than one.  Run the return numbers yourself to double check.  Just because an opportunity is not in your back yard does not mean you should pass it up.
	
	Disclaimer: one of the two turnkey providers I have worked with is Norada.  It was a good experience....but as always, do your own due diligence.
	
	Good luck, sir!

Daniel Guillermo · Answer

@Luke Redford  I have to disagree with the mentality that you have to start local.  I live in Long Island NY, where the numbers are high and cash flow is very difficult.  To the east of me is the Hamptons and to the west is NYC.  Their is no local market that makes sense financially.  I'm sure I could drive upstate NY or go to NJ to find deals but that is the same as researching out of state markets.  Most of the people that say you should invest in your backyard, live in a market where you can find properties at affordable prices and the numbers work.  If I lives in that type of market I probably would invest in my backyard too.

The most important thing is that you do the proper due diligence on the area and the local team and purchase when and where you feel comfortable.  Like mentioned above, there are lots of scammers.  Your job as an investor is to find the "good guys"

Steve Endress · Answer

Just now seeing your post.  I shared the sentiment, but have overcome it by due diligence and experience.  Would be glad to share my experiences if you want to PM me.

Marco Santarelli · Answer

@Bill Gulley's  concerns are well justified and one should always be cautious  regardless of how close or distant their investment is.  However, there  are a couple of assumptions that gloss over and generalize out-of-state  investing that are simply not always true:

1)  Basing your decision on what you're told. --  There is a saying that goes, "Trust but verify".  This is true  regardless of what you invest in, or where it may be.  You will always  be working with other professionals in real estate.  It's important to  ask a lot of questions, gather information, and do as much due diligence  as you can.  All the people you work with are there to answer questions  and help you gather the needed information.  They are resources.  It is  up to the investor to use their head, think things through and verify  information.  It's usually when you listen to others on blind faith that  you run into trouble.  Base your decisions on actual facts and verify  those facts.

2)  Getting as many folks cut in on your deals as possible.   --  Who are these "folks" and what is the local investment being  compared to?  If you're investing in your own backyard, and you're  rehabbing a property, then you will have a large team of people to deal  with that all want to get paid for their time and service.  Aren't they  cut in on your deal?  It's important to compare the "deal" in your  backyard to any other deal you're considering in as much detail as  possible.  The numbers will tell you a LOT.  If you're getting better  leverage on invested capital in another market, and your returns are  high than what you can find locally, then the number of "folks" becomes a  far distant concern.  It's either a great deal or it's not.

Side Note:  For those that make the argument that you should buy and  rehab a fixer-upper in your local market in the hopes of getting larger  initial equity and better cash-flow, then I pose the same questions as  above.  Additionally, this assumes that you have the time, money,  experience and other resources to make that happen.  Many investors  simply are not in that position.

Finally, you can learn "the basics" regardless of  where you live or where you choose to invest.  The question is, what  basics are you trying to learn: rehabbing, buy-and-hold rent-ready  investing, or something else?

Continued success!

Tom A. · Answer

@Luke Redford , I don't think you're being paranoid.  I think you're asking very pertinent questions.  A new investor buying an out-of-state turnkey is stacking a number of risks.  You're pretty perceptive in that you identify many of them in your most recent post in this thread:

Originally posted by Luke Redford:

Doing the due diligence in one's own backyard isn't simple.  There are areas in my market where subtle differences in housing style, school district, elementary school or location in the neighborhood have significant economic effects.  These aren't apparent even to some long-time local investors who haven't done a deep-dive into the numbers, or don't have extensive experience in that specific area.

Then there are trends or developments (good or bad) which you'll know about as a local but will be harder to keep up on as a long-distance investor.  Will you know if/when a local community decides to get tough on landlords?  When their budget problems will lead to higher taxes or reduced police/fire/parks/trash services?  When a nice looking area flips from being predominately owner-occupant to primarily rental, taking down values and rents?  Or when a decline in a particular school district results in higher quality renters leaving and lower quality renters moving in?

I realize there are areas where rentals just don't cash flow.  Can you look perhaps an hour away, rather than a couple time zones?  Cut your teeth on something closer to home, then branch out once you're an experienced investor.  I've seen too many new investors lose a lot of money by making newbie mistakes compounded by turnkey mistakes.

I don't know anything about the track record of our turnkey BP members, good or bad, so my advice isn't in some way "personal".  I've just talked to a number of long-distance investors who 6, 12 or 18 months down the line are reaching out to people like me who have nothing to do with turnkeys, to help them formulate their salvage plan.  They're shocked to find that their sub-performing rental is in a bad area, is in bad condition, and their property manager has a bad local reputation.

If you do go the turnkey way, you should have a second team that checks up on your primary team.  While not foolproof, having for example, a second property inspector to inspect the first inspector's finding for veracity will help you avoid (but not eliminate) some undesirable outcomes.  Or have someone who can drive by your property to see if it's occupied (meaning you should be getting rent checks, not excuses from the property manager about why it's taking so long to rent).

Bill Gulley · Answer

Oh my, I see I'm really late, many already got to you. If you are just starting out and have a half ton of money, buying out of state, trusting others basing your decisions on what you're told, getting as many folks cut in  on your deals as possible since you're out of town is a good way to end up with a quarter ton of money. Start local, learn the basics before venturing off into the great unknown. If there is anything I can say or do to add to your paranoia, don't hesitate to let me know, I'll do my best..... :)

Engelo Rumora · Answer

Hi Luke,

The most important thing when buying out of state is the team you have on the ground managing your investment. Take the time to establish these contacts and don't buy until you are completely comfortable with the people you have chosen.

We assist a lot of foreign investors in Kansas City and this is is something I would always mention. This goes for any area you decide to invest in. The team is the key.

Thanks and have a great day.

Luke Redford · Answer

Thanks for all the input @Marco Santarelli

I get for the most part what you are saying. And I understand that different markets have different forces for different types of prices, I guess my main concern is knowing all the details without actually living in a region, if that makes sense.

The main reason I would like to diversify into real estate is because yes, I do feel paranoid in having little-to-no control over my stock investments, so I would like to go into something much more tangible, and since I don't have the time to start a business, real estate seems like a great idea. Looking at the math I get why it's a great investment, so now it's down to the details. I guess investing out of state has the same feeling that mutual funds do to me, trusting of other people to give you correct info that your money is in the right place. Obviously not the same as there is direct ownership, but still, the idea of a need for advisors (for a beginner) worries me. You must do due diligence on people as well as the building

Is there a link/explanation for the due diligence your clients go thru when buying from out of state? How do you know if it's a good area? How to find reputable inspectors/appraisers? How do you trust charts that the rent will be sustainable? I guess these are some of the worries I have when I'm not able to go walk around a neighborhood that I've grown up around, and knock on a building ;)

Obviously any investment has risks, and local investing has it's own risks that come with slim profit margins, I guess I'm just looking for opinions on how people have overcome the fear of the risks that come with non-local real estate

Sorry if this isn't making much sesne ;)

Out-Of-State Investing Paranoia?

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