Originally posted by @David Faulkner:
Originally posted by @Jeremy Lee:
I see there are a few naysayers here regarding OOS investments. Can you guys elaborate more on why you think it is a bad idea overall? If a place is cash flowing and appreciating for you, does it matter where you're invested? Honest question - not trying to pick a fight. Just trying to understand the perspective of non-OOSers. Is the issue that you think OOS investments will actually depreciate and lose you money in the long-term? Or is it that investing locally (in CA at least) will just make you much 'richer' in the long term vs out of state? It sounds like the latter based on @David Faulkner's perspective (correct me if I'm wrong). So if that's the case, is it better to wait until the next crash (time the market?)? Or look hard for a 'deal' in SD (or OC) for buy and hold, accept the likelihood of a negative cash flow in the near-term, and bank on 'near-guaranteed' appreciation and cashflow in the positive after X years of being in the negative? And is banking on appreciation not considered speculation if it's in CA? Or is it just "low-risk speculation"? Sorry for the likely elementary questions - newbie here with similar goals as OP and just trying to figure out where to start out. My main goal is to increase my near-term revenue streams since my wife stopped working last year and we have two kids.
You give up control when you go out of state. This means that as newbie that you:
- Are investing in a market you are unfamiliar with. No, flying out there a time or two and googling it do not count as due dilligence and won't really familiarize you with the market.
- Are 100% reliant on others to make or break your investment for you. Especially the PM. People say, no problem, just find a good PM. It is a problem, most PMs suck and will rip you off. I personally have gone through 7 of them in 5 years in an out of state market and did significant due dilligence. When they do screw up there's not a darn thing you can do about it OOS except fire them and look for another one (remotely) and each time that happens it will cost you thousands.
- You will be paying a lot of people to be doing things you could/would otherwise do for yourself for free in your local market. Even if they are competent, it costs a ton to hire realtors, PMs, contractors, etc. and that all eats into your profit.
- You can't practically find a great deal like you can by hitting the streets in your home market. You might think you have a great deal, but most of the time it is not, because it is what the local investors have already picked over, but you think it is great because you don't know the market.
- You can't practically manage and execute a rehab to force appreciation like you can in your home market. You would have to contract out everything with minimal supervision (no, email pictures don't count) which adds significantly to costs and risks.
- If anything does go wrong, it will take a lot longer for you to detect and fix ... small problems that go unresolved quickly become large and expensive problems. The PM will take care of it, you say? ... see comment above on PMs ... it is their incompetence and thievery that caused most of my problems.
- Properties and your team are difficult to physically access ... plane rides and hotels are time consuming and expensive. Forget about putting things on auto-pilot and never needing to go there, it ain't gonna happen that way. You will need at least several trips per year ... I was going out once a month when things got bad (frequently) ... factor that into your costs and hassles.
- You don't really learn much going out of state compared to hands on locally, so you don't improve as quickly as an investor.
Add up all the extra aggravation, risk, and costs of all of the above, and OOS is not nearly as attractive. In fact, for me it actually was more labor intensive, far riskier, and farless profitable than investing in CA ... I'm not going to say that investing in CA is easy ... you have to know what you are doing, and done improperly it can be very speculative and risky, as can any other market.
Or, alternately, if you are going to give up control on your investment and not be able to assess and mitigate risk, which will be the case out of state, then you are giving up many of the very advantages that make REI an attractive asset class. In that case, you'd likely be better served buying an S&P500 index fund and/or a few REITs and calling it a day. No, I'm not joking.
It seems like there are a lot of people doing OOS though (non-turnkey) that are successful. I keep hearing the *major* qualifier with this is building the right team. Logic says that if local investors in any given state are successful due to the team they've built around them (including PMs or not), that out of state investors would also be successful using the same references locals are using. I can see how PM would cut more into profitability - I thought I saw someone mention as high as 25% though!? I thought it was typically 10-15% for any given PM. In any case, I know of one guy who retired earl, is traveling around the world with his wife and kid (not glamorously but on a pretty low budget), and is basically using OOS rental income to supplement this lifestyle. I've PMed with him and he couldn't stop reiterating how important it is to spend the time up-front vetting all pieces of your team in any given area. If you can't build a trustworthy team, no matter what market it's in, even if it's a great market, then don't invest in that area. Given that, he doesn't spend more than several hours a month dealing with managing his PMs and team and getting things taken care of for tenants. He started off first by managing most of the OOS properties on his own though, where he would have a reliable contractor on hand to take care of things as needed. He also said that he rarely, if ever, flew out to locations on his own on the logic that if he really trusts the PM/contractor/inspector/agent/etc he doesn't need to be out there and given they're the experts that's enough for him to know that he's all good. He's been investing for around 10 years now since the crash and I'm sure he's had his handful of 'learning experiences' but it doesn't seem to have stopped him from continuing to invest OOS.
I would definitely concur that local investing should be the first priority where applicable. For buy and hold in CA though, it seems near impossible to get to the 1% rule... The majority I've seen is closer to .5% which is terrible. One seasoned investor I spoke with the other night said that if you're going to invest in CA, do wholesaling or flipping, definitely not buy and hold. So this begs the question: if an investor in CA wants buy & hold or BRRRR to be part of his/her strategy NOW, what should they do? Hold off completely and put money in the S&P500 and wait for the next housing crash in CA? Or pick a state with a favorable buy & hold rental market, move there, and "rent locally" ?
