Starting points in investing out of state for high income

[Adam Berlinberg]

Hi all, I am interested in getting started in real estate investing and pretty overwhelmed after reading a lot and doing a lot of the basics over the past 6 months. I am a physician so looking for more hands off investing, and my wife and I are considered fairly high income so luckily we can build relatively quickly for investing. We have a primary residence that has appreciated approximately $300k in a HCOL city, and it is a terrible market in terms of investing due to popularity. We are looking out of state, particularly into the midwest with places like Ohio and Indiana. More interested in multi-family rather than single family homes, but not sure what a good entry point is. Interested in connecting with anyone that may have good suggestions and ways of getting started. Finding local real estate agents and teams? Turnkey properties? Benefit to cashing out equity in our current house for more leverage? Any direction is greatly appreciated.

[Ian Ippolito]

Quote from @Adam Berlinberg:

Hi all, I am interested in getting started in real estate investing and pretty overwhelmed after reading a lot and doing a lot of the basics over the past 6 months. I am a physician so looking for more hands off investing, and my wife and I are considered fairly high income so luckily we can build relatively quickly for investing. We have a primary residence that has appreciated approximately $300k in a HCOL city, and it is a terrible market in terms of investing due to popularity. We are looking out of state, particularly into the midwest with places like Ohio and Indiana. More interested in multi-family rather than single family homes, but not sure what a good entry point is. Interested in connecting with anyone that may have good suggestions and ways of getting started. Finding local real estate agents and teams? Turnkey properties? Benefit to cashing out equity in our current house for more leverage? Any direction is greatly appreciated.

Adam, I have both directly owned real estate (single-family rentals) and passive real estate (via syndication/crowdfunding) in my portfolio. In my opinion, neither one is perfect and both have their pros and cons (and I feel an ideal portfolio has both).

But, I'm hearing that you're busy and looking for hands-off investing. Even if you hire a property manager, your directly owned real estate are going to require time and effort (at a minimum you will have to be involved on acquisition and also will have to "manage the manager"). And investing turnkey has additional risks.

To explain further:
1) Directly owned properties are great because they give you maximum control and the ability to tweak them exactly how you want. So for example I'm very conservative and don't want any debt on them because I feel this hardens them in case of a severe recession. That's unusual and it would be very difficult to find a passive investment like that.

Also direct control means you know exactly what's going on. And, for those people who have more time than money, they can put in sweat equity into directly owned real estate. This will increase the return above what can be obtained on a passive investment.

The flipside of having the power to control everything is that can be alot of work (and a full-time job if you are putting in sweat equity). Not everyone wants that or is willing to put up with that. It also requires gaining a level of sophistication and knowledge that not everyone has the time, inclination or ability to do. And someone jumping into this as a complete newbie can expect that they have a decent chance of making some expensive newbie mistakes.

2) On the other hand, one of the main advantages of passive investments (via syndication/crowdfunding) is that you can hire a manager who has years more experience than you can ever hope to obtain yourself. And once you finish the due diligence, your work is done: it's completely passive. Also, rather than taking a large amount of money and investing into one single directly owned property, you can split it up into much smaller chunks across many different passive investments. This can allow a person to get much better diversification protection across geographies, asset types, strategies, investment subclasses etc. Versus putting all the eggs into one basket.

The downside is that someone has to be comfortable with turning over control to someone else. That means learning how to vet a manager. Not everyone can do that and not everyone feels comfortable turning over control. So it's not a fit for everyone. Also there is a management fee to pay for all of the above. So someone who is looking purely to maximize potential return (and has unlimited time) is unlikely to find this a good fit.

3) Turnkey operators are kind of in-between. However I would not consider them to be truly passive because they do not put any skin into the game like a good passive investment does (via a sizable coinvestment). This coinvestment is what mitigates the risk of the other party taking risks that could be a detriment to the investor. Turnkey operators don't work like that and they are more like a broker collecting a fee for their work (regardless of the long-term performance). So they are financially misaligned on long-term performance (and I think this is why there are so many people who have had bad turnkey experiences)

And, as someone who has done lots of rehabs directly myself, I have seen hundreds of ways that turnkey operator could take shortcuts (to the detriment of the investor but beneficial to their bottom line) which investor could never detect (or not until years later when it's too late). So personally I don't trust reviews from investors saying there turnkey operator is great (because really they have no way of knowing). And personally I cannot pull the trigger on a turnkey operator. However there are other investors who feel very differently and love turnkey operators.

Hope this helps.