Landlording & Rental Properties

Buyer Beware: 3 Essential Items to Vet BEFORE Investing Out-of-State

Expertise: Mortgages & Creative Financing, Business Management, Landlording & Rental Properties, Commercial Real Estate, Real Estate Deal Analysis & Advice, Real Estate Investing Basics, Personal Development
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There has been a lot of discussion on BiggerPockets and elsewhere on how to and whether you should buy out-of-state (see here and here for example). I certainly understand the temptation, although I should note that temptations are often for things we should avoid. I, for one, came from a West coast city (Eugene, OR) to a Midwestern city (Kansas City, MO) and have seen both sides of investing out-of-state.

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On the one hand, it makes sense because in certain places, such as California and even my home of Oregon, real estate is just too expensive to rent out and make it pencil. After all, the average price of a home in San Francisco is just under $1,000,000 and about three quarters of the city is rent controlled. However, buying out-of-state is very risky, and I have seen a lot of hard-earned equity go the way of the Dodo bird through out-of-state investing.

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 even more for the rehab. When they stopped returning his calls, he came out to Kansas City and found that both properties stood in the worst part of town and hadn’t even been touched. I have rarely seen someone look so defeated, and telling him there was nothing we could do was a difficult task to say the least.

Related: Wholesalers: How to Close A Real Estate Deal with an Out of State Seller

I know another who got stuck with a 50-unit complex that took three years and three managers to turn around (with "turned around" still being a bit of a euphemism). Another lost two fourplexes to foreclosure. The owner of a short sale property we bought found our website and the part that mentioned "we buy distressed and undervalued property," and she almost had a panic attack (we bought the house for about half of what she did. A real estate agent friend of mine used to work with a hedge fund that raised money from out-of-staters to invest in properties throughout the Midwest that eventually went bankrupt. 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. It can be done, and it can be done profitably, but it’s much riskier than staying close to home.

If you do want to risk it, here are some key things to do.

3 Essential Items to Vet BEFORE Investing Out-of-State

Vet the Team

Regardless of where you are, you need to do this, but even more so when dealing out-of-state. There are, unfortunately, some unscrupulous types that prey on out-of-state investors’ ignorance. Just because a property is cheap doesn’t mean it’s a good deal. You must erase the assumptions you have about real estate prices from your home market. If a property costs $30,000, it may sound like an insanely good deal, especially if similar houses where you’re from cost $500,000. But if the neighboring houses cost $20,000, it doesn’t really matter what houses in your home market cost.

When vetting a team, ask around to find a property manager. If you’re working through some all-in-one agency, don’t just take the manager they recommend. Furthermore, interview whomever you choose 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 from 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. Finally, 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. Some of these areas are what a friend of mine calls “rent optional.” As a quick rule of thumb, if the pro forma cap rate is over 20, it’s made up. I guarantee it.

So call a Realtor or two to get a CMA (comparative market analysis) and their advice on these areas (or a different Realtor if you are working with a Realtor already).

Zillow is also a good place to look for values, 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. RentRange is even better, although it costs money.

If there is already a tenant, make sure to get an updated rent roll, proof of payment (like a bank statement) and preferably (although you’ll need the tenant’s permission) a copy of the tenant’s 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 a 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, so add in a contingency to your budget (15 to 20 percent).

Related: Going the Distance: Should You Invest in Out of Town Real Estate?

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 while some are, others do not look that bad on the surface. Ask around and visit websites that have crime and income data. City-data has a map feature that can break down income and other demographics (although unfortunately not crime) by subdivision. And CLRSearch and Homefair have zip code crime data. I’m not a huge fan of the crime mapping sites, such as CrimeReports, because I am quite confident they don’t have complete data, but they are worth looking at as well.

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 rarely cover the turnover and rehab. To make money in these areas, you really have to specialize in it. It can be done, but there isn’t a manager on Earth I would trust in rough areas, especially several states away.

Buyer Beware

Again, for the most part, 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 very careful indeed.

Time for you to weigh in: What has your experience been investing out-of-state? Or is this something you would never attempt?

Leave your comments below, and let’s talk!

Andrew Syrios has been investing in real estate for over a decade and is a partner with Stewardship Investments, LLC along with his brother Phillip and father Bill. Stewardship Investments focuses on the BRRRR strategy—buying, rehabbing and renting out houses and apartments throughout the Kansas City area. Today, they have over 300 properties and just under 500 units. Stewardship Properties on the whole has just under 1,000 units in six states. Andrew received a Bachelor's degree in Business Administration from the University of Oregon with honors and his Masters in Entrepreneurial Real Estate from the University of Missouri in Kansas City. He has also obtained his CCIM designation (Certified Commercial Investment Member). Andrew has been a writer for BiggerPockets on real estate and business management since 2015. He has also contributed to Think Realty Magazine, REI Club, Elite Daily, Thought Catalog, The Data Driven Investor and Alley Watch.

    Gregory Jackson Real Estate Agent from Boston, MA
    Replied over 4 years ago
    Andrew, Some good tips and links. Much appreciated! Thanks, Greg
    Bob Lowry Property Manager from Moraga, California
    Replied over 4 years ago
    Andrew, Great points to consider and thanks for all the links and references. I’ve come across a firm here in California that has developed a network of property buyers/managers in several cities. The firm vets the local firms, checks their histories, track record, tenants and local area before allowing the firm to present to investor network. All properties are sold to investors after rehab, and the rehab is video taped and provided to the investors before a call is done and all come with tenants in place. The local firms make quarterly visit to the Bay Area to meet current investors and answer questions of future investors. Their program appears to reduce the risk but of course not eliminate it. Due to my funding sources I am required to make only active investment otherwise I would consider them. If you want to check them out, they are known as The Wealth Network at the same url. Would be interested to see if any BiggerPockets followers have any experience with them. Thanks again,
    Replied over 4 years ago
    Useful article. Being on the west coast where I might be lucky to find a rental above 0.5% rule it is always tempting to buy out of state when I see these Midwest prices…i see all these turnkey companies and wondered if what they are selling is truly worth it. I’ve dealt with properties in low end areas that “had higher returns” but dealing with that tenant base wasnt worth it.
    Replied over 4 years ago
    Useful article. Being on the west coast where I might be lucky to find a rental above 0.5% rule it is always tempting to buy out of state when I see these Midwest prices…i see all these turnkey companies and wondered if what they are selling is truly worth it. I’ve dealt with properties in low end areas that “had higher returns” but dealing with that tenant base wasnt worth it.
    Sara Cunningham Investor from Chesapeake Beach, Maryland
    Replied over 4 years ago
    We invest out of state, but to be totally fair we know the area really well in OKC. We lived there for 10 years and already owned several properties before we left to live overseas in Italy. We purchased a SFR and a triplex while we were over there. We have a property management company a realtor and contractors we have worked with for sometime so have a team in place. We still haven’t actually seen the last two places we own even though we have returned back to The USA. We are now in MD and plan on investing in OKC still since we know we can get good cash flow. I have been tempted to look at other areas like Kansas but am wary since I don’t know the area. You make some good points it takes a lot of due diligence, a tolerance for risk and at least a couple of trips to a potential area to invest outside your own back yard.
    Donald Tepper Real Estate Agent from Fairfax, VA
    Replied over 4 years ago
    I tried it a number of years ago. I’m in the Washington, DC, area and this property was in Spartanburg, South Carolina. I didn’t do my due diligence. In retrospect, the comps were seriously bad–properties a couple of miles away. The property itself was in far worse condition than the photos or description indicated. The person I was dealing with had excellent references, but that apparently was ancient history. I lost $15,000 on that fiasco. I tried it more recently with birddogs in Atlanta. This time, I was better prepared, even though prices of $20,000 (versus $500,000 where I am) do seem attractive. But I learned that each market is different, and it takes time to get to know it. Where I am, for instance, wholesalers don’t put “For Sale By Owner” signs around the house. In Atlanta, they do. So I was paying for a lot of leads (until I caught on) that weren’t FSBOs at all. And, boy, do sellers lie about the condition of their properties. I guess I already knew this, but there was a house with “minor fire damage to the ceiling of one room” that was a total gut. Lots of stuff like that. I bought a course recently from a well-known guru that deals with virtual investing. (“I’ve got a couple of folks in Australia buying and flipping houses in South Carolina.”) Much as I’d like to believe that . . .
    Simon Baker from Sydney, New South Wales
    Replied almost 4 years ago
    Hi there Donald, We’re actually looking at investing in the US from Australia and wondered what was the course you brought? Cheers Simon
    Mark Shaffar Real Estate Agent from Madison, Wisconsin
    Replied about 4 years ago
    Thanks for the info on how to do due diligence on these. I’d like to use those web tools
    Michael Cini from Sherman Oaks, California
    Replied over 3 years ago
    Great article Andrew. Lots of useful information.
    Hector Sapinoso from San Gabriel, California
    Replied over 3 years ago
    Thanks for the great article Andrew. It’s an eye opener and a reminder that we need to do our homework before diving into a property.
    Jennifer McElliott from Mukilteo, Washington
    Replied almost 3 years ago
    Interestingly, my yahoo newsfeed happened to have this article on my list today:–sector.html?ref=gs
    Account Closed
    Replied 8 months ago
    great article very informative. Many good points that i think alot of investors overlook that are absolutely crucial to the process.
    Gaurav K. Rental Property Investor from Carlsbad, CA
    Replied 7 months ago
    Thanks for putting this together. The post has some great resources.