Investing from across the country?

Question

In my local market, a multi-families in our A or B parts of town with a Cap rate of 5.5% will usually fly off the market in a few days, often with multiple offers. In the few C parts of town, that cap will have to be 7 or so. It's hard to get excited about buying when compared to the numbers in places like Memphis and Atlanta. My question is, with some of the turn-key operations who buy, rehab, lend private money on, sell to investors and property manage all for you, are investors comfortable putting money into properties from across the country? I had lunch yesterday with a local investor who now has 10 properties in Memphis, and I'm definitely interested. But what has been people's experience, and what's the advice from the pros?

J Scott · Answer

When investing with a turn-key investment company (especially long-distance investing), you need to be VERY cautious. Many of the turn-key companies are at-best offering very slim margins and at-worst taking all the equity and leaving you with negative cash-flow. And the worst part is that you may not recognize the negative cash flow right away due to a half-assed rehab, but it catches up with you quickly when you run into major repair and vacancy issues. Now, all that said, there are some good turn-key companies out there -- just make sure you do your due diligence. In terms of Memphis (since you mentioned it), while I've never used their services, Chris Clothier who runs Memphis Invest (and is a well-respected BP contributor) is a great guy, and everyone I've spoken with who has done business with him has only had great things to say. So, there are definitely good companies out there, and it appears Memphis may be one of the places you can find them.

Tod R. · Answer

[quote=J Now, all that said, there are some good turn-key companies out there -- just make sure you do your due diligence. In terms of Memphis (since you mentioned it), while I've never used their services, Chris Clothier who runs Memphis Invest (and is a well-respected BP contributor) is a great guy, and everyone I've spoken with who has done business with him has only had great things to say. So, there are definitely good companies out there, and it appears Memphis may be one of the places you can find them. I was thinking of Chris as well in my post. I don't specifically recall others off hand.

Mike Jakobczak · Answer

I agree with J Scott, I often find companies who come to Toronto and pitch their great deals to foreign investors and to the uneducated person with the local market the deals look great! 100k property rented at 1200/month is great return for someone in Toronto who has to pay 300,000 to make 1500/month. But if you are familiar with the areas, these deals are not really deals. They are average or retail priced properties. So becoming familiar with anywhere you are buying is so important. Get to know the areas better then where you live. Since your money may be living there for awhile.

Brandon Nelson · Answer

Hi Tod, Thanks for the welcome, glad to begin here! I read in a similar thread "Investing from afar" that @Don Konipol wrote "I think it's more important to be very familiar with a market than physically close to the market." Makes sense. My question would be -- and this seems like a perfect upcoming podcast topic -- What are 4 or 5 starting research points that a distant investor can/should drill down in a prospective investment market? My friend I mentioned with 10 Memphis properties spoke about the area's job growth, its role as a major epicenter of global distribution, and 50%+ investor owned housing. In my relatively small town of Bellingham, WA, with less than 90K people, we still have close to 30 distinct neighborhoods all with a unique place in the RE market. Knowing that you can't "know it all" in any market, what can and what should you absolutely know before investing?

Michael D. · Answer

To be clear, I have 12 units, but only 4 properties out of state. Financing multi-family is do-able, but it'll be a commercial loan most likely. You can get 20% down with reasonable terms, but you need to make sure that you have great cash flow and present the deal in the right way. Setup a financial model for the property, show good estimates for all the expenses.

Brandon Nelson · Answer

Michael D., thanks for your excellent post about your recommended strategies and tactics. Interesting that you ended up investing in AL and PA -- not states I've heard buzz about like some of the others near them. (A hint I should pay attention to, I'm sure! :-) Michael, can I ask about your financing on these 12 properties -- or to anyone who's built an out-of-state portfolio well above what I understand to be the FNMA/FDMC limits? Is conventional financing even available for a non-owner occupied SFR with an out-of-state buyer and a price of, say, $60K?

Brandon Nelson · Answer

Chris, thanks for jumping into the conversation. Your philosophies resonate with me entirely. There's no sales pitch that's more music to my ears than when someone says, "Don't take my word for it... find out for yourself and if you like what you learn, let's do some business." Might I ask for some guidance on the "find out" part? Perhaps we could work it backward from a trip I'd like to make to Memphis about 6 or 8 weeks from now to check things out for myself, meet you and your team and some other professionals in the business. My question is, what are some points that would make you say, after spending a day together, "Man, that west coast dude has done his homework! He's gonna do well here and I sure look forward to working with him!" Michael D. poses some excellent general questions about greater Memphis that I will research for myself. But over the next 6 weeks, I'd like to get down to "runway level" as much as possible from afar. I priced tickets today, so I'd like to set a date for the trip and really have my @#$* together when I get there.

Michael D. · Answer

I own twelve units in AL and PA that I've never seen, so I can give you advice from that perspective. You need to look at things at two different levels: Strategically - Is this general area one that is likely to see economic growth? Are people/commerce/industry moving in or out? What is the overall public sentiment? How business/tax friendly is the area? How one-dimensional is the economy? Tactically - For each property you're looking at, make sure you're getting good non-biased input from your agent, inspector and property manager. Lots of photos, frank discussions, and open-ended questions will serve you well. Do a lot of due diligence to understand the micro market right around the property, including rents and common practices.

Chris Clothier · Answer

J Scott and Tod R. - I really appreciate the references to my families company on here. I have a lot of respect for the way you guys do business and its always nice to know that others respect the way we do business. Thanks - Chris

Chris Clothier · Answer

Brandon Nelson - The advice I give any investor looking to invest across country is to do some economic research on markets you are interested in first. Where a market is going (future stability), is really important compared to where it's been in the past from an economic standpoint. Probably more important than anything is who you are working with. A high quality team with a focus on long-term property management is much more important than the property itself so that becomes the next focus once you've identified a market. As far as the houses themselves, you know what you are looking for and if you are crystal clear on what you expect, then the team you are working with should deliver properties to you that meet your criteria. It can be a very easy and painless process, but you absolutely must do your due diligence. Lastly, I always tell people to never take anything I or anyone else says on faith. Always verify and check everything. Once you've built a relationship, then you are able to determine how much trust you can give, but I recommend you trust nothing until you have seen for yourself. It is always smart to verify and do proper due diligence when purchasing from a far. Recommendations should hold a lot of weight, but not until you know for yourself. As a side note, I wouldn't suggest borrowing HM from the same person I am buying a home from. Just my opinion, but that introduces a pretty high level conflict of interest on your part. I know companies that do it both here and in other markets, and ultimately, I have seen investors get hurt in multiple ways by that little perk. I would not advise to do that. All the best - Chris