Downside to Out Of State investing for cash flow now in 2020?

Question

Hello...I am new to this forum. Live in SoCal and have been investing in SFRs mostly and one Multifamily since 2009. I have sold most of my investments due to capital appreciation (yes! I did pay pretty hefty taxes but am good with it). I was looking at OOS investing including turnkey investing. I like the cash flow aspect of it but I am worried about price depreciation(I feel like the prices are too high now in 2020 at least in So Cal) and big repair expenses that could drain all the profits and put me in a negative. Also, the property management costs when you add everything up such as the monthly 8%, lease fee of 75%, renewal fee, bi-annual inspection fee, 15% margin fee on repair etc. seems like a lot and in the end, they make a lot more money on my investment than I do with little to no risk while I am taking all the risks. Can anyone with experience in OOS investing give me some advice on this? I'd like to learn more about the risks associated with this type of investing and how to mitigate them. All your advice are welcome and appreciated! Thank you!

Ali Boone · Answer

Hey Karan. Good thought processes you have going on. You're not wrong in considering the impacts of it. I'll just offer a couple things in response to what you said:

- there shouldn't be a 15% margin fee on repairs. If there is, get a new property manager. Repairs should be straight cost. (despite what some PMs will argue)

- one major critical thing is when you're buying a property, especially a turnkey, is to verify that none of the big-ticket items are scheduled to go out in the near future. Obviously things happen, but to your point about big repair expenses, it's super important to confirm the exact condition of your property prior to closing, to hopefully avoid all that for quite a while.

And then one last thing I would offer for your consideration is that a rental property has 5 actual income streams that come with it. You can see details at-

https://www.biggerpockets.com/...

What's important to know about that is that at any time if one income stream struggles, the other four should help out so you don't suddenly become negative.

And then lastly, if the value of the property drops later for whatever reason, that only matters if you're buying or selling (or refinancing) it. So if you just continue to hold for cash flow, you should be okay assuming rents haven't dropped (which they likely won't unless you're in a major depressed area).

Jonathan Oh · Answer

@Karan Chandran Prices have risen everywhere. Most markets that turnkey providers operate in are linear markets. Prices don't fluctuate as wildly as SoCal. The most important aspect to OOS is PM. Yes, they can cost a lot, but you have to ask yourself, is it more worth it to save the extra costs by managing yourself? It's not just about management either. What about understanding local laws, eviction process, etc? I invest OOS, so feel free to ask me questions. Hope this helps!

Account Closed · Answer

I looked around and settled on Phoenix. Las Vegas is probably good too, but when I did a point by point it jumped out at me. Your criteria might be different than mine. Make a comparison list and see what the bottom lines says to you.

Diane G. · Answer

@Karan Chandran

I think you are pretty smart and got OOS all figured out...

I would wait for a sizable correction, if/when that happens, to buy OOS.....

Lillie MAnon · Answer

@Karan Chandran you could do a joint venture with someone that lives locally in the market you are interested in or try finding a “boots on the ground” person, whether that’s a recommended property manager or a friend who will look out for things for you. You have valid concerns, but I think having someone locally in that market is the best way to ease those fears.

Alternatively you could consider investing passively. Truly a game changer...

Karan Chandran · Answer

Thank you @Lillie MAnon I like the idea of partnering with someone local! Thank you @Ali Boone for your good advice...the 5 income stream was a good refresher...apreciate it! Thank you @Jonathan Oh and Account Closed....do you have any good local PM/Realtor with whom you work with in Phoenix? Thanks!

Account Closed · Answer

As requested I sent the info. Check your messages.

Karan Chandran · Answer

@Chad Stark Thank you for sharing your experience. I really would appreciate if you can send me where you are investing and refer whom you go through for PM. TK etc. Thanks!

Chad Stark · Answer

@Karan Chandran I am from CA as well and decided that out of state made way more sense.  I have been fortunate enough to take part in a market where my properties have stayed rented and the market values have gone up.  I am looking at buying another one this year since I have had a good experience thus far.  Sure beats investing in California.  If you need any references, I'm sure I can send those over the messenger.  Best of luck

Ingryd Hernandez · Answer

@Karan Chandran Hi Karan. I'm a realtor in Phoenix, trying to turn into an investor 😉. Let me know how I can be of service.

Downside to Out Of State investing for cash flow now in 2020?

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