Pros and Cons of Buying Multi Units in another state?

Question

Moshe Gat · Answer

I'd agree with the comment about "buy the worst house in the best area". But regardless, you need to make sure you understand the demographics, you need to make sure that your property manager is capable of dealing with the clientele, and you also need to make sure you underwrite the deal with realistic property taxes and insurance. These two items might go up significantly after the purchase, so you need to understand how it will affect your cash flow. I have 3 multi family properties, all out-of-state, and the best advice I can give you is to make sure that you have full visibility to your manager's software. You need to be able to pull P&L and rent roll reports at will. You also must have direct access to the operating account. If your property manager gives you a hard time with these, find a new one. Hope that helps!

Joel Owens · Answer

Why not buy value add where you are local or build ground up??

I would not want to own in a C- area states away. The area could easily change to a D quickly. Have you pulled crime reports for the area? You need to look at violent versus non-violent crimes and if trending upward.

You can have the best property in a marginal area and have constant problems.

It's better if you reverse it and buy in a B area close to you with C- tenants. You can change the tenants much easier than the area. I have known investors that make properties overly nice in an iffy area and it gets trashed over and over and it loses money.

The C- area you need to look for the loyalty factor. Have say 75% of the tenants been there more than 2  years and have they been paying rent on time with little to no issues? Stay away from properties where it is newly filled up as you do not know how those tenants will perform over the long run yet. They could also put in suspect tenants with loose screening and offer first months free rent or waiver of security deposit to slam them in fast.

Joseph Gozlan · Answer

@Jeremy Woods I always recommend people to start local. As @Craig Haskell said, you don't know what you don't know.

I consider myself knowledgeable in the TX/OK markets and can evaluate costs and maint. that would be needed in our properties but I know nothing about basements, baseboards heating, snow removal, and other weird things North East investors would know inside out just like they won't know anything about foundation issues in north Texas or slab leaks and how to handle them...

just my .02

Craig Haskell · Answer

Hi Jeremy:

Don't buy in jungles you have no experience or knowledge in. You might get hurt.

Knowing your local market, the players, the product and the properties has huge value. Sharp investors know their market better than anyone else and thus can find great hidden value opportunities that other don't see.

Having done a number of Joint Venture partnerships with institutional investors, i know that my very experienced partners are looking to partner up with investors who have local market knowledge. Why? Risk. They have learned over the years when you don't know your market, the investment outcome is jeopardized.

Every time I tried to go to another market that I didn't know, they would turn me down. If you watch what the pros are doing and why, you'll see that they recommend staying in your own backyard until you have a proven strategy and track record to support moving to an other market.

Finally, think about this. Why do smart investors look for out-of-state property owners?

Good luck,

Craig Haskell

Joel Owens · Answer

For the property taxes you could request a credit from the seller at closing to hold in a reserve account for such an situation.

If taxes goes up depends on the area and how they assess taxes. You also when buying want to check on the appeal time lines for taxes going out. Insurance sometimes the landlord uses a master policy so the rate they are showing on the books for the annual policy might be much lower than a single property policy.

Another one not mentioned is utilities. A lot of older buildings do not have water direct connect for each tenant to the utility company. So either the landlord has to bill back separately for water or include in total rent payment. I have seen water companies raise per gallon water and sewer rates now that economy is recovering. So even with no leaks a landlord gets hit with more expenses per unit.

Rents have been in bubble phase for apartments. Historically over decades nationally averages are about 10% vacancy, 50% opex, rent growth of 1 to 2% annually.

So a seller touts a 6.5 cap with 4% rent growth, 35% opex, and 3% vacancy. What happens when rent growth stagnates, vacancy rises, and expenses go up because of higher utility costs, property taxes, and insurance?? You get  a cap rate in the 5's at the top of the market. Your down payment with equity is now eroded and you have to hold on a long time for a recovery cycle.

Now I do know companies that buy buildings for 20,30,40 million that is class A  building and area. They have a plan for buying at a 6 cap and through costs measures and strategies getting to an 8 cap in a number of years but that is different than the C type older stuff smaller investors buy.

Jeremy Woods · Answer

I would buy in Northern Colorado but it's got to the point where everyone is buying up everything no matter the price theres not of room to cash flow I would be banking on appreciation if I stuck to this market alone. I do like the idea of buying the worst house in the best neighborhood. I should preface this by saying I am originally from Kansas and and use to live in this area so I know it fairly well. One of the things that concerns me as well is while I would get some great cash flow I wouldn't see much or any real appreciation in the next 5-10 years. Thanks for the advice on taxes, I have seen first hand how they can go up drastically and I never thought about having easy access to the property management backend for the property.

Bill S. · Answer

@Jeremy Woods so the adage is buy the worst house in the best area. I think the same could be said for multi-unit buildings.

Pros and Cons of Buying Multi Units in another state?

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