Quote from @Marcus Auerbach:
You've been sold a pipe dream. I get it. Finding deals has become a lot harder in recent years, which leaves a lot of people frustrated and looking for alternatives. And because the grass always looks greener on the other side, you are looking to invest OOS. Because the grass always looks greener on the other side.
Investors are supposed to be good at math, but nobody is talking about how the math is impacted by not being local.
Anything you do remote is harder and costs more. There is a cost burden that comes with OOS investing. I would say that is at least 10%-20% on everything. In some cases, it's hard cost, in some cases soft cost or just inefficiencies. You will on average pay more for the same deal, you have to hire a GC instead of just subs, your contractors may charge you a little more, order too much material or make mistakes you would have caught, if you would have been on the job at least 3 times a week (like I do). Every service call is more expensive and it will take longer to rent it out. The quality of the tenants is lower, simply because nobody watches your money like you do.
The book you have probably read about OOS investing tells you to get three quotes from three contractors. Sounds easy enough. Until you find out how hard it actually is to find just one contractor who has time and is willing to spend half a day walking your property and giving you a "free" estimate. We have a contractor shortage. The good ones don't even answer their phone if they don't know the number. It's these little things that sound so easy and reasonable in that book, until you try to do it.
So when does it make sense to invest OOS?
In my opinion, you have to find an economic delta that is large enough to make it worth while the OOS premium. If you live in Chicago, investing in Milwaukee does not make economic sense. Milwaukee is a slightly better market and you are less than 2 hours away, but it's still remote and the small market advantage in the end not worth paying the OOS premium. Keep your home field advantage. If you work in tech in CA or in finance in NY, it might be worth it to go OOS. Your income is higher and local real estate is absurdly expensive. The economic delta is big enough to offset the additional cost.
Elon Musk calls that first principle thinking, you could just call it common sense.
The absolute worst case scenario are OOS investors hunting for bargain deals in the hood. Because they don't understand. They buy a 100-year-old house at half the median price that has a ton of overdue capex. They hire a cheap PM and ask them to keep the rehab budget under 10k. And then they can't find a tenant. Or just a really bad tenant who trashes the place. They get in trouble with the city, because their house is so bad the city issues work orders or fines them for garbage in the front yard (like a mattress or tires - often dumped by someone else not even living there).
Now the OOS investor finds out that reality does not match the spreadsheet. Perhaps the worst part is when they make the local news and give all investors a bad name, because the press forgets to mention that the absentee owner has not seen the property in years - and it's just bad press for landlords in general - and soon enough local politicians start calling for more regulations..
Based on my own investing experience for over 15 years in Milwaukee I feel in general that it is always best to buy the best quality real estate investment you can afford at the time. Ask me how I know! That is true if you are local, but even more important if you invest remote and every little step is harder and or more expensive.
I'll wade in here as someone who does the dreaded midwest to midwest OOS investing to give my perspective on how you
can make it work. For background, I live in Chicago and invest both here (in the city) and 3+ hours away in Indiana. You are pretty much spot on that all in you will pay 10-20% more as an OOS investor, and I'd counter that's probably even on the low end a bit..... if you try to do this casually and don't spend the time to really dial in your systems, processes, and people you work with (i.e. run it like a good business and constantly evaluate how you can do things better/cheaper/more efficient). At the end of the day, the skills needed to be a successful rental property investor and landlord are the same in any market, but every markets trends and economics at any given point aren't always the same. Getting really good at being an investor and running a business can help you take advantage of great market specific opportunities as they present themselves. A few tips to those wanting to invest out of state:
1.) Start investing local first. Ironic advice, I know, but you will learn more from the experience of doing it all yourself than you will from a book/blog/podcast/social media guru
2.) Dial in your processes and learnings from your experience as a DIY landlord to define how you want to run your OOS rentals (how you screen tenants, find deals, manage marketing, what materials you use on rehabs, how you manage rehabs and turns, etc) and the characteristics/qualities you'll want from your OOS PMs, Realtors, wholesalers, lenders, tradesman, cleaners, you name it.
3.) Pick your OOS market because it offers some sort of unique outsized growth opportunity your current market does not (don't pick it just because it's cheaper)
4.) Travel there often to learn on the ground nuances of the areas, neighborhoods, streets, and to network with all of the folks listed in point #2
Personally, OOS investing has helped me scale. By putting a time barrier between me and some of my properties, it's forced me to get serious about setting up and running a successful business that doesn't allow me the crutch of my own manual labor/time to paper over corners I cut somewhere else. It's also had the additional benefit of giving me higher returns than I saw in my home market of over the period where I was investing most aggressively.
