Pitfalls of out of state investing (And some solutions!)

[Joe Kim]

I've posted before about out of state investing.  I've definitely made some money both on the cash flow and appreciation (appreciation was a surprise in most cases).

But that being said, the exit strategy is difficult and I can see why people lose money on these ventures.

Four pitfalls I see:

#1 Lack of control:  Depending on property managers who in most cases do not have your interest in mind.   PM make money no matter what happens.  Vacancy happens...well that's great for PM who make money by turning over the property, lease up fees, etc.    When it's time to sell, doing the rehab/cleanup, etc.. is a pain when you are depending on some third party to do it, and monitor the work.

#2  Passive vs. active.   Lots of out of state investors think this is going to be a passive investment.   The funny thing is at least half the properties are not "passive" but stress filled with lots of activity (frequent maintenance costs, turnover, vacancy, eviction, cap ex)   Decisions have to be made sometimes with little time or little oversight when doing it so far away.    Sometimes you try to get really active but end result is the same because PM is your boots on your ground who you have to place some level of trust.(and distrust).

#3 Hidden costs:   Even if you sell your property at a higher sale price than when you bought it, agent fees, repair fees, capex fees eat away at your profits.   Predicted cash flow is sometimes not realized, about half, or worse break even.   (if you are negative cash flowing, then you probably bought a bad deal).

#4  Limitations of stress.   Growing stress can lead to hasty decisions.    Dealing with problems so far away can be far worse due to the unknown and second guessing that comes with lack of trust even in competent help, let alone incompetent help (PM, agents, etc.)     

I can see why wholesalers target - absentee owners.   Frustration leads to just dumping the property to the next buyer at lower than market price.

I cannot end on a bad/negative note.   How about some solutions.

#1 Diversify. I'm learning which markets work for me and what kind of buy/hold I'm willing to tolerate. Without having a portfolio of rentals, I would not have learned what works well for me and my goals. You cannot base your entire REI based on a single bad experience with ONE property alone.

#2 Sell.    I'm selling a handful of my portfolio, not because the properties are "bad" or not cash flowing.   Once I've found the right kind of property for me, I want my portfolio to reflect those goals.  

#3 Buy.   At the right time, right location, and most of all at the right price (below market price).    Almost nothing beats having a cushion of equity to soften any recession or compensate for costs/capex.   For me I would almost always try to look for properties with better appreciation potential than less appreciation potential.  Cash flow can be deceiving and sometimes all you are left with is appreciation or (depreciation -hopefully not!)

#4 Take control. Think about self-managing. Sometimes the headaches are way way less. And when you are actively solving problems, the time put into the work seems worthwhile. Trying to manage a manager seems at times futile or the end result is the same - regardless of any kind of intervention. Self-managing helps you to control the #1 best thing in REI - tenants. Spend your energy finding the best LONG term tenant possible and you will save yourself tons of headaches in the future. The quality of tenants found by the PM is all over the place.