Do the numbers really work with out of state investing?

Question

I keep running the numbers with out of state investing, and I don't see how people make this work. Would love to hear success stories/strategies!

Even when I find properties that hit the 1% rule, I just don't see the returns being worth it.

Here's an example in Jacksonville, Florida:

Purchase Price of a townhome: $116,000

Rent: $1,200/month

HOA: $112

MONTHLY PAYMENT WITH 20% DOWN (including taxes, insurance, and HOA): $775

Expenses-->

Property management: 12% of rent or $144

Repairs (since I'm an out of state investor I'll have to outsource ALL repairs) 15% of rent or $180

Leasing agent (first month of rent): $775 (Leasing agent keeps rent and I pay full month of mortgage

Unit turnover (one month): $775

TOTAL RENTAL INCOME PER YEAR (assuming 11 months--> One month turnover): $13,200

TOTAL EXPENSES PER YEAR: $3,888

TOTAL MORTGAGE PAYMENT PER YEAR: $9,300

TOTAL CASHFLOW PER YEAR: $12.00

Sure someone is paying my mortgage down and I definitely used conservative numbers, but I just don't see how this is worth it after putting an investment of ~ $23,000 down. The risk vs. reward just doesn't weigh out.

Sure I could do a BURRRR, but then if you're not in state then you're paying the mortgage, someone to manage it, and taking on high risk.

Do I really have to leave the Bay Area to continue my real estate investment career???

Thanks for reading everyone :-)

Russell Brazil · Answer

Novice investors do 1 of 2 things....they either way underestimste the costs of owning property, or way overestimate. You have 35% of your rent going to repairs, pm, and vacancy. Maybe thats reality for some people, but yeah you cant run a business if 35% of your rent disappears right off the bat.

Lesley Resnick · Answer

The investors I work with in in Jacksonville are doing quite well.

I think some of your numbers are a bit high and you may want to adjust your strategy.

I am not a big fan of condos or HOA's.

Property management should be more in the 10% range

2160 a year for repairs in a condo is really high.

A property like this should not turn over every year and it is unlikely to stay vacant for a month a year.  The turn cost is quite high as well.  If you have been maintaining the property there should not be much cost.

If you did nothing more then find  property without an HOA and lowered your management fee to 10%.  The outlook is very different (112+24) = 136 a month.  However, I would suggest in reality you will realize much lower expenses and a significant increased cash flow. In the current scenario you will have a tax loss.  Mortgage pay down, appreciation, rent increase, depreciation (tax) and a few dollars in cash flow.  I would suggest that a 20k investment provides a solid return.  If you disregard everything else,  only consider the 136 a month (1,632) a year cash flow on a 23k down.  The return is in the 7% range.  The real numbers annualized is probably 2x that.  You mention risk, I am not sure what would be a better alternative?

Caroline C. · Answer

@Adam Sandow You've kind of hit the nail on the head. It definitely works if you get a tenant in there that pays rent and stays for a few years and the place doesn't need a lot of repairs. If the tenant turns over every year then you will not make monthly cash flow, although you have many other benefits such as debt paydown, tax deducations, etc. Cash flow is much better at the lower end of the rent spectrum, and that is how a lot of investors make money, but it is risky because those tenants sometimes have problems paying, and turnover can have costly repair expenses.

Placement of good tenant is most important factor, and unfortunately with fees PM's charge, their incentive is not necessarily to put the best tenant in place - they often receive late fees, and they receive a fee every time they place a tenant. That is why you need strong due diligence on the PM side of it.

Yes your numbers are conservative, but that also gives you buffer for cap-ex, so not a bad strategy. With price appreciation in Jax last 3-5 years, hard to make things work now at that price point.

Over time I've built a portfolio of approx 15 out of state investments, so that when one or two have an issue, the rest of the portfolio evens things out. In the beginning when we only had a couple of investments, each vacancy or capital expense was painful.

Larry Fried · Answer

As others have indicated you are calculating at a kind of worse case scenario - high repair cost, yearly turnover, etc. Now this might actually play out if you only have one property, choose badly on the PM side, and are unlucky.  But make some better choices and plan on buying multiple properties and your numbers should work out much much better across your portfolio, assuming you buy right and work with the right team.   I would also suggest that you not stop at the 1% rule for properties. You have to look at the underlying costs.  HOA fees or high taxes are two such factors that make the 1% rule too little to achieve.  You also have to consider the quality of the property and the neighborhood.  However, if you are planning to buy true turnkey in a decent neighborhood in Jacksonville these days, well the 1% without HOA is probably not going to happen.

Brian Ploszay · Answer

The numbers are too tight.  With some unforeseen capital issues, you're losing.

I see your turnover costs potentially being more.  You may lose one month's rent.  You pay your leasing agent one month's rent.  And then the physical cost of turnover could easily be over $1,000, unless the tenant was very light on the place.  Imagine if you have to replace a carpet, appliance and paint and clean the entire place.  That's more than $1000.

Jack Medford · Answer

The problem I see is that these numbers don't work even if you are an in state investor. As @Russell Brazil pointed out, you're not going to make money if your costs are that high. You've got a 1% property that has an HOA and a PM that charges 12%. These alone eat a lot of cash flow.

Personally, I don't ever look at 1% properties because I put PM in place on all my properties, and the numbers just don't work. The numbers can work if you are buying in an area with decent appreciation prospects and you are counting on loan paydown as an avenue for profit, however cash flow will be tight.

I stick with properties that are at least 1.5% cash flow, and then any appreciation is gravy on top. There are a lot of markets like that here in the MidWest.

Clayton Mobley · Answer

@Adam Sandow I agree with @Russell Brazil and @Lesley Resnick  , you have a few expenses listed here that are quite high. So yes, if you are only looking at properties and service providers for which your figures are true, you cannot make it work.

That being said, you can invest in plenty of markets in the south and midwest with numbers that work.

• As Lesley said, avoid HOAs. It's a waste of money and they often have lots of little rules that can make tenanting a pain and also cause difficulty if you ever want to pull out equity.
• Also, your PM fee should be 8-10%, I don't know any solid PMs that charge 12%, that's nuts.
• Your maintenance should definitely NOT be 15%. This rate would only come about if the prop you purchase doesn't have new or newer capex items (old leaky roof, old carpet, boiler than needs repairs etc; look for a different deal), if the PM defers maintenance (fire them), or if the PM (is incentivized by fees to handle a lot of maintenance call outs (fire them again).
• Your PM should charge you two fees: a % of your gross rents (8-10%), and a leasing fee (usually one month's rent or a smaller amount for resigning the same tenant, which also takes work because tenants, like everyone else, are looking for the best deal).
• Late fees should be split between you and the PM - half for you for waiting, half for them to pay for the time it took them to chase up that payment. Believe me, PM work is a business with very narrow profit margins.

Basically, it looks to me as if this isn't an out of state issue, it's a 'this combination of property and service providers' issue. It's absolutely possible to get $200+ in net positive cash flow per month on a property you only have 20% in, let your tenants pay down your loan for you. That's fully rehabbed turnkey, you shouldn't be seeing any big repairs or replacements for 10+ years, and your maintenance costs should be 5% or less (though most folks use a slightly more conservative estimate, 15% is overkill).

I'm not personally familiar with FL markets, but I'm given to understand they are pretty popular, so that means someone is making it work, somewhere. First step is probably to ditch the HOA (this may require looking in another market), and then do some work on vetting PMs and providers if the numbers you're using came from someone 'in the know'. If you got 12% from an actual PM, maybe start looking at their competition. If everyone in Jacksonville charges 12%, maybe start looking at other markets where expenses are lower. If you're already going out of state, the whole country is your oyster.

If the numbers you present are just you trying to be conservative, you can back up a bit on some of them and still be wellll within the range of conservatively realistic. As @Larry Fried said, the scenario you lay out is assuming you make some bad decisions AND have some bad luck right off the bat. You can do better.

Good luck!

Do the numbers really work with out of state investing?

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