My Out-of-State Search: Step 3, The Gameplan

 A call to action!

In my previous 2 posts, I talked about our long-term REI strategy and how an out-of-state investment fits into that plan.  And while all investment decisions should start with similar steps, those are very philosophical.

Today I will shift gears and focus on a plan for action as I outline my game plan for our next purchase.  To do this, this post will outline the project plan and describe the characteristics of my ideal property.

Purchase Price

We would love to keep it around $80,000 - $100,000, but might be able to go up to $125,000 if needed.  We hope to get ‘as good of a deal as possible’ and would be happy paying 5%-10% below retail – but would be OK paying close to retail if it meets our criteria well.

Property/House Characteristics

These guidelines outline my ideal property based on the 3 goals from my previous post, and my personal view on what might drive performance in these three goals.  However, it’s important to highlight that an ideal property never exists.  As such, the values associated with these characteristics are somewhat arbitrary, and should be treated as guidelines; a robust yet productive search is far more art than science.

Cash Flow

1. 10% cash-on-cash return, after additional capital expenses.
   
2. Clean/decent condition of interior (note that I might be willing to invest in modest cosmetic fixes such as new appliances, paint, carpet, etc.  But no remodels or major repairs needed in year 1.)
   
3. Newer construction.  2000+ is great, 1990 is OK.  1980 would take some convincing.
   
4. Reasonable commute to large centers for employment.
   
5. 3+ beds; 2+ baths.  I would say that 4/2.1 would be ideal.
   
6. Modern features such as a functional 2-person master bath, social kitchen, attached 2+ car garage, central heat and/or AC, non-gold features, etc.
   
7. Clean, decent, functional yard (low cost of upkeep, so no pool and probably no water feature)
   
8. B neighborhood or better, and on a decent or better street.
   
9. Attractive curb appeal.
   

Appreciation

1. Stable-or-better outlook for the economy (this one is complicated)
2. Low $/sqr ft (<$50 is ideal)
3. Low cost of living in the city
4. Larger lot in a neighborhood with larger lots
5. Diversified economy
6. Non-Extreme climate
7. Property doesn’t have any significant negatives (high road noise, power lines, hills, odor, etc.).
8. Housing market trends must make sense.
9. Decent or better city to live in.
10. A decent sized city or larger (maybe one of the biggest 75 MSA in the US.  Note that this is due to both appreciation and feasibility)
11. Ideally, the real estate market for the city would be in pretty poor shape for the recent/near-term.  We are not selling any time soon, so falling prices, foreclosures, vacant homes, etc. for the city-at-large are not a huge concern.

Diversification

1. Not in the Pacific NW.
2. Not in an economy largely driven by Nike or Intel.

Other

1. SFR.
2. Within the US.
3. Not primarily a college rental or specialty rental (section 8, elderly, etc.).
4. Non-offensive political views of the state? No joke, but I think that there are some states that we may not want to invest in due to their political stance.  I’ll ignore this point for now; if we get to the point where one of our finalists is in one of these cities – we’ll take it from there.

I purposefully left taxes off of this list; I view taxes as very important insofar as they impact cash flow.  If taxes are high but rents are also high and the property cash-flows, high taxes may actually be a positive.

Capital Finances and Financing

We will most likely do a 30-year fixed mortgage in my wife’s name with 25% down.  It would be nice to only put 20% down, but that does not look likely.  We have good credit.

We currently have a rainy-day fund which is off-limits, and a RE fund which has around $27K in it now.  However, my wife is off work with our 4-month old which means we are running at a monthly loss (we had planned for/budgeted for it), so I expect for our savings to be around $23K when she returns to work, and back up to $30K by November.  This means that the earliest we could qualify would be late-September and the earliest we could close would be around November.

Based on a purchase price of $100,000, I project our capital needs at:

1. Down Payment: $25,000.
2. Closing Costs that can’t be rolled in (taxes, inspection, title insurance, etc.): $2,000.
3. Travel: $2,000.
4. Consultant/Advisor (optional; more on this in another post):  [left blank, as I may end up negotiating this with one of the readers]
5. Using rough numbers, we are around $30,000 in capital.

Most likely, we will also have a vacancy once purchased, but I am considering that operating, rather than capital expenses.

The Exit Strategy

Our plan is to hold for a very long time – at least until entering retirement; and reading the tea leaves, I think this is what will happen.  Once in retirement, we would have lots of options – but those are a lifetime away and projecting what would happen then feels a bit presumptuous.

Plan B would be to refi in some years for cash/leverage.

Plan C would be to sell on the MLS, but I doubt that’s in the cards.  In a worst case scenario, we could dip into our rainy-day fund to prep it for an MLS sale.

To Turnkey or not to Turnkey

We have two general options:

1. Buy a turnkey property through a turnkey provider.
   
2. Buy a move-in ready property and hire a Property Manager (PM).
   

This is a big question, and one that I will not go into depth on here.  What I will say is that finding the city to invest in is the next step, so the turnkey decision is not-yet time-sensitive.  For now, I will side-step this discussion as best I can.

The Team Resources

Most of these are obvious, but to buy out-of-state, you need experts to help.

1. **RE Agent**.  I expect for my RE agent to act as my expert ‘on the ground’ and put me in touch with others as needed, and walk me through the purchase.  A RE agent that works with investment properties and out-of-state investors is ideal.  I may even consider hiring a RE agent if I purchase a turnkey property – though may need to pay this person out of my pocket in this scenario.
   
2. **Property Manager**.  Maybe the most important partner for cash flow; I hope to have this person identified prior to finding a house (to provide insight into the rental market).  I will use referrals from BP and RE agent to create a short list, narrow it down, and enter final talks with 1-2.
   
3. Mortgage Person.  Our financing is pretty simple, so once the wife is back to work, I don’t anticipate a problem getting a mortgage.   I plan to have ~2 referred to me from the RE agent.
   
4. Turnkey Company? (if appropriate)
   
5. Advisor?  I don’t want a coach or a guru, but hiring a local expert who knows the market to help with the search may make sense.  I don’t think this is needed, and if we get a RE agent who is half-way-decent, this should do us just fine.  But still, it’s an option.
   
6. Appraisal?  If I purchase a turnkey, I plan to hire a local RE agent to provide me an opinion of value before putting in an offer.  Obviously the full appraisal would still be done during the loan formation.
   
7. A Home Inspector.  Be sure that this person has no relationship with the seller (important for turnkey).  This can be found through my RE agent.
   
8. Title company/attorney.  Frankly, I’m not worried about these, and am happy using the recommendations from the seller or RE agent.
   
9. Insurance agent (I think our current guy can insure out-of-state, but I’m not sure).
   
10. I already have a CPA in place that can apparently do my out-of-state taxes.
    

I do not anticipate the need to interact with a GC, wholesalers, or RE attorney (other than closing).

The Timeline

One of my favorite project management phrases is “you show me a completed project, and I’ll show you a finalized project plan.”  Indeed, timelines and plans tend to be quite malleable.

With that in mind, here is my first attempt at our timeline:

1. Now through September.  Locate the market to invest in.
   
2. September.  Locate core team.  I will have our current/local RE agent refer us to someone in our target city.  This lets her get a piece of the pie, and we trust her implicitly!  With a RE in place, we will identify a property manager.  Conversely, if we opt to go turnkey, we will identify turnkey provider(s), and/or advisors.
   
3. October.  Finalize core team; begin working with mortgage person.  Study intra-market characteristics.
   
4. November.  The formal search begins!  Probably an on-site visit to city where I hope to see 10+ properties (all of which have been previewed), put offers on 5-6 and get 1-2 negotiations accepted.
   
5. January.  Close from afar.  Hand off process to PM.
   
6. February.  Profit.
   

I find that I feel a sense of urgency with this search, which is a bit of a bad thing.  This is a search that is out of our comfort zone with real risks attached to it.  Our process and our search should be calculated, methodical, and probably opportunistic – not characteristics facilitated by a sense of urgency.

The Risks

No good plan is complete without a review of the potential risks.  In fact, this was a very exercise for me – as the first risk listed is one that I had not previously considered, and that has a very high chance to derailing the search before it beings...

1. **I may not be ready for an overnight away from the family that soon**.  I have spent 1 night away from my 2-year-old and none away from my wife in the last few years.  Alternatively, I’m also not ready to travel with a 7 month old and a 2-year old…  As such, I’ve considered buying site-unseen, which would present several additional concerns.  This presents a serious risk to the plan.
   
2. We may opt to do something else with the money.  We are believers in the stock market, but with our newest arrival, we are behind on our 401k contributions.  This is in-part by design, as our income will also be piddley this year, minimizing the tax advantages.  We will not be able to both purchase a rental and max those contributions this year.
   
3. Buying in winter is a little risky, as the big tenant flurry tends to come in Spring.  As such, I’m a bit nervous about having a place vacant in January.
   
4. Given the option, we may still buy locally.  However, I doubt that we will find a place that makes sense.
   

Next Steps

With the criteria in place, I had planned to begin the process of narrowing down what markets we might invest in.  However my reservation about visiting a property/city is easily the most urgent issue right now, and is what I will speak to in my next post.

ps - sorry for formatting - I'm having formatting issues.