successful RE investors told me to not invest out of state

[Roee Hazut]

Recently I had the opportunity to speak with two investors, they are both in their 60’s and both of them have managed to create a great financial freedom for themselves and their families. I was really happy to have this moment to learn from them and to educate my self.

Because the market here is at the top of the k wave it doesn't make sense for me to buy my first real estate investment here (BRRR), so I asked both of them what they thought about investing in other states, in markets with lots of opportunity right now. The answer from both of them was

"I never invest out of state,” and one of them even told me that "it’s a really bad idea.” That was very discouraging for me because in my eyes they are both very successful and they have created exactly what my vision is, as far as the real estate. Because of this it was strong for me to hear that while I’m creating new relationships in other markets in other states and looking for my first deal.

l already read the book "Long Distance Real Estate Investing" by David M. Green (really important one). At the beginning of the book he explains exactly this about the older generation, that some them have a “paradigm" of not investing out of state.

Of course there is a risk in every investment and there are a few additional parts in the puzzle of long distance investing that need to be mastered in order to lower the risk.

I would love to hear your opinions and experiences with investing in other states. If this is my first deal is the consideration different when thinking about investing out of state?

Do you also prefer to invest only in your local market like many people or do you work wherever the opportunity is?

Thank you in advance!

Roee

[Tim S.]

@Inna Lauris  Yes, I mentioned the diversification point, earlier in this thread.  

SF rents seems to be dropping quite a bit due to work from home in cheaper areas, could be seeing that in the south bay as well.  I'm certainly working on it.  Houses in Lake Tahoe area are selling like crazy to bay area tech workers who can work from home up there.  

[Inna Lauris]

It is interesting information about Tahoe. I know from my daughter that a lot of young hi tech workers are leasing In Tahoe not buying though. Most of them were told not to come to the office till the end of January. They are not sure what would happen then

[Brian Garlington]

Some people do both :-)

[Dan H.]

Originally posted by @Huy Le:

This is an obvious advice, but do your research!

My mom and I bought an investment property in Houston, TX and we're currently renting it out and it's doing great! We found an amazing PM and she takes care of EVERYTHING. She even shopped around for an insurance company for us (idk if that's normal or not). the House is a SFH with 3bds/2bths and rent is 1350/month which we bought for 155k. honestly, the cash flow is good and the risk is very low (minus the covid shenanigan that's been going on)

I own and live in a house in Minneapolis, MN that's also 3bds/2bths and if I were to rent it out, I'd say rent would be around 1350/month too, but the house was 50k more expensive than the one in Houston. and my house is considered to be in a bad area.

it's all up to you & your method of investment. for example, if I want to continue buying and renting out then I would focus in TX but if I want to flip/BRRRR then I would focus locally in MN.

long story short, focus on your method, check your budget, then choose you market/location.

I have no idea what percentage you put down or your definition of "cash flow is good", but using 50% rule, 30 yr loan, 3.5% interest, 20% down shows this to be just over $100/month positive.

$1350 * 0.5 (50% rule) - $557 (mortgage) = $118/month.

Taking into account the risks of OOS and I suspect this is an example where risks versus reward was not well analyzed.  Hopefully your PM continues to be a rock star which will mitigate much of the OOS risk.

Good luck

[Huy Le]

@Dan H. there's a funny story behind it, we actually bought the house with cash. this was how I was introduced to REI actually. we purchased the house and started collecting rent in full (minus TI & PM cost). return wise, after TI & PM cost it's about 7% return, so not exactly the ideal 8% return; but our tenants pay rent on time every month and they're wonderful and really nice people. our PM is wonderful, if you (or anyone) in the Houston area is interested, I can pass along her info. And you're right, it wasn't analyzed AT ALL. Rent doesn't meet the 1% rule, but the 1% rule (or any other % rule) is a rule of thumb. i'd rather take a 7% with good responsible tenants than 9+% with terrible tenants.

[Dan H.]

Originally posted by @Huy Le:

@Dan H. there's a funny story behind it, we actually bought the house with cash. this was how I was introduced to REI actually. we purchased the house and started collecting rent in full (minus TI & PM cost). return wise, after TI & PM cost it's about 7% return, so not exactly the ideal 8% return; but our tenants pay rent on time every month and they're wonderful and really nice people. our PM is wonderful, if you (or anyone) in the Houston area is interested, I can pass along her info. And you're right, it wasn't analyzed AT ALL. Rent doesn't meet the 1% rule, but the 1% rule (or any other % rule) is a rule of thumb. i'd rather take a 7% with good responsible tenants than 9+% with terrible tenants.

>it wasn't analyzed AT ALL. 

Using the 50% rule for expenses, I show a 5.2% return for the first year ($1350 (rent) * 0.5 (50% rule) * 12 (months) / $155000 (investment without any closing costs)) with an unlikely scenario for compounding (so the annualized return decreases for each year of holding).

I do not know where you get the 8% goal from, but I would not consider buy n hold residential RE investing if I was only projecting an 8% return.  Too many more passive options that are likely to perform better than 8%.

The S&P 500 lifetime return is almost 10% and compounds.  Your active investment (but with a Rockstar PM may be on the lower side of the active residential buy n hold range) will return just over half of what a passive S&P 500 has historically returned.  

I do not mean to pick on you, but want to show the need for running numbers, understanding risks, understanding level of effort, and understanding other investment options (lost opportunity).

If you wanted to invest in RE, your return would have likely been far better investing in a good RE syndication.  

Ideally you learn a lot with this investment (most important is to analyze the return, risk, effort) and it seems unlikely to cost you more than lost opportunity.  It could provide some relatively cheap RE education.

I want to applaud you for not sitting on the sideline and taking action.  I want to encourage you to evaluate the investment prior to purchase next time and compare it to other investment opportunities.

Good luck 

[Darius Ogloza]

To be fair, the S&P 500 is not a risk-free investment.  In fact, it is quite risky as far as investments go.  The one year Treasury is paying .15%.  That's your risk free baseline, and the rest is up to your personal risk profile.   On the other side of the coin, 
Bernie Madoff was promising 15% annualized (joke).  

 

[Dan H.]

Originally posted by @Darius Ogloza:

To be fair, the S&P 500 is not a risk-free investment.  In fact, it is quite risky as far as investments go.  The one year Treasury is paying .15%.  That's your risk free baseline, and the rest is up to your personal risk profile.   On the other side of the coin, 
Bernie Madoff was promising 15% annualized (joke).  

 

In the short term, there is risk.  Long term it has been historically risk free as in 90 years it has increased at an annualized rate just under 10%.  Most S&P 500 declines have been short in duration.  So I view it as a low risk if holding for the long term.  If you need the money in the next couple/few years, then you likely want a more stable (and lower return) investment or an active investment where you can use sweat equity to achieve a short term return (example a property flip if you have the experience and skill set - First flip is typically not low risk).

[Darius Ogloza]

Dan: I myself have about 40% of my net worth in the market: S&P 500 + Russell 2000.  I am a believer.  However, my late father viewed Florida swamp land as safe and would have been terrified to buy a share of GE or AT&T.  No accounting for individual's risk profiles.  To some people, a 5% yield is amazing based on their own risk tolerance.