First investment: Invest in Bay Area or OOS with turnkey?

Question

I am a new RE investor in the bay area and have been researching properties in the east bay that will cash flow and have found very few that make sense.

Keep in mind, my original goal was to find multifamily <$600k, 3.5% down, and live in one unit and rent out the other(s). The markets I am left to find deals are in concord, richmond and oakland in C- or D class neighborhoods, which I would not feel safe living in.

I am now at the point where I rather buy a condo or small house with potential for sweat equity to live in, while I invest in OOS TK properties like memphis invest.

I really don't see a way to invest in my local market unless I win the lottery, join a company that IPOs, or partner with another investor to get into a more expensive property (I would prefer to have a few investments under my belt before doing that).

Joseph Crunkilton · Answer

@Mikhailangelo Llanos

If you're looking at turnkey, I'd recommend checking out @Zach Lemaster over at Rent to Retirement. They specialize in turnkey rentals with good returns in cash flowing markets. I recently just closed on a property with them and wanted to refer them to you.

If you want to hear more about my deal or have any questions feel free to PM me

Lee Ripma · Answer

@Mikhailangelo Llanos

My problem with TK properties is that they are often in terrible areas. In Kansas City there are some rough areas that TK companies sell in. You can look at the comps and they will be 20k, 30k, 25k, and then there are ones that are sold by the TK companies and they are 90k, 80k, 95k etc. They are selling on cap rate and charging 3x the comp value.

Here is a couple of thoughts in no particular order:

Never buy a SFH on a cap rate! Look at the comps.

The area where you buy a property really matters. A areas often have little cash flow and D areas have high cash flow and high risk. The sweet spot is B/C areas for rentals.

There is a company in Kansas City that buys SFH in A areas and master leases them from owners. They turn around and have a professional company that leases to young professionals by the room. This is a great way to get the best of both worlds - A assets that cashflow with very little hassle.

Make sure that you inspect whatever real estate you buy.

Why do you need to buy from a turnkey company? You can buy a turnkey product on the MLS and have a lot more protection than what a TK company offers. At least think about it.

There are a couple of TK companies in KC that are really bad and one that is good - I won't post the names here but just do due diligence on who you are working with, always.

Understand the relationship between risk and reward.

Axel Meierhoefer · Answer

@Michael Reisman I second that. @Mikhailangelo Llanos I actually have a few properties in the Dayton/Ohio area. The important thing is not just the market but a really good TK provider. I know a lot of people on BP don't like me to keep saying it, but I have a lot of proof that that is pretty much as important as the deal itself

Zach Lemaster · Answer

@Joseph Crunkilton thanks for the mention!

@Chris Clothier excellent advise!  I agree that networking with a local investor to grow your network & finding a mentor is key.  Much better than paying expensive fees to some guru for some educational seminar.  I know your team is out there offering great service to out of state investors.  Keep up the good work!

@Mikhailangelo Llanos My wife & I also live in an expensive market (Denver), but we do not invest here.  Our very first rental was a duplex we lived in half, rented out the other, and then kept that as a rental for many years when we moved out.  That helped tremendously to kick start our investing career.  We now invest in markets where we can maximize the combination of cash flow, appreciation & initial equity.  That is how we've built our business successfully for many years.  It's all a numbers game, and the most successful investors invest in areas where they get the best returns.  It is essential to have your local boots on the ground team in these locations that you can count on.  Feel free to reach out with any specific questions you have.

Chris Clothier · Answer

Mikhailangelo,

I really appreciate the mention of my families' company as the type of company you would want to do business with if you invested out of state.  To avoid confusion going forward, we changed our brand name to REI Nation in January of this year as it better reflects the fact that we are now operating in seven different southern and midwest cities. However, we will always have Memphis Invest in our tagline as we love the city that helped us start the company!

After reading your post here I have two pieces of advice that hope you will take to heart.

First, find local mentors right there in the East Bay area that you can meet with for coffee or lunch or something of the like.  There are so many investors from your area right here on BP and there are so many local meet-ups that you could probably visit a different one every night for a month.  These are going to be filled with investors of all level of experience and the best and most experienced have always been willing to share what they know.  I just spoke at a conference in Oakland and was blown away by how nice everyone was and how willing so many were to share their stories.  If I were in your shoes, before looking to go out of state, I would surround myself with local investors and some of them will be investing out of state and others will be house hacking multis like you describe.  All of them will be able to give you first-hand feedback.

Don't rush!  Be patient and attend local meetups as well as find local investors who you can talk with.  Certainly before you pay anyone for advice or join clubs and groups that cost a lot of money, you can buy an investor a coffee, lunch or beer and get a long way toward learning and understanding if you can invest locally or need to go out of state.

Second, when you are looking for mentors, people to network with and learn from or hiring someone to help you get started, you have @David Green right there in your area to work with.  He literally wrote the book on how to invest out of state on your own without going to passive, turnkey route.  He is also a local agent/broker who can help you determine if you can invest in east bay or not.  And, if you can't, he is someone who can certainly help you decide if you can do it on your own or if you need to buy from a company like mine.

You are in such a good situation where you have access to capital, good credit and are willing to house hack.  I hope you step back and put some effort into meeting other investors locally and really get the facts on house hacking there in East bay before simply deciding you have to invest out of state or hit the lottery!  I think you may find it easier than you think.  At a minimum, at that point you will be fully informed on your local market and maybe even working with someone like David to help you successfully go out of state.

Best of luck to you as you move forward!

Michael Reisman · Answer

@Mikhailangelo Llanos

You should look into Columbus and the Ohio market in general. I’m a bit biased because I’m based here, but Columbus specifically has seen a lot of oos investor interest.

Johnny Wolff · Answer

@Lee Ripma - think that is the biggest thing I'd love to be echoed from the halls of the BP forum.  Chasing lofty cash returns as a newer, out of state investor isn't the way to win as you're starting out.  Lofty returns on assets with minimal risk do exist but they are swiftly picked up by local networks...leaving out of state investors with two real choices

1)  Solid returns on solid assets

2)  Great paper returns on questionable assets

Neither is wrong - but understanding that trade-off is crucial

Remington Lyman · Answer

Let me know if you decide to invest in Columbus, Ohio. I know a lot of investors from your area that have purchased in Columbus.

Zeke Liston · Answer

Columbus, OH is a good city to find turnkey properties, might be worth a look once you get your condo @Mikhailangelo Llanos!

Axel Meierhoefer · Answer

@Mikhailangelo Llanos for a call please let me know some times preferably in the afternoon pacific time next week and I can find a match.

As for the interest rate, you have to consider two options: If you stay in the residential (less than 4 units) investment space that you can assume about 1-1.25% higher interest for investment properties than what you would pay for owner-occupied. That is assuming you would get FHA/Fannie/Freddy loans, which is 90+% of the market.

Should you decide to go into the commercial world ( properties larger than 4 units) you can see anything from 1% - 4.5% higher interest than owner-occupied. I spoke to a broker the other day and he had offered 7.5% interest for 20 years. He claims he has plenty of people who take him up on that.

The reasoning you will hear is based on a risk argument. I hate it and totally disagree with it but the borrower is pretty much powerless. The lending industry often appears to be like a cartel. They pretend to compete, but nobody is ever reviewing the arguments they have so conveniently given themselves. It still escapes me how it is supposedly riskier to have a tenant pay for a mortgage and if that tenant is not there then you have an owner as backup versus just having the owner cover a mortgage in an owner-occupied property.

Looking forward to setting a date/time to speak to you. Have a great weekend

First investment: Invest in Bay Area or OOS with turnkey?

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