Buying my first investment property out of state?

Question

Hey everyone,

My biggest dream is to own my own property, and start developing some cash flow. I’m currently a teacher in Los Angeles and the real estate market is out of reach for me where I live.

I was thinking of investing in a rental somewhere in the Midwest (Cleveland?) somewhere in the price range of 50k-100k, because thats what I can put a 25% down payment on.

It sucks not being able to take advantage of an FHA loan for my first home purchase, but I don't see myself moving soon because my entire family lives in LA.

What do you think? Is this a good idea? I’m

Melanie P. · Answer

If you're going to live in LA forever the first thing you need to do is establish your primary residence - in LA. The sooner you do it the more $$$ you'll make over your lifetime. There are programs for first time homebuyers. You could always take on a roommate(s),

Drew Sygit · Answer

@Adam Ortiz

Recommend you first figure out the property Class you want to invest in, THEN figure out the corresponding location to invest in.

Property Class will typically dictate the Class of tenant you get, which greatly IMPACTS rental income stability and property maintenance/damage by tenants.

If you apply Class A assumptions to a Class B or C purchase, your expectations won’t be met and it may be a financial disaster.

If you buy/renovate a property in Class D area to Class A standards, what quality of tenant will you get?

Similarly, if you put several Class D tenants in a Class A 4-plex, what do you think will happen to the property?

So, when investing in areas they don’t really know, investors should research the different property Class submarkets.

Here’s our OPINION for the Metro Detroit market (use as a template for your target area!) that we’ve learned in our 24 years, managing almost 700 doors across the Metro Detroit area, including almost 100 S8 leases:

Class A Properties:
Cashflow vs Appreciation: Typically, 3-5 years for positive cashflow, but you get highest relative rent & value appreciation.
Vacancy Est: Historically 10%, 5% the more recent norm.
Tenant Pool: Majority will have FICO scores of 680+ (roughly 5% probability of default), zero evictions in last 7 years.

Class B Properties:
Cashflow vs Appreciation: Typically, decent amount of relative rent & value appreciation.
Vacancy Est: Historically 10%, 5% should be applied only if proper research done to support.
Tenant Pool: Majority will have FICO scores of 620-680 (around 10% probability of default), some blemishes, but should have no evictions in last 5 years

Class C Properties:
Cashflow vs Appreciation: Typically, high cashflow and at the lower end of relative rent & value appreciation. Can try to reposition to Class B, but neighborhood may impede these efforts.
Vacancy Est: Historically 10%, but 15-20% should be used to also cover tenant nonpayment, eviction costs & damages.
Tenant Pool: majority will have FICO scores of 560-620 (approaching 22% probability of default), many blemishes, but should have no evictions in last 2 years. Verifying last 2 years of rental history very important! Also, focus on 2 years of job/income stability.

Class D Properties:
Cashflow vs Appreciation: Typically, all cashflow with little, maybe even negative, relative rent & value appreciation
Vacancy Est: 20%+ should be used to cover nonpayment, evictions & damages.
Tenant Pool: majority will have FICO scores under 560 (almost 30% probability of default), little to no good tradelines, lots of collections & chargeoffs, recent evictions. Verifying last 2 years of rental history and income extremely important to find the “best of the worst”.

Make sure you understand the Class of properties you are looking at and the corresponding results to expect.

The City of Detroit has 183 Neighborhoods we’ve analyzed.

DM us if you’d like to discuss this logical approach in greater detail!

Nabil Suleiman · Answer

@Adam Ortiz

I align with Tim on this one. I am all for owning your own residence, but really it comes down to your current situation. AKA are you living at home not paying rent? if you are renting is it inexpensive and therefore creating cashflow out of state can bring you closer to a net zero cost of living? It is very situational, and there are a lot of good opportunities to invest in places out of state. I invest locally and invest out of state, and the main issue for most is the shiny diamond syndrome providing you the reasons why investing (insert area here) is the best place.

My way around it was really digging into 5 places that then narrowing it down from there. I have a few friends who is very pro Ohio (Akron and Columbus specifically), but i ventured elsewhere. Other hot spots I am sure you will hear about are Florida, NC, Texas, Indy to name a few. It all comes down to you researching and aligning with the area that you feel will fit your investment goals best.

Tim Ryan · Answer

Hey Adam, this is possibly, yes. The key is to pick the right out of state market. There are many ways to buy cheap elsewhere but still lose your shirt.  Doing it right will pay off.  I disagree that you need buy your own home first. I preach the exact opposite. For sure get an investment property first which is affordable (out of state), then later, buying your primary home will be even easier with lenders.

Michael Evans · Answer

I recommend that Detroit market for single family turnkey rental properties. For $50,000 you can have a turnkey low-income Section 8 rental property that generates $7,500/year in NOI. It's more important to own investment income producing property that generates at least 10% annual ROI than it is to own where you live. Create a portfolio of income producing properties and you can use that income to pay for your primary home.

Adam Ortiz · Answer

Hey Tim,

Thanks for your perspective. I looked into trying to house hack in LA, with roommates or multi family but it just doesn’t seem worth it with the numbers.

Can we connect to talk a little bit more about investing out of state?

Erik Estrada · Answer

Hey Adam,

Have you gotten Pre-Approved already? You might want to consider doing a house hack to help you qualify for more. Lenders will allow you to use 75% of the rental income in a 2-4 unit. You may also put 5% down on a conventional loan with no self-sufficiency requirement.

I agree with Melanie,

If you work towards buying your primary in Los Angeles, it could help you leverage to buy rental properties out of state in the future.

Buying my first investment property out of state?

Most Popular Reply