Out of state investing- SCAM! False promise land of cash flow.

[Joe Kim]

BEFORE I say anything.  I want to be clear I am totally bullish on real estate investing.  But I want to warn people that it is not what you think it is.  And share my own journey over the last 3 years.

Ok.  Out of state investing is NOT a scam.  

But all the hype and promises are rarely realized.

First some background.  I started buying buy/hold rentals out of state (I live in California- no surprise right?) in late 2013 in texas via a "turnkey provider".

I completely bought into the cash flow is the key to REI (real estate investing) philosophy especially since California properties are overpriced and cannot cash flow. Buying for appreciation is gambling. Sound familiar?

So I got to 10 conventional mortgages this year when I bought my 9th rental property(10 doors). That equaled a total of 10 doors/units (I have 8 SFR, 1 duplex, and primary home).

I also bought into the whole diversification model and bought in 6 different metro areas in 5 states!

Before I unleash my tirade on why out of state investing SUCKS.   Let me say this.  I made a lot of money doing REI over the last 3 years.  I love REI.  I will continue to invest in real estate until I die. 

Also, I want to thank my buddy DK who introduced me to REI.

That being said, let me outline what the promise of "out of state" "turnkey" "passive" "cash flow" investing has been for me.    Only "out of state" is true...rest of the it -turnkey, passive, cash flow---all a pipe dream of sorts and/or significantly lower ROI than promised with a lot of headaches.

#1 Turnkey.   I went to recent SF summit in Oakland(by J. Martin) this past weekend.   Chris Clothier of Memphis Invest and Australian Dingo (Ohio) spoke about what REAL turnkey is all about.   Let me tell you I've yet to experienced TRUE turnkey that these two guys were talking about. (Unfortunately, I have not yet invested with two of these reputable companies (Memphis Invest and Ohio Cash Flow) but I have dealt with 3 different turnkey providers in 3 different states.

This is what turnkey investing should look like:

**Release control: IDEALLY: The turnkey provider does 99% of all the work. The investor only has to put up the cash or financing for the property. EVERYTHING else is done by the provider. The list of properties- nearly every one of them should be HIGH quality, good cash flow, FULLY rehabbed to new or nearly new condition (with no real Capex expected for at least 5-10 years!)

REALITY CHECK: I'm constantly checking up on the turnkey provider due to current or prior bad experiences of poor rehab, poor property management, unexpected Capex within 1-2 years of purchase, costly maintenance nearly every month, terrible cash flow. How can I release control when problems keep coming up?

#2 Passive.   Communication should be prompt and timely.   Lease renewals should be given notice to the owner.   Any major problems like lease NON-renewal, eviction, etc.  should be communicated quickly with a plan of action that is executed after owner's consent.  

REALITY CHECK:  I felt bipolar about being "passive".  I would be passive as much as possible and then a string of problems make me sensitive to all that is happening.  4 evictions in 3 years is pretty high and in some cases clearly due to poor tenant selection.  That makes me want to be part of tenant screening/selection - that's not passive.    Being "passive" and poor property management just kills your cash flow.  For me, if I'm going to spend the time fixing problems or dealing with issues, I should just self-manage -then my time is well spent.   Spending time deal with property management rarely ever resulted in big savings, rather just more stress.   Poor communication made things worse.   I could give examples, but this post is getting too long.

#3 Cash flow: Promise land of cash flow will let you quit your job and retire early. Good luck. If you could buy 20, 30, 100+ SFRs(for higher income earners) to replace your income. Jason Hartman says routinely in his podcasts, "Even if you get HALF of the promised ROI, it's good." Well, I would say, HALF is the MAXIMUM you will get with most of these turnkey providers. Let's say predicted cash flow is $300, then $150 is likely your maximum cash flow when calculated over at least 2 year period. Because within the first 2 years of buying these properties I had roofs, HVAC, electrical panels ($2000), moldy bathrooms ($3000), rotting tree removal ($1100), make ready whenever there is turnover (as much as $1500) ,toilets ($600), etc...so many capex or maintenance costs it has wiped more than a year's worth cash flow easily in some properties.

REALITY CHECK: Cash flow sucks.   Unless the property is rehabbed to NEW or "like-new" conditions and high quality long term tenants are chosen (for that class of property), capex/maintenance and turnover costs will eat away a LARGE portion of your cash flow.

Now you may think, this guy is an idiot who did not buy the right properties from the right turnkey providers.   I think making $500,000 to $600,000 in equity appreciation in my 9 properties in the last 3 years with properties in high cash flow areas like texas, Indianapolis, chicago etc... is pretty awesome and makes up for the poor cash flow.  Certainly, I made a lot of mistakes and got some LUCKY breaks (market timing) in the my first 6 properties but I think I'm doing it better now in the last 3 properties I bought.   This post is too long.   in the next post, I will highlight what I learned and how I applied what I learned to the last 3 properties I bought in 2016.