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Updated almost 2 years ago, 01/18/2023
Out of state investing- SCAM! False promise land of cash flow.
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.
@Joe Kim only a solid deal from strictly a purchase point of view. I am not talking about the "hidden cost, repairs, maintenance, PM cost, etc." In other words, if someone would have approached me about that house at your purchase price, I would have taken a serious look. Now whether or not I actually close on it would depend on my own due diligence and whether or not any maintenance or vacancy reducing upgrades existed.
- Alex Craig
- 901-848-9028
Originally posted by @Joe Kim:
Originally posted by @Russ Draper:
My experience with out of state investing is that you have to pay attention to it. It isn't entirely passive, you still have to pay attention to your rentals. So the myth of just forking over money and getting a return isn't true, you still have to manage the PM's a bit. If you want to just pay money you should dollar-cost average invest in index funds (same amount at fixed time intervals no matter how market is doing).
Russ, I totally agree. The problem is that when you actively manage your manager, what is your return on your time like? I feel that all that time/effort/stress spent on trying to "improve" your manager is usually futile in 90% of cases. ( you still end up paying for maintenance/capex, etc..) How do you then have a portfolio of greater than 10 properties if you are going to spend so much time (largely wasted) dealing with prop. managers?
I think the key is to buy the right property and find the right tenant. That is much more important than the property manager. In fact, I'm just brought a property that I'm self managing 3000 miles away! it's working great so far.
Originally posted by @Diane G.:
Joe - I enjoy reading your post.... Just for the sake of discussion -
I imagine your 7 properties were purchased for $1.2M with say $300K down....If you put that $300K down and bought a SFH for $1.2 in Palo Alto in 2014, you would probably be looking at $1.7M today.... That is a $500K appreciation...how much do the 7 bring in appreciation in total? probably comparable is my guess....
On cash flow front, yes, the 7 probably does better than a SFH in Palo Alto can bring you...But you put in significantly more time and efforts into these 7 than a SFH in Palo Alto.....
All considered, in hint sights, would you choose the 7 or 1 in Palo Alto?
Palo Alto- hands down -less work and appreciation is probably slightly more than the smaller 7 properties.
However, who has the crystal ball?
Fortunately the real estate market cycle is pretty clear and California follows a dramatic upturn and downturns.
So my next move will be moving a large amount of investment into California once the next downturn occurs.
Selling 4 of my out of state (outside of California) properties - one this year and 3 next year. I would have sold 8 properties total and only keeping 4 remaining.
Joe Kim
I totally agree with you.
OOS turnkey, has become the landmark for BiggerPockets, and so many marketing guys pretending to be investors on this site.
I would challenge any OOS investors with a fair comparison to what if they invested locally in CA. In my case, CA investment beat OOS by many many fold.
If you really want to invest OOS, I guess you have to go there and check it out yourself, not relying on "turnkey providers" to tell you some pipe dream over the phone.
I have thought about OOS but decided against it. Stay in ca.
I think Joe Kim has some good points but also some misleading ones. Did you get an inspection prior to purchase? Did you ask the PM about their retention or eviction numbers?
I’ve had a good experience in Memphis so far. I think some of it is either bad luck or just not proper vetting.
Maintanence will always happen to some degree. Also turnkey is not entirely passive, you should check in every couple months even if everything is going great.
I also think your PM will give you better pricing if they’re large enough. Most turnovers won’t cost you 8k
Originally posted by @Caleb Heimsoth:
I think Joe Kim has some good points but also some misleading ones. Did you get an inspection prior to purchase? Did you ask the PM about their retention or eviction numbers?
I’ve had a good experience in Memphis so far. I think some of it is either bad luck or just not proper vetting.
Maintanence will always happen to some degree. Also turnkey is not entirely passive, you should check in every couple months even if everything is going great.
I also think your PM will give you better pricing if they’re large enough. Most turnovers won’t cost you 8k
Of course, I got an inspection on every single property, turnkey or new construction.
Yes, most turnovers don't cost 8K. More like 1K to 2K (in a good situation). But if your cash flow is $400/month = $4K/year. Then half your cash flow is gone with the turnover ($2K in repairs). If you have other major repair (appliance, HVAC, plumbing) that is unexpected it will also eat up your cash flow. So really over a span of 2-4 years the overall positive cash flow can be very low unless you got lucky with a long-term tenant for 3+ years.
One more thing: things are great now. people have jobs. Imagine what will happen to your wonderful cashflow when recession hits - people lose their jobs, eviction will spike, etc.. A ton of investors will dump their properties at a loss, and big investors will buy them up for discount and sell them to other investors.
I've been lucky with a handful of properties with minor repairs but in general - especially the ones that are so called "turnkey" - the rehabs are not very good.
Maybe you are working with Memphis Invest which has a very solid reputation but they don't sell their homes for cheap. But the world's best property manager cannot prevent someone from losing their job, getting a divorce, or moving for whatever reason.
My portfolio grew to 12 properties with cash flow ranging from low $400 to as high as $900/month with average around $600/month. But when I get a turnover, eviction, or capital expenditure that cash flow got destroyed.
Honestly, appreciation way way beats cash flow. That's why the BRRR method is so good and anything you can do to "force appreciate" or buy the property for cheap is the way to go.
However, Turnkey properties typically cannot be bought for cheap or discount. The turnkey provider is the one who is making bank. Also, they make a killing in property management side while the investor gets screwed.
2013,2014 were good years for me but closer to the present, the market has definitely changed (higher prices, very low appreciation potential).
I've made very good money in real estate investing. properties in places like Houston and Indianapolis which have DOUBLE in value and or 50% appreciation in 2 years time.
But the whole cash flow game in the turnkey space is really a poor way to invest. All the meat has been eaten by the turnkey provider. That makes the investment risky.
Hi Joe,
As an experienced investor with multiple out of state properties in various markets, and with what appears to be an extended period of time in each of these markets, I think your long term results and insights into OOS investing and turnkey in particular are extremely valuable to the new investors that follow BP and are looking to start investing and trying to decide what path to take.
If your average cash flow was $600.00 / property and you were losing a large portion of this cash flow to expenses that were not accounted for in the estimates given to you by the your providers, I wonder how long an investor making the "generally accepted" $100 to $200 per door, can survive before deciding to call it day and selling their "cash cows" back to a provider who can then repeat the cycle. At least you have an up market to sell in! There would be serious losses if you were forced to sell in a down market like one of my friends had to do quite some time ago in Tx.
As most of the successful West Coast investors will continue to say over and over again. Buy what you know, buy value add, and buy local if you can. Real estate investing is difficult enough already without having to completely rely on the good will of others for your share of the pie.
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Originally posted by @Joe Kim:
Originally posted by @Caleb Heimsoth:
I think Joe Kim has some good points but also some misleading ones. Did you get an inspection prior to purchase? Did you ask the PM about their retention or eviction numbers?
I’ve had a good experience in Memphis so far. I think some of it is either bad luck or just not proper vetting.
Maintanence will always happen to some degree. Also turnkey is not entirely passive, you should check in every couple months even if everything is going great.
I also think your PM will give you better pricing if they’re large enough. Most turnovers won’t cost you 8k
Of course, I got an inspection on every single property, turnkey or new construction.
Yes, most turnovers don't cost 8K. More like 1K to 2K (in a good situation). But if your cash flow is $400/month = $4K/year. Then half your cash flow is gone with the turnover ($2K in repairs). If you have other major repair (appliance, HVAC, plumbing) that is unexpected it will also eat up your cash flow. So really over a span of 2-4 years the overall positive cash flow can be very low unless you got lucky with a long-term tenant for 3+ years.
One more thing: things are great now. people have jobs. Imagine what will happen to your wonderful cashflow when recession hits - people lose their jobs, eviction will spike, etc.. A ton of investors will dump their properties at a loss, and big investors will buy them up for discount and sell them to other investors.
I've been lucky with a handful of properties with minor repairs but in general - especially the ones that are so called "turnkey" - the rehabs are not very good.
Maybe you are working with Memphis Invest which has a very solid reputation but they don't sell their homes for cheap. But the world's best property manager cannot prevent someone from losing their job, getting a divorce, or moving for whatever reason.
My portfolio grew to 12 properties with cash flow ranging from low $400 to as high as $900/month with average around $600/month. But when I get a turnover, eviction, or capital expenditure that cash flow got destroyed.
Honestly, appreciation way way beats cash flow. That's why the BRRR method is so good and anything you can do to "force appreciate" or buy the property for cheap is the way to go.
However, Turnkey properties typically cannot be bought for cheap or discount. The turnkey provider is the one who is making bank. Also, they make a killing in property management side while the investor gets screwed.
2013,2014 were good years for me but closer to the present, the market has definitely changed (higher prices, very low appreciation potential).
I've made very good money in real estate investing. properties in places like Houston and Indianapolis which have DOUBLE in value and or 50% appreciation in 2 years time.
But the whole cash flow game in the turnkey space is really a poor way to invest. All the meat has been eaten by the turnkey provider. That makes the investment risky.
that's just landlording .. If you don't want those risks or ups and downs you should just buy GREAT performing notes.. did you ever fail to pay on any of your mortgages on your rentals ???? so why not take the position of the bank and let someone else who wants to do the heavy landording job do that.. and you collect mail box money.. I have been doing the be the bank for years now.. and most of our clients frankly are you JOE burnt out landlord syndrome.. you have some money and just want cash flow with no drama.. I love the performing note business.. we never have to deal with these things.
- Jay Hinrichs
- Podcast Guest on Show #222
Originally posted by @Joe Kim:
Hi guys,
I just posted my first property of out 3 that I bought this past year with new philosophy and focus on just more than cash flow.
Buford, GA! brand new construction with cash flow $600/month right now. Most importantly I'm SELF-Managing this property across 3000 miles away!
Hey Joe - thanks for this. How do you go about finding solid maintenance/on-site managers etc if you're out of state? How do you vet them, and know that they aren't overcharging/cheating you etc? Understand that properties of scale help, but you need to start with 1 building first right?
Originally posted by @Xander Snyder:
Originally posted by @Joe Kim:
Hi guys,
I just posted my first property of out 3 that I bought this past year with new philosophy and focus on just more than cash flow.
Buford, GA! brand new construction with cash flow $600/month right now. Most importantly I'm SELF-Managing this property across 3000 miles away!
Hey Joe - thanks for this. How do you go about finding solid maintenance/on-site managers etc if you're out of state? How do you vet them, and know that they aren't overcharging/cheating you etc? Understand that properties of scale help, but you need to start with 1 building first right?
Hi Xander,
I bought brand new construction so that all I had to do is find a good tenant and then self managed the 4 properties.
I also have home warranties and lastly Yelp and angieslist are easy way to find contractors, plumbers, electricians.
As always, maximize effectiveness by using your own personal network to find a connection to the place you are looking at.
Also, biggerpockets is a great way to find help.
Joe
Thanks so much for your response! The idea of managing a place remotely without a property mgmt company is daunting. Encouraging to know others are making it work.
@Joe Kim, it has been an interesting read.
My thoughts: Your CPA MUST love you! You file taxes in a number of different states every year.
It seems like you trying to make money the 'hard way'. Do you have a specific rate of return you MUST have? It looks like you are 'shotgunning' all over the place.
My 'model' is newer properties in good school districts in the Phoenix AZ area. I attempt to hit the 'average' to slightly above average. ALL properties are SFR so I don't have to wonder who I might sell to when I want out.
They are doing well today, but they don't usually in the first few years as cashflow is poor. My properties are easy for me to self-manage, I rarely have issues, and my tenants stay an average of 5 years. Right now I have that has been with me 6. In my past I have had a tenant for 9 years.
Hope that helps.
Thought this was going to be another Morris Invest post lol
Don't go with Ohio Cash Flow - they're known to rip off investors, I lost about $25,000 with one of their properties
Quote from @Zachary Schimenz:
Don't go with Ohio Cash Flow - they're known to rip off investors, I lost about $25,000 with one of their properties
Feel free to click on this thread to read our version of events compared to the investors - https://www.biggerpockets.com/...
- Engelo Rumora
- Podcast Guest on Show #89
