Out of state investing

[N/A N/A]

I am a young professional currently renting in a very expensive part of Southern California. I am hesitant to buy a home in my area because they are very overpriced ($700k for a small 3BR townhouse) and I have been seeing the prices begin to drop over the last few months. Also, the mortgage would eat up all of my paycheck and he 2.5 times my rent. For these reasons I am looking into buying some rental property out of state (Arizona, Texas, etc.). My credit score is excellent and I have about $15k to work with. I want to buy a multi-family property (2-4 units) and keep the property long term. I am not sure what the first steps should be? Find a place on the internet? Travel to the city and have an agent take me around? Should I secure financing first? Any advice would be appreciated.

Also, any comments regarding buying a rental property withoug owning a home? Will this make getting financing easier or harder?

[Mike McKinzie]

Sorry for the bump, but I have received personal emails from BP members asking about out of state investing.

Jason Hanson posted a blog here on Bigger Pockets on May 1, 2011 about investing in properties out of state. You can also add properties that may be in your same state but be hundreds of miles away, ie. Live in Southern California and invest in Northern California. I know many BP members do not read blogs, and you should, so I am bringing this item up for discussion.

As a successful out of state investor, I want to clarify a few things and then let the individual investor decide if they want higher returns or not. I currently own 30 properties across 6 states and have 7 property managers.

Originally posted by Jason Hanson:

Well, personally, I try and keep my houses within a 60 mile radius of where I live. And quite frankly, I often have to go that far to find the best deals. But any further than that and I pretty much have to hire a property manager. However, as the saying goes, “nobody is going to manage your properties as well as you do.†Of course, that’s true, because you’re the owner and nobody cares about your properties like you do.

No offense to Jason, but unless you have been managing properties for years, there is no way you can manage your property as well as a Property Manager. There are necessary skills to manage property correctly just as there are necessary skills to do any job whether a CPA, Lawyer, Doctor or Grocery clerk. The problem that most real estate investors do is that they do not MANAGE their property, they BABY it like it is some kind of pet.

Originally posted by Jason Hanson:

So, when I’m evaluating a deal that is in another state and far away from me, it pretty much has to be a “home run†for me to want to purchase it. If it’s a deal where I’ll make $100 a month in cash flow, or where I’ll get a little bit of equity then I won’t do it. The reason being is that first, I’ll have to hire a property manager. And you have to factor in the fees of the property manager which are often 10% of the rent every month.

I have not paid 10% property management fees, EVER. As in nearly all things Real Estate related, PM fees are negotiable. My lowest is 6% and my highest is 8%. One PM charges me $50 a month, whether it rents for $600 or $1,000 a month. I NEVER get charged when a property is vacant.

Originally posted by Jason Hanson:

Every time a new tenant moves in, a property manager will keep the first month’s rent for finding a new tenant, or at least a portion of the first month’s rent. As you can already see, the property manager alone is going to eat up a lot of profits so it can’t be an “average deal.â€

Of my 7 property managers, 6 do NOT charge me anything to put in a new tenant. They only charge the exact costs of advertising and since most tenants come from the Yard Sign, my advertising costs are low. The one company that does charge me, charges me 70% of one months rent. While I do not like it, their situation is unique. They list all their available rentals on the MLS and pay 50% of the first month’s rent to the procuring agent. This company is very unique, they have over 5,000 SFR’s under management.

Originally posted by Jason Hanson:

Plus, what happens when you have to fire the property manager or when there is a major problem with the house. It’s not like you can get in the car and drive a few miles and take care of a problem… Or drive a few miles and interview a new property manager to see if you want to hire them. Therefore, you might also want to factor in the cost of a plane ticket or two.

This is a problem and one which took me a couple of failures to get right. With the information on the internet, it is easy to screen Property Managers and you MUST do this diligently. You are the “employer†and you are hiring an “employee.†Read reviews of Property Managers in the area you are interested in. Get referrals from them and CALL CURRENT CUSTOMERS. In the last 3 years, I have fired 3 Property Managers and hired 5 Property Managers. Of my 7 current property managers, I have met only 2.

Originally posted by Jason Hanson:

So, my advice to you is to be very careful of ever buying a house that is not within an hour drive of where you live. Over the years I’ve met plenty of investors who have owned out of state property and only a small percentage of them have had a good experience.

Let’s be honest here, only a small percentage of real estate investors, as a whole, have a good experience, whether it is next door or across the country. Investing in Real Estate successfully takes a certain mindset and a very small percentage of the population have it. While it is not all that difficult, it does require a certain mental and emotional stability. If you lose sleep because your rental is vacant, then you probably do not have it.

I posted some comments on Jason’s Blog and here are a few excerpts.

Originally posted by Mike McKinzie:

Last year, I spent $700,000 (cash) on investment real estate. If I had stayed within 60 miles of my house, I would have made about $2,500 a month in rent. By going out of state, I make $7,000 a month rent.

Someone else posted that you should have your business close to where you live and I responded:

Originally posted by Mike McKinzie:

It is a good thing that Sam Walton and Ray Kroc did not follow your advice. We wouldn’t have very many Wal Marts or McDonalds then.

And actually, investment property is very simple compared to running a Retail Store, a Restaurant or even a manufacturing plant.

Real Estate investors really need to get out of the old fashioned mindset that they need to own property close to home and that they need to manage their own properties. I had that mindset for many years! It was not until I got out of that limited thinking that I started to realize great returns.

Here is a thought, if a real estate investor drives by her/his rental property and thinks to themself “wow, I own that propertyâ€, then they should NOT be a real estate investor. They will claim that they are just doing a “Drive By Inspection†but deep down, if they are being honest with themselves, most will admit that they are driving by to brag to themselves about owning it. THAT is when it is a “pet†or a “hobby†and not really an investment. And if you have ever driven a friend or family member by one of your investment properties and told them that you own that, then it really is a “pet†or “hobby.â€

Just remember, there is a much BROADER world of Real Estate Investing out there than just your neighborhood and community. To maximize returns, you need to widen your horizon.

Here is another thought. Let’s say someone started investing in Real Estate in 2005 and lived in Las Vegas or Phoenix or California or Florida. If they stayed local, they would be in a world of hurt. If they paid cash, they just lost more than half their investment. If they were fully leveraged, they probably lost it all.

As a final warning, do not ever buy from one of the “internet hucksters.†The best way to start out of area investing is to find someone in your area who is investing in the area that you are considering. Ask here on BP for experts in that area. Talk to agents and property managers in the area you are considering. As a “checks and balancesâ€, do not use an agent and a property manager from the same company. If the agent says this is a good deal, ask a separate property manager to confirm, and vice versa. I have even asked two separate property managers to give me their opinion of a property.

For me personally, I am a Real Estate investor. I am not a handyman, a babysitter, a psychologist, or a priest. You do have to ‘manage’ your property managers and keep them on their toes. But a Registered Letter, a surprise office visit or a simple phone call does wonders. If you are a beginning investor, you might want to start out managing your own property (not baby it) so you know what to demand of your Property Managers. But at some point, if you want to build a portfolio, you will have to use managers. You don’t ever hear of Donald Trump collecting rent, unclogging a toilet or painting a kitchen (although he did in the very beginning).

As a final thought on Property Managers, make sure they have multiple companies they use for repairs. Some have 'in house' repair companies and you need to keep a close eye on them. On large repairs, I always require a minimum of 3 estimates. While I do not always use the lowest bidder, I do use the bid to get a higher bidder to lower their price.