Investing Out of State

[Zo A.]

Hey Everyone,

I live near Tracy, California (near the Bay Area) and I am looking to invest out of state for cash flow properties. I am not really sure what states/areas to look at. I'd like to invest a maximum of 100k. 

I'm open to hearing any ideas of what I could do locally as well. I really want to start my real estate investment career this year. 

Thanks for the help in advance. 

[George Gammon]

@Zo A.Here's what the majority of investors don't seem to understand.  Let me do my best to explain.  Hopefully this helps you.

The investor community sees the options for investing out of state in a way that's far too black and white, especially when considering turnkey providers.  

As an example.  The turnkey option is typically viewed as pay a little more for the property but off load all the headaches of learning the market, buying, rehabbing, finding a PM etc.  So option 1 is buy a rough property and rehab it yourself, building equity through the rehab, and option 2 is buy from a turnkey provider, let them do the work and forgo the upfront equity.  The big decision becomes "is the equity worth the headache?"  

Here's the problem.  This assumes turnkey providers are going to sell you a property you want.  It assumes you discuss with the turnkey provider what your goals are and if you prefer A, B or C areas, the provider then shows you the inventory they have that meet your qualifications and you choose which looks the best...

It's ********.  Here's why...In a sellers market (and this is key) it's extraordinarily difficult for any investor to find attractive deals, this includes local investors who have been in the market for years (often decades) and turnkey providers.  The turnkey providers have to have inventory to sell, therefore they buy properties local investors don't want (or they don't want for their own portfolios) and sell them to out of state investors because they're oblivious to the issues with the areas, neighborhoods, or specific properties.  

I'm not saying the turnkey providers will sell a C property as a B property etc. (although many do), I'm saying all A, B and C areas aren't created equal.  

Let me give you a specific example here in Kansas City, more specifically Jackson County.  The best suburbs are Lees Summit and Blue Springs, they'd be considered A areas.  But there many smaller micro areas within Lees Summit or Blue Springs that are no where near A quality.  In fact there many areas where one street all the properties will be A and the next street over all the properties are C.  Or there many areas currently A, but mass multi family is being built near by, most likely taking it down to B or C within the years to come.  

On the flip side of the coin, there areas currently C or B that a huge new home development is being built right next door, corporate campus or gaining "trendiness" giving tailwind to the area potentially propelling it from C or B to A.  This is paramount for out of state investors to know.  It's the edge local investors have and what most turnkey providers won't tell you.  

Let me be clear.  I'm not implying turnkey providers have zero attractive A, B or C inventory.  I'm simply stating, in a red hot sellers market, the majority of the inventory will be undesirable and it's up to you to educate yourself and cherry pick based on your individual goals.  

The reason this is most often hidden is because out of state investors don't consider inflation when looking at their supposed paper appreciation and they don't sell so they don't truly know the market value of the property.  The only thing they have as a measuring stick is the cash flow.  As long as the properties cash flows as advertised they assume they got a good deal.  What they're not factoring is the inflation adjusted depreciation of the asset.  This needs to be deducted from the cash flow to have an accurate assessment of the properties performance.  

Let me give you another real example.  If you purchased a property in 2010 for 100k and today it's worth 100k you lost approximately 10k.  Why? because in order to have the same amount of purchasing power today as you had when you bought the property in 2010 for 100k, you'd need 110k.  This is due to inflation or the price of goods and services increasing.  Often asset prices don't keep pace with inflation and sometimes they exceed inflation.  

So using our hypothetical scenario we'd need to deduct the 10k from our cash flow to get the real ROI. How many investors do this?

An even more alarming example would be the same scenario but using 2006 to 2012.  Our hypothetical investment property would have to be worth 113k in 2012 in order to have the same purchasing power it had in 2006 (100k).  How many properties do you know that went up in value between 2006 and 2012?  Most likely it would've gone done in nominal value making the inflation adjusted paper loss even more severe.  

This is applicable to out of state investing because most turnkey providers inventory (in my opinion) will struggle to keep pace with inflation and therefore under deliver without the investor even knowing.  

WHAT'S THE SOLUTION? If you're considering an out of state investment select the market(s) first.  Take a month or at least a couple weeks and go to that market(s).  Get a rental car and drive for dollars.  In other words, drive up and down every street in your targeted zones, take notes.  Talk to as many local investors as you can face to face when you're there, meet with property managers, agents, bankers, general contractors and turnkey providers face to face...give yourself that local knowledge and "edge."  Then and only then can you truly make an educated decision when buying.  

Use that information gathered to buy a property and rehab yourself or cherry pick the turnkey providers inventory knowing you're buying precisely what you want...

If you don't have time to do that don't invest out of state. 

Hope that gives you some food for thought.  

Good luck,

George