Starting with large(r) buildings?

Question

I'm not new to owning real estate, but I'm still new to investing in real estate. As such, I don't want to claim that my strategy is set in stone, but I'm currently thinking that I'd like to acquire income producing properties that I could hold long-term to generate passive income. I'm also starting to wonder if buying a large building in another state is a reasonable way to start, or if this is some ridiculous pie-in-the-sky strategy for a newbie investor.

Here are the factors driving my thoughts:

1) I currently have no debt, $240K in available cash, a home that is owned free and clear, and a reasonable/stable income at my regular job. This encourages me to believe that I might be able to start with a larger building.

2) I'd like to invest locally, but the local "deals" here in Denver don't really seem to have numbers that add up for the investment strategy I outlined above (Denver is booming right now, and near me a property with a $375-400K purchase price might rent for just $2,000-2,300/mo).

3) Going out of state on a first investment scares me, but I believe I could somewhat smooth that risk and better afford to have a property professionally managed if I started with a larger building (maybe 10+ units?). The challenge I see here is understanding the regional/local market dynamics of an area where I don't live, and finding the right management partner in that area.

Again, nothing is set in stone for me at the moment... when I first joined this forum I was convinced I was going to invest in local single family homes as rental properties. I haven't found any enticing deals locally (at least for that strategy), and I'm trying to broaden my real estate investment horizons at the moment.

Any thoughts?

Thanks!

Bill S. · Answer

@Kevin H. so I don't have an answer for you but I would be remiss if I didn't point out the glaring obvious. In the last three years while you waited on the sidelines you missed out on $100K in appreciation and another $60k in rents (assuming a purchase of a $300k property appreciating at 10% per year renting at $2,000 per month). Even if you had purchased of one of those "...bidding wars, lightning quick sales, or overpriced piles of crap". Or on the other hand, you also missed out on the cash flow of say 10% cash on cash (conservative - $60K on a $200k investment) with an all cash turnkey in some yet to be determined mid-west market. In short you need to pull the trigger as you are currently in a state of analysis paralysis and it's costing you real money! You have money to deploy and are not doing so, to your own financial loss. Personally I would rather own a property here in Denver in 20 year or 40 years than some mid-west rust belt city but each to their own. Pick a plan and execute it. Perhaps you are wrong but you are obviously careful and I seriously doubt you will pick a dog. Whatever you decide, find the best quality you can and go with it. In 40 years, you will laugh at how little you paid for real estate here in Denver. I just looked at an off market 5 unit property. The owner paid $74,000 for it 40 years ago. Now it is easily worth 10x that and they collected rents for 40 years. It's really hard to make a mistake in this area when you have the long view in mind (20 plus years). So what if the market goes flat or declines for 5 years. As long as you don't have to sell or you don't get tired of owning and sell it doesn't matter. Personally I seriously doubt that the market will decline for 5 years but there is nothing to say it won't continue to increase for another 5 years either. There is no certainty in the future in either direction. As my Dad says "Do something, even if it is wrong"

Rob Gillespie · Answer

Hi Kevin, Cleveland is the hottest market in the country right now for cash flow. I can understand the fear of buying out of state, but if you are buying below market value with good management, you should be fine. I would be happy to look over any deals you are considering. I have been buying and selling in the Cleveland market for years. I have quite of few investors from around the globe that come to me for direction in my home town. Hope to see ya in C town soon!Rob

Brian Garrett · Answer

Kevin - based on everything you've said from your first post I could have easily written the same post with the exception of the third factor.I like the input on how out of town properties always look better on paper, however given the Denver market right now I think my money goes farther in other cities. The real issue is how to assemble the remote team to help support the purchase/buy/hold process. So for me - buying remotely hasn't been as big of an issue as long as the team is in place. I'm fortunate enough to be working with someone (in my office) who already has several buy and hold properties in other states and has established the process. He doesn't mind me shadowing his process, so I think that's going to be the path I follow.At least that's my $0.02 worth. That and $5 might get you a coffee at Starbucks.. :D

Robert Ellis · Answer

Kevin if you are on the fence about Cbus i'd be happy to chat. Columbus population is growing, it's a state capital, many fortune 500 companies, top 5 public university (OSU), etc. Over a million people and so many sub markets.

Travis Sperr · Answer

@Kevin H. out of town ALWAYS looks better on paper than it actually performs - doesn't mean it doesn't work - just means you need to really scrub the due diligence and have the absolute right people in place.I agree Denver is difficult right now but I am still seeing deals that make enough sense to buy. Last one I purchased was $230k town home in a strong HOA - that will rent for about $2,000 a month, HOA is $180 and built in 2006. Best to identify exactly what you are hoping to achieve - supplement or replace income, how much, etc.

Andrew Johnson · Answer

@Kevin H. There's no real right or wrong answer here. The first question that pops into my mind is where else do you have boots on the ground? Did you go to college out of state? Have friends living in an area that's not quite as hot as Denver? Any cousins that in the rust belt for some reason? Basically, someone (who has no vested financial interest) that can help you understand where the right vs. wrong side of the tracks are in that market. If you can use that to narrow your out-of-market geographies to 3-4 options I think it's a good start.In most areas you'll be able to find a decent property manager. If you don't like them (and there's the risk that you don't) you can change them after a year. I don't want to minimize the risk as bad property management can kill you and it's not an instant turnaround when you change management. But, overtime, you can change a PM easier than changing property. However, if you do on the "wrong side of the tracks" you're saddled with the mortgage for the next ___ years. The reason why it's blank is because in commercial deals you might have a 5-year fixed rate with a balloon, etc. You should also get comfortable with the idea of a full-recourse loan and the other things that come along with owning a commercial property. I'm just scratching the surface but maybe some of this helps lend perspective.

Jagdish Bajaj · Answer

Hey @Kevin H. - I am sort of in a similar boat. Here in the Toronto area, prices have risen to a point where it makes little sense to invest in SFRs because they will nearly never cash flow with a 25% down payment. So I think your strategy of buying a large(r) property makes sense as it reduces vacancy risk, allows for professional management, etc.I am also thinking of buying out of state or in the USA for better returns. From initial searches, it seems like the Midwest offers good returns on larger properties. Cleveland, Akron, Columbus, even Buffalo, maybe?Have you shortlisted areas where you are or will be looking?Wish you luck.

Federico Gutierrez · Answer

Just take action. Pick a location, fly to it, scope it out. Talk to locals, agents, contractors. Whom ever you want to, but the longer you wait the faster the market will move. The more you will talk yourself out of investing. If your scared buy in a decent area and maybe you have to pay a bit more but your buying a quality assests. If you think the deal is too good to be true go with your gut, usually is Buy quality, something that you would feel.comfotable living in. If you can't see yourself owning and renting it don't expect others to do the same, don't gamble on future apperication. You can't go wrong there

Dustin Frank · Answer

I am seeing a few fix and flip deals come up in the north Denver area. I live in Westminster and scour my neighborhood daily for potential deals. Any decent agent should be able to help you locate a few options. Also I do have one property In mind that you may be interested in that is no longer on the market.

Kevin H. · Answer

Hey Bill, sorry for the delayed response, it has been a busy couple of days around here! I certainly agree with you about the problem of declining populations and the issues that can arise in those markets, particularly with a long term hold. That's what has scared me away from Cleveland investments thus far (and Cleveland is my birthplace -- I know that area better than most places out of state).But, there are also out of state areas I've considered where the population is still growing. Columbus, Ohio, is an example of one of these places. I went to school at the Ohio State University in Columbus, so I know that town pretty well, too. It's no Denver in terms of growth, but it has basically gained the population that Cleveland has lost in the past twenty years. Naturally, the easiest option from a management and knowledge basis would be to purchase right here in the Denver area (or even elsewhere along the Front Range). I guess I'd say my one hangup here comes on the accounting side of the house... In the past three years of searching, I've yet to find a place where I feel like I can make money in this town! In fairness, my searches started with a different goal originally. We initially planned to buy another house for ourselves, and rent the one we own free-and-clear. But, so far we haven't found the replacement house (while we have found bidding wars, lightning quick sales, or overpriced piles of crap).If we find a house that meets our needs in this area to live in, our current home will provide for an easy rental, is debt-free at the moment, and would probably rent for at least $2200-2400/mo. If we don't find another home (and we haven't thus far), then I'd like to put the cash we have into other real estate investments... locally or nationally. I know how deceiving the internet can be on real estate (or other sales items). But, I can sit here at the computer right now and run basic numbers on properties around the country that look like they should easily cash flow some decent returns. I can't seem to do that in Denver right now.With all of that said, I'm a guy that will happily be proven wrong when being proven wrong can help my position! So, if I'm missing the forest for the trees here in D-town, I'd be happy to hear about it :)