Should I consider investing out-of-state with another investor?

Question

I'm looking at and debating the potential risk/reward of investing in flips out-of-state.

I have a relatively small amount of capital, about 30k. I am aware of a certain investor in AR who has her own rehab team, etc. and says that I can invest 20k-30k (sort of partial financing) and expect a 25% to 30% return. She states that flips there generally make about 20k after expenses.

So, this theoretically means that I could turn that 30k into 60k over the course of a year, if I repeat the process every 3-4 months. To me, this seems like a good way to quickly gain capital for the purpose of acquiring buy and hold units (long-term, passive income being my ultimate goal). Sure, I could try to do flips in my own market, but, I don't have any experience and I know that flips don't generally make that much here.

So is this a good idea? Any reason I should not invest in this kind of a model? To me it sounds like a great, passive way to quickly gain capital, and as I get more, I can fund larger projects for greater return.

However, I have some concerns. Does this person really do what they say they're doing? Does their business actually exist? Etc. So if this is a decent way to invest my limited capital, how might I go about verifying everything, as much as reasonably possible?

Aaron Pfeffer · Answer

So, from an objective perspective, this thread seems to have gotten off track.  Maybe we can all take a step back and put some perspective on what Lucas is proposing...

For starters, he isn't "flipping" these properties himself, so he's not actually doing out of state property flips.  He is apparently lending his money in a Gap Financing position to this woman (or her associates) from the sound of it.  So we're assuming she's going to lever up as much as she can with a first position loan and then utilizing Lucas' $30K to gap the down payment and/or repairs.  Does that sound about right @Lucas Mills?

If that is the case, then okay, she is offering you what appears to be solid 'pref' and a taste of the profits, which is standard for a passive gap lender.  It's also not unusual for flippers doing deals in volume to use Gap Lenders and giving those lenders sizable returns for their risky investment.  These types of JV structures happen between flippers and lenders all the time...but it's important to know that is exactly what we're talking about here, because if it's anything else, then yes, it would raise many concerns.

And even if this IS what we are talking about, then you're going to want to feel extremely comfortable with her as a flipper, and more specifically, as your partner., because that's really what she is here.  This is a Joint Venture of sorts, which makes you partners, especially since you are participating in the profit.

Strongly suggest you take that four hour drive, meet her in person, meet the entire team, see her previous flips (numbers on those flips) she has completed, and know exactly what you are getting yourself into.  AND make sure you collateralize your money appropriately if you ultimately decide to move forward with her.

Best of luck!

James Wise · Answer

Sounds like a business endeavor that won't pan out.  If folks would be able to passively turn their money with an ROI of 25% why are all the hard money lenders out there lending at a rate that is half of that?

Hank Keller · Answer

@Lucas Mills - It appears to me that you are not buying a house, but participating in a flip, correct? I'd ask why this flipper is willing to let you in on a deal when she could just keep the money herself? Especially if she has a large team in place and doing several properties. Something doesn't add up to me.

I think that your idea of going to meet and see her operation is a good one and the first thing you should do.

Jay Hinrichs · Answer

doubtful you can get 3 turns a year as everything would have to be perfect and everything is not perfect in flipping houses.

I suspect you could do just as well right there in your own market as Ali suggests without having to travel or do remote rehab

Ali Boone · Answer

If you're in MIssouri, is there a reason you want to do it out-of-state? Missouri isn't really a state that forces investors out-of-state that I know of (like living in LA or NY or a higher-priced area would).

Kim Tucker · Answer

And you being so close to the Vacation Rental Capital of Missouri in Branson and Lake of the Ozarks.  There are a lot of folks investing right in springfield, so no need to go out of state unless of course you are going to be a hands off private lender and funding someone experienced somewhere else?

Lucas Mills · Answer

Huh? My understanding is that, in addition to doing her own rehabs/flips, she is also a loan broker. So she pairs new(er) flippers with private investors and charges points on the loan. She takes on little to no risk by doing this and makes a little money in the process. The flipper gets their funding and the investor gets a percentage of the profit. For example, if the flippers require 40k, she may take 20k from two separate investors. Each investor may reasonably request up to 25% return; so the flipper gets 50% while the investors split their 50% two ways among each other. That's why she can allow investments using relatively smaller amounts, because she's using multiple investors in these scenarios.

That's my understanding, anyways. Does this seem nefarious for some reason?

Lucas Mills · Answer

You are right. "Gap financing" is a term that she used to describe the model.

The area of concern for me is that I'm not trusting her and/or her team to do the flips -- I'm pretty sure that she is just matching me up with new(er) flippers who need financing and acting as a broker in this situation.

Of course she vets the investors and the deals, but obviously this leaves a lot more up to chance.

Lucas Mills · Answer

Good points, and I don't know. That's why I'm here to discuss. Maybe I don't fully understand all details of this and have a false expectation. Maybe she is trying to pull the wool over my eyes, as a new, ignorant investor. Could be.

Ultimately, I don't think I'm going to pursue this avenue. There has been raised enough reason for concern for me to give something like this serious consideration and I think I need more experience before getting involved in this kind of investment.

Andrew Johnson · Answer

@Lucas Mills I think you're missing the point.  It's an extrapolation of the expected returns.  This woman is telling you that she has some system for giving you a 25% ROI and you can roll this investment over every couple of months.  *If* this woman is truly successful at this, has a system, and your posit is correct (there is a point of diminishing returns) then she doesn't need your money.  And she certainly wouldn't give an annualized ROI for 100% (your $30K -> $60K example) in exchange for that money.  That's what doesn't make sense.  You have two lanes:

1.) So, if there a finite supply of these $50K homes and this partner has a team, is successful, etc. then she doesn't need your money.  She would have her own money in the deals and would have local investors lined up to get an annualized 100% return on their money.

2.) If there isn't a finite supply of homes (and hence can use more capital) then you get into my hyperbolic example of returning nearly $2 million at the end of the 6th year.  Heck, you can cut the return in 1/2 and say that you'll have $900K at the end of 6 years and it still sounds hyperbolically irrational.

Maybe I'm wrong, maybe this is the deal of the century, how the heck would I know.  But just think this through:  If someone out-of-state called you on the phone...tonight...right now...and told you about an out-of-state investment opportunity that was (using as much of your posted data as possible):

a.) A "great, passive way to quickly gain capital"

b.) Could give you a 25% ROI in a couple of months

c.) Would allow you to reinvest your capital to get a 100% compounded ROI in 12 months

What would you do?  Would you...

i.) Ask to hear more.

ii.) Sign a check and mail it the next day.

iii.) Hang up on them but if it sounds too good to be true...then...you know the rest.

Anyway, I don't know if this particular deal is good or bad.  Go for it if you believe in it.  All I'm saying is that it (on it's face) just sounds like an American Greed plotline...

Should I consider investing out-of-state with another investor?

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