Quote from @Rome West:
Hello all.. I'm new to the real estate investing field and have no idea about investing. I have a some real estate experience from being a loan signing agent here in Arizona, so I'm familiar w documents. I'm looking for advice on how to get into out of state multifamily investing. I've been researching the different ways of financing. My wife is former military so we qualify for VA as well as use the FHA I've also heard about the NACA program. Can anyone point me in the right direction? Thank you all! Super excited and happy to be here w you all.
@Rome West
While it's certainly possible to start out with out of state investing, I would suggest that working locally at first is at least advisable if possible. Why?
1. You are new. Real estate has a learning curve. Be it the buying process, the tenants, the vendors, the upkeep, evictions... you name it. None of it is overly hard, but until you have experienced it, you don't know what you don't know.
2. Working locally, you will be much more hands on. When the tenant reports a problem you can go see if it is really a problem. Many times it is 'operator error' or something you can fix yourself. Example: "MY AC isn't working". You go and figure out the batteries in the thermostat are dead. After you experience that once, you would know to ask, "Did you check the batteries in the thermostat?" If you started out out of town, that would have been a $150 service call.
3. As soon as you say "Out of town / out of state investing" you necessarily are saying, "I'm hiring a property manager. If you finance your property, at best in today's market you will probably net (after principle, interest, taxes, insurance and a maintenance reserve) - at BEST $300 out of every $1000 you make in rent. If you have a property manager, the round number most people use is 10% (of gross rents) for their services per month. Many charge placement fees for getting the renter into the apartment... sometimes as much as the first month's rent. But let's just say it's just the 10%. From your $300 in profit, you are now down to $200 in profit (10% of $1000 is $100). So that property manager just cost you 1/3 of your monthly profit. Point being - property management on a financed property is a pretty expensive proposition. If you can manage your own property - and I'm here to tell you it is really pretty easy - you will make 33% more profit by investing locally if the market allows.
4. By 'cutting your teeth' doing some local managing, you will be more experienced with all the little situations that pop up with your properties. You will learn what to do yourself - versus every call going to the property manager and you are just clueless. Case in point: My wife had PM years ago. The tenant called the PM and said "The garage door opener is broken". The PM called a local company and they quoted $800 to replace the garage door opener. The PM then called my wife to authorize the repair. I told her "That's a crazy price to replace a garage door opener that only costs $150 at the store. We went and replaced it ourselves in 2 hours and saved $650. That $650 bucks represents over 3 months of your profit if you were using property management. My wife fired her PM the next week and we started managing our properties ourselves. So the point there is - property managers aren't there to save you money... mostly just to handle the issue as quickly as possible (hopefully). If that was an out of state call, what choice would we have had but to pay the vendor $800 for the repair? Very few... maybe call a local handyman - but suddenly you are now doing the PM's job. So know that repair expenses will likely be higher if you are working at a distance.
5. Quality Control. Anytime you are working at a distance you have very little ability to know how well anyone is doing their job - be it the PM or a vendor. Say your unit needs to be painted. Did they make a mess of the paint on the floors, the ceilings, etc? If you aren't there, you won't know.
Finally - know that at this very moment both real estate and financing are really expensive, compared to the past few years. This translate to: It is hard to find things that will really cash flow well right now. You have to come up with what your strategy is for buying a property. For instance: How little are you willing to make when you invest $40,000 (perhaps) in a $200,000 rental? The question of "When should you buy?" becomes an important one. For us - we started off 5 years ago saying, "It needs to at least make $300/door (so a duplex would be $600 - 2 doors) for us to be interested. For Current reference - a high yield savings account is currently paying 4-5% a year right now...and that would represent $133/month on that same money at 4% for a completely safe, no hassle investment. So keep those figures in mind as you look at deals. In the previous example of netting $300 and paying a property manager $100, is it worth the extra $70 in income for all the potential issues? Not in my book. There are other perks though - like appreciation of the property which can play into a decision - but keep in mind prices are really high right now, so most properties are depreciating presently. We own 37 doors after 5 years, and our monthly per door net income after accounting for PITI and a maintenance reserve is over $600/door. That is through a lot of deals though - Buying units under market value, selling units with lots of equity appreciation along the way and paying off other higher interest mortgages to raise cash flow, several amazing "Got really lucky to get it at that price" random opportunities that came along. We have bought houses off craigslist, at foreclosure auctions, at in person auctions, through wholesalers, and the majority straight off of MLS.
But I would tell you that right now the majority of houses I run numbers on are literally upside down once you factor in a maintenance reserve, as well as the new tax rate. You need to understand that taxes reset a year after you buy your property. So if the current taxes were say $1000 on a property your seller paid $100,000 on; but you are buying it at $300,000 because he bought it 10 years ago... you can expect for your taxes to at least double, and probably close to triple the year after you buy the house. So an extra $166/month on a $2,000 increase in taxes per year. Now your cash flow in the $300 profit example above is $40/month. You are officially upside down compared with keeping your money in the bank at 4% interest.
So there is a lot of learning curve as a newbie to the industry.
Hope it helps!
Randy
