Out of state investing feasibility?

[Nicholas Morris]

I live in california but want to invest for cash flow, not appreciation. I've done some research on prices in some of the areas people talk about on here where monthly gross rent multipliers are as low 30-50. Is this even feasible when youre not in the area and you are starting out with less then 50k to invest?

[Jon Holdman]

First let me clarify that I know nothing about James' specific properties.

This analysis:

The cash flow analysis looks something like this:
Rehab & Purchase Price $50,000
Monthly Rental Income$825.00
-Principal & Interest $299.00
-Management Fee $65.00
-Monthly Property Tax $92.00
-Monthly Insurance Expense $55.00
-Monthly Maintance Reserve(6%) $48.00
+Positive Monthly Cash Flow$266
Annual Income= $3,192

ROI= $6.3%

Is missing a few significant items.
Vacancy
Capital
Legal and accounting costs

And those are just the mandatory ones. No matter what, you will have vacancies. You would need to be extraordinarily lucky to have one tenant move out and another move in the next day. I've had it happen, but its the exception not the norm. Over the course of 20 years, roofs, furnaces, appliances and sewer lines need replacement. James' $48 a month is $576 a year or $11,520 over 20 years. That might cover routine maintenance, but it won't cover a roof, a furnace and two hot water heaters you'll buy over that period. And, since you're out of state, you'll have to find someone to do the work and pay them to do even the smallest job. You'll have to file taxes in not only your own state but also the state where the properties are located. And you will need legal assistance at various points.

And then there are the random events like a crazy tenant who won't leave and milks the eviction process for six months. Or the one that leaves but wrecks the place on the way out. If you have one property you may never have this happen. If you have 20, it will be fairly routine. Maybe not every year, but every few years.

A more realistic assessment is to deduct 50% of the gross rents to cover expenses, vacancy and capital. That leaves you $412 from the $825 rent. A $37,500 loan at 6% for 30 years is $225 a month for P&I. That gives you cash flow of $187 a month or $2246 a year. With a down payment of $12,500 that's a 18% cash on cash return. That's still a reasonable deal. If you pay cash, you get $412 a month or $4944 a year for a 10% cash on cash return.

You really must, however, go to the area. Learn the area. Learn the rental demand. Learn the people and the properties. I've looked at a number of turnkey deals. A few have been good deals. Much more commonly the deals are over priced relative to other properties in the area. The claimed rents are above the prevailing rents in the area. Demand is less than claimed. The promoter guarantees the rents for a year. But after that you discover you own a property that still needs work, that can only be rented for a lower rent than you expect and that you can't sell without a big loss. You MUST, MUST, MUST do your own due diligence and really understand the market.