Is it a bad idea to purchase rental properties in other states?

Question

Hello,

A little about myself. My business partner and I started a successful company about 2 1/2 years ago and have started to make enough money to begin thinking about investments. My wife and I will clear $300k+ in the SF Bay area and it's very possible to clear 400k+ next year. Our overhead is very low. We own our home completely paid off and live a fairly frugal life. Next year I will have between $100k - $200k to invest in real estate.

I've read a number of books about real estate investing, including some from the Bigger Pockets publishing. I believe, for myself, that buying multi-family properties with the intent to rent and hold for long term would be best for us and our investing.

The problem is, in the SF Bay area, none of the numbers make sense for anything that is for sale. We live in Sonoma county and a fire recently left many people homeless. The supply of houses is very low and will be for at least a few more years. We also are not interested in investing in just one or two properties. Diversity is resilient in my business experience.

With all of that said, I have been looking at cities that are seeing growth, particularly in industries that are positioned to last, that have a lower barrier to entry. All of these places are outside of California. We have already decided that we will use a property management team so we can continue with our regular careers and not have as much time taken up by the properties.

What are the pitfalls and downsides to investing in multi family properties for rent that are located out of state?

Thank you for your time.

Todd Dexheimer · Answer

I think it is a great idea to purchase in emerging markets vs over saturated markets. Investing out of state is best if you can buy larger properties, but can work even with single families and small MF's. The key to out of state is the team that you build and the most difficult and important part of the team is the property management. With properties that are small, the management eats into the profit and the management is much less efficient/effective. With 75+ unit buildings, you can afford to have some on-site staff, creating a much more effective management team.

Downfalls:

1. You will need to hire a team to watch your assets. This means you need to be able to find people that you can trust and that work hard for you. This can be tricky and some people will take advantage of you as a long distance landlord.

2. Financing can be more difficult. If you are buying 5+ unit buildings, especially with a loan under $1mm, financing will be really hard. Getting a Fannie/Freddie over $1mm becomes slightly easier, but is still a challenge. Read more here: https://www.biggerpockets.com/blogs/10145/72001-ge...

3. Finding properties can be difficult due to not being in the market. Brokers won't take you as serious, especially at first and it is more of a challenge to build relationships. Also, you are not able to run out and view a property quickly, so you need to rely on others again. Read more here on how to overcome this: https://www.biggerpockets.com/blogs/10145/70795-ho...

4. Contractors sometimes don't want to work with you, because you're out of state.

There are challenges, but one of the best things for me, other that the profit, is that out of state investing has forced me to operate my business much more efficient and much more like a business.

Last thing, check out this article for the best markets: https://www.biggerpockets.com/blogs/10145/68178-to...

Percy N. · Answer

@Dana R., congratulations on starting a successful business.

Having started and successfully exited businesses, I know it is not easy.

If you are looking for a passive investment, I would recommend you also look into investing in a syndication deal (whether multi-family or other) as an option, along with the other out of state options you are considering.

The larger size of the deal gives you economies of scale (typically over 75-100 units) that single family residences would not.

Henri Meli · Answer

@Dana R. Lots of people invest out of state. But as mentioned by a few, you need to find an location that fits your investment criteria, then build a team in that location. This new team will act as your boot on the ground and handle things for you. At a minimum, you will need to find the right property management company. Depending on the level of investment, you might also need to have contractors to fix things and/or even leasing agents, in case you go the path of commercial office buildings. In order for you to find deals, you will most likely need a broker as well. There is a number of resources on this site on how to build and manage a remote team.

Good Luck!!!

Terry Lao · Answer

@Dana R.

https://www.biggerpockets.com/forums/712/topics/51...

Start with the top ten cities, then narrow your search with what best suites your goal. My niche is Las Vegas, and living in southern california, it was the logical choice.

Terry

Etienne Martel · Answer

Hey Dana,

I agree that the Bay Area does not have a good return for buy & hold properties. I grew up in Foster City, so I know the Bay Area very well.

I invest out of state with my family specifically on buy & hold rentals. They're much less expensive compared to the SF Bay Area and have amazing returns.

I would say that the hardest part of investing out-of-state, is setting up your team. You need to be able to trust them and understand each others view on the process.

Let's connect! I would love to learn more about your goals and see how I can help you.

Thanks!