Buying investment property out of state for my first rental. Is this a good idea or a bad one?

Question

Hi I live in San Diego and all the real estate over here is very expensive. I read that you have to start small so I was looking into buying a property out of state around 20K-30K cash then taking a small loan for the renovations that would be needed to make the multi family home rent ready. I know I will need a property management company. Do you guys think this can work if I don't live near my investment property?

Justin R. · Answer

There's plenty of smart people who happily invest remotely.  I'm not one of them.  Here's my POV:

I would never buy "out of state" for my first buy-hold-rent properties. I live in San Diego too, so I know exactly what it's like to start here.  I now have a handful of properties here and, looking back 10 years, I wouldn't have done it differently.

The reason is simple: in life, you need education.  And you get educated by paying for school or by paying with your time and money by trial and error (often, both).  There's no shortcuts.  But it's that education that you can then leverage to do bigger and better things.

The reality is that your second property will very likely be better than your first.  Your third will be better than your second.  But to really up your chance at success, you've got to jump that education curve as fast as you can.  You'll learn 10x faster by investing locally, managing properties yourself, finding and working with contractors on your own, and building local relationships.  You and I just live in a place where getting that education is financially riskier than elsewhere.

Maybe I'd take a different approach if I were 50 and seeing retirement on the horizon.  Or, maybe if I just wanted an alternative to stocks to put my money. Or, maybe if my core skill was negotiation and I could close killer deals everywhere I went.

But, for normal people starting out with aspirations to become a skilled and "successful" REI (whatever that means), we need education.  And you'll best get that locally.

Justin R. · Answer

@Brandon Hall Very valid points.  In particular, the fact that being setup to invest remotely means the entire country (world?) becomes your market is really attractive.  Why only target thousands of neighbors when you could target millions of them?

That doesn't mean I'd recommend starting this way.

For me personally (sample size of 1!), I look at the last 2 projects I've done - which have involved re-zoning, new square footage, and/or lot division - and I *know* I would have never gotten the experience and confidence to do it without investing locally.  That's what I mean by "jumping the education curve" - if buying and operating a small multi family gets you a profit of X, but rehabbing and zoning a mixed use gets you a profit of 2x, I don't think it's likely people will reach the 2x if they start by "passively" investing remotely.  Investing remotely doesn't allow you to attend frequent Neighborhood Planning meetings, or get to know your city council members.  If you're not focused on one area, it's not practical to follow proposed development districts to grab property before turnarounds happen.  I'd argue these are *core* abilities for a RE business, not something to outsource for long term success.

I'll grant that setting up your company to scale means your company could theoretically reach 2x by simply doing more of what you're doing now.  And I certainly don't mean to suggest that success can't come from investing remotely.  My point is just that anyone who starts out has to pay for an education one way or another, and that investing and managing locally is the best way to do so.

That said, at some point I'll be looking to you for your advice on the details of how you're able to operate efficiently remotely.  ;)

Brandon Hall · Answer

@Christopher Lee In my opinion, you will likely be okay finding a solid realtor and solid property manager which can be accomplished with a few months of diligent screening and networking.

The property manager, if they are good, will have an entire network of contractors, repair guys, etc.

Lawyers may need to be local, but a competent one will have the know-how of researching local laws pertaining to your investment. So you may be fine finding one after you move.

Accountants/CPAs do not need to be local so you have flexibility here as to when you want to find one.

Brandon Hall · Answer

@Christopher Lee I don't know your situation, but for me, I'm young, not married, no kids, so it strictly comes down to the numbers and opportunity cost. At the end of the day, which choice will net you more money? For instance, say you stay in ATL, invest locally, and net an additional $5k annually but if you could move and take a higher paying job that nets you $10k annually, then I'd seriously consider moving.

Another thing to consider - if you have lived in ATL for a while, you likely know the market pretty well, so spend a month or two building up a team, then move to the city with the higher paying job but invest in ATL. You'll be comfortable with investing in ATL because you know the area and your team, and you get to write-off your trips back to ATL to visit friends/family. At the same time you are in a bigger city with a higher salary and upward mobility. Best of both worlds.

@Jeff T. I'm actually writing a BP blog post about how to identify cities with solid financials and demographics to aid out-of-state investors. The premise of the blog post is that you can randomly pick a city, analyze its financials, identify strengths and weaknesses, and then decide if you should take a deeper dive and start identifying ripe neighborhoods and potential properties. It's like the 2% rule, but for cities - helps you weed them out. That post will be coming out within a couple of weeks (tax season man).

Jeff T. · Answer

@Justin R. those are really good points about understanding your local market.  I can do that to a lesser extent out of state because I invest where I grew up and have family and contacts.

But it's much easier locally to keep up and take advantage of future development.  I haven't seen that too much on the forums as a method of finding areas to buy.  David Schumacher's Buy and Hold books discuss that sort of thing quite a bit.

Jerry Padilla · Answer

Luis Moreno doing these kind of deals.

Dave Fontana · Answer

It a good idea.

Just find a person that is managing SFH. My PM in Charlotte manages 450 Home. Its a no brain-er for me.

Jassem A. · Answer

Only if you have a very trusted property manager and can see past numbers and projections

Account Closed · Answer

Absolutely, that is what I do and it works extremely well for me. Having good people on the ground is the key, and totally doable ! :)

Buying investment property out of state for my first rental. Is this a good idea or a bad one?

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