Out of state investing VS being a private lender

[Adrien C.]

Over the past few weeks, I've spoken with several out of state investors interested in my area because of higher ROI compared to their area and lower costs to purchase. Many want to buy turnkey properties that are either tenant occupied or ready for tenant placement. I understand the thought process because what it takes to buy 1 SFH in say California can buy 3-4 here and the investors receives 2-3x the possible rents.

However, I was thinking that this involves a lot of risk being an out of state investor. One has to rely on a solid PM company to take care of the property, keep it maintained, and keep it occupied. Also, being out of state, the investor has to be more intentional about staying abreast on local happenings that may influence the investment. My thoughts lead to the idea that it makes more sense for an out of state investor to take that same $60K that they'd spend to buy the house (which rents for $1000) and instead be the bank for a local investor. Sure the ROI may be less (like 3-4%) but there's a different set of risks and a lot less hassle since they don't have to deal with the physical property.

So what are the pros/cons of being the bank vs being the actual owner of the property? Assume the ROI for the owner is 12% and the interest for the banker is 8%.

[Ali Boone]

It's just completely separate means of investing. There is a lot of benefit to owning REAL property (and plenty of ways to mitigate stated risks), but there is less risk than with private lending. Maybe. Maybe not. Either way--it's just two separate means of investing. Neither is right or wrong. It's also not an either/or type of thing.

Private lending though too, keep in mind, can require a lot more capital.

[Account Closed]

If you have the capital private lending is the way to go. In addition to the problems you noted there is another major one when owning property. Lawsuits. One is far less likely to be sued as a lender than as an owner.