The Dangers of Investing Out-of-State

Coming from a West coast city to a Midwestern city, I've seen both sides of investing out-of-state. On the one hand, it makes sense because in certain places, such as California, real estate is just too expensive to rent out and make it pencil. However, buying out-of-state is very risky and I have seen a lot of equity go the way of the Dodo Bird through out of state acquisitions.

One memory it particular springs to mind of a man who stopped by our office asking if we managed properties (we do, but only our own). He had bought two houses out-of-state at highly inflated prices from an extremely shystie company and then paid them more for the rehab. When they stopped returning his calls he came out to Kansas Cit and found that both properties hadn't even been touched. I have rarely seen someone look so sad, and telling him there was nothing we could do was a difficult task.

I know another who got stuck with a 50 unit complex that took 3 years and 3 managers to turn around and is still only sort of turned around. Another lost two apartments to foreclosure. The list goes on...

Needless to say, unless you own an investment company that is more national in scope, out-of-state investing is something I would shy away from. If you do want to risk it, here are some key things to do:

Vet The Team

Regardless of where you are, you need to do this, but even more so when dealing out-of-state. Ask around to find a property manager, interview them thoroughly and ask for references. Do the same with any contractors you use. From what I've seen, it's usually unwise to have the same company that you bought the property do the rehab. It can be a conflict of interest. And make sure to visit from time to time to keep them accountable and make sure everything looks right. And do not be afraid to switch if they are not getting the job done!

Vet The Property

Many people from California or other high priced markets are so blown away by the price difference and potential return (key word: potential) they assume they must be getting a good deal. But often these properties are in the middle of a war zone and the potential return can just be a bunch of made up numbers. If the cap rate is So call a realtor or two to get a CMA or their advice on these areas (or a different realtor if you are working with a realtor already).

Zillow.com is a good place to start, but remember the Zestimate is usually high. Same goes for EAppraisal. Look for the nearby sales and compare that to your prospective property, don't just look at whatever value some algorithm shot out. Also look at the rents. Rentometer is a fine place to start, but real comps are better; Hotpads and Craigslist both have map features now that allow users to easily find comparables. If there is a tenant, make sure to get an updated rent roll and preferably (although you'll need the tenants permission) a copy of the tenants' background report.

Do not trust a seller's repair estimates, it's always more and usually a lot more. It's not uncommon for me to triple seller repair estimates when doing the estimate myself. Even when sellers are trying to be honest (and yes, most are honest) it's usually low because people are overly optimistic. The Sydney Opera House was supposed to cost $7 million but ended up costing over $100 million! Look at the property in person yourself and try to get a contractor bid or at least rough estimate. And remember, that bid will usually not include appliances, HVAC, carpet and cleaning. There will also probably be a few change orders and add ons.

Vet the Area

Finally, some bad areas can be deceiving even when you are there in person. The movies make these areas appear completely hopeless and some are, but some do not look that bad on the surface. Ask around and visit websites that have crime and income data. City-data.com has a map feature that can break income and other demographics (although unfortunately not crime) by subdivision. And CLRSearch.com and Homefair.com have zip code crime data. I'm not a huge fan of the crime mapping sites, such as CrimeReports.com, because I am quite confident they have incomplete data.

Do not skip this step, you absolutely do not want to own a property several states away in the middle of a war zone. The A/C will get stolen, the tenants will trash the house, etc. The rent (when it comes in) will not cover the turnover and rehab. To make money in these areas, you really have to specialize in it. There isn't a manager on Earth I would trust in rough areas.

Buyer Beware

Again, I recommend staying close to home. And while careful due diligence is always important, when investing out-of-state, it becomes exponentially more so. So if you choose to risk it, make sure to be extremely diligent.

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