My Out-of-State Search: Step 1, Know Thyself

BP is freaking awesome!  It’s a wealth of knowledge and colleagues who are willing to bend over backwards to help out.  With that said, I've found resources about out of state investing, somewhat lacking.  So, I thought documenting my own journey might be a good way to give back to the community – and frankly, help keep myself on track.

 

In this process, I plan to look at turnkey vs retail vs rehab purchases.  I plan to look at region vs state vs neighborhood characteristics and projections.  I plan to locate, do due diligence and hire a team.  And ultimately, I plan to view, review, and purchase an out-of-state rental. 

 

But first, a few words about me.  I’m not lawyer, or financial planner, or real estate agent, or consultant, or guru.  The benefit of this is that I’m not selling anything.  The downside is that despite an opinionated and direct thought process, I have no real expertise to offer.   

 

Step 1 – Know yourself and your long-term goals.

The first step in any real estate deal should be reviewing who you are.  What is your risk tolerance.  What assets do you have?   What benefits do you need now?  In a year?  In 3 years?  In 30 years?  What about contributions during the same periods?

 

Knowing these is important, if for no other reason than it helps determine where this search/property fits into your plans.

 

For me – slow and steady wins the race

Risk Tolerance:  The measure of financial success is primarily in the severity of the financial lows.  To say it another way, a healthy and stable portfolio of $500K is better than a portfolio that maxes at $10M but is bankrupt 8 years later.  So, while I am fine risking upfront capital and have a long-time horizon, I would say that my risk tolerance is somewhat low for a REI.

 

I counter-weight my REIs with other investment.  Currently, around 25% of our worth is in real estate.  On those real estate holdings, we are >80% leveraged.  Long term, we hope to increase the % of worth in RE to 50%+ and decreased the percent leveraged to around 50-60% in 8 years, and much lower (25%?) in 25 years.

 

Assets:  My wife and I make good income from our W2 jobs and have money left over each month after maxing our 401Ks.  As such the neutral cash flow from current properties is not a huge concern – though we do hope to turn that into a positive within about 2 years and use that cash flow to generate more properties.

 

We keep a rainy-day fund both to cover personal expenses and/or REI expenses, and feel that every REI investor should do the same.  This rainy day fund increases slightly with each rental.

 

We have very good credit scores.

 

We now hold 4 SFR properties – three investments and our primary.  All of these are in our local market (Portland, OR).  One of the three rentals is currently leased to a family member at a significant discount.  In 2013 and most likely 2014, we will basically break-even in terms of pre-tax cash-flow (excluding any large capital expenses such as a new roof or new purchase).

 

Goals:  Our long-term goals are as simply as they are greedy: an early, and fairly lavish retirement.  I want to drive a nice car and she wants to spend a month in Europe.  I’m OK with the month in Europe as long as we can take a 5 star cruise there.  And while we are on pace for a healthy retirement now, we need to step it up to get there by 50 (the same year that the kids are out of the house).  With early retirement 18 years away, it’s hard to share specifics in terms of net worth or cash flow requirements – but using rough numbers, I figure we need around $8-10K/month in passive income, outside of 401Ks, in today’s money to get there.   Yowz.

 

It’s hard to know how many units we will need to retire.  Our goal has been to continue maxing 401k plus buy 1 house/year (at ~30K capital per purchase) without refis and we have been successful doing that.  I hope that in around 6-8 years, due to pay increases, lower daycare, and cash flow from properties, we will ramp that up to double/triple that rate.  At $250 positive cash flow/door, that’s 40 units needed to get to $10k/month.  For now, this is conceptually and functionally “a bunch” of doors, and we are leaning on compounding returns to get there, and dollar cost averaging to make it successful.

 

Cash Flow vs Appreciation: Given our good financial shape today and our long-term time horizon, our primary goals are long-term net worth and future cash flow.  I figure that if we growth our net worth to a strong amount at age 50, everything else, including cash flow will take care of itself. 

 

I would say that I am somewhat of a speculator: I believe that holding the condition of a property steady and over a long-enough time-period, a diversified real estate portfolio of SFRs will increase at a faster pace than inflation. 

 

However, I would not say that I value appreciation over cash flow.  In fact, I would lean the other way, primarily because cash flow can buy you more properties.   

 

I believe that appreciation is very difficult to project (though I have some thoughts about this that I will share in my next post).  I believe that past appreciation is an always dangerous and frequently inaccurate measure of future appreciation.

 

However, I believe that rents and cash flow are much more stable and predictable than appreciation.

 

Management Style:  I like to be completely hands-off on the management of the day-to-day, but completely hands-on for all strategic decisions such as purchase.  As such, I’m willing to pay a little more for a good Property Manager who I can trust with even large repairs.

 

I’ll pay close to retail for a property if needed.  Or rather, I believe that making the deal and having the process convenient has a dollar value associated with it – and one that we’re often willing to pay.  Looking ahead, this will be a key determination in an out-of-state purchase.

 

In my next post, I will evaluate how the short-term goal of an out-of-state rental property fits into my long-term REI plan.