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?
Secure your lending first. Know exactly what options you have and what types of homes will qualify for the lending programs.
There are various lines available.
Are you looking to do multi-units with little or no repair needed to generate positive cash flow in rent?
Something needing work you can rehab and then rent securing some equity in your asset while generating positive cash flow?
For example here in Ohio we have homes for 75-130k that are multi unit.
Low prices due to poor economic conditions and blue collar industry lay-offs.
You could rent 1 unit for about 650-800. So 4 tennants would be 2600. Mortgage would be around 1000 so 1200 profit monthly minus expenses.
1000 would likely cover mtg, taxes, and insurance.
Give me your thoughts about my post and let's see what idea's we can come up with.
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, â€œnobody is going to manage your properties as well as you do.â€ Of course, thatâ€™s true, because youâ€™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 Iâ€™m evaluating a deal that is in another state and far away from me, it pretty much has to be a â€œhome runâ€ for me to want to purchase it. If itâ€™s a deal where Iâ€™ll make $100 a month in cash flow, or where Iâ€™ll get a little bit of equity then I wonâ€™t do it. The reason being is that first, Iâ€™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 monthâ€™s rent for finding a new tenant, or at least a portion of the first monthâ€™s rent. As you can already see, the property manager alone is going to eat up a lot of profits so it canâ€™t be an â€œaverage 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 monthâ€™s rent to the procuring agent. This company is very unique, they have over 5,000 SFRâ€™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. Itâ€™s not like you can get in the car and drive a few miles and take care of a problemâ€¦ 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 â€œemployerâ€ and you are hiring an â€œemployee.â€ 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 Iâ€™ve met plenty of investors who have owned out of state property and only a small percentage of them have had a good experience.
Letâ€™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 Jasonâ€™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 wouldnâ€™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 â€œwow, I own that propertyâ€, then they should NOT be a real estate investor. They will claim that they are just doing a â€œDrive By Inspectionâ€ 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 â€œpetâ€ or a â€œhobbyâ€ 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 â€œpetâ€ or â€œhobby.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. Letâ€™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 â€œinternet hucksters.â€ 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 â€œchecks 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 â€˜manageâ€™ 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 donâ€™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.
Thanks for the post, Mike. Excellent info. Should be made into a book or something.
I'm glad we have investors here that have successfully done both. I can see real advantages in investing out-of-state and several pitfalls.
My key concerns would be finding property managers that make sense and getting to the know the markets where my investments are. I'm sure there are many ways to get past these hurdles, I just haven't taken the plunge yet.
With limited time to travel and learn areas, I have found it difficult to get started out of state. First, how do you choose your areas, and second, how do you find your agents?
In both Phoenix and Vegas the areas are so saturated with investors and vacant rentals and over loaded PM's, that it seems the out of state investor would get the least attention compared to the PM's friends and aquintances, locals and the biggests clients.
If you're planning to invest out of state, I would absolutely advise getting a property manager. I've met investors who manage their properties remotely, but I would never advise doing so. There's no substitute for somebody on the ground who can see what's going on on a daily basis.
With that said, it's absolutely critical that you get a good property manager. I've had good and bad, and I can tell you from personal experience that bad managers can very quickly turn a good real estate investment into a very bad one.
Once you've done your homework on some areas to invest in, I would recommend traveling there, attending real estate investment clubs, and networking with local investors as much as possible. Get property manager references from the local investors. I would not advise picking somebody out of the phone book. I'm embarrassed to say that's how I found my first property manager and it didn't work out too well! At least I learned and fixed the problem :).
As far as buying a rental without being a homeowner first? Not a problem as long as you meet the usual qualifications, ie, credit, income, reserves, etc.
I agree with mark. Go with a manager, but only a good one. One that is good because other INVESTORS say is good, not some wholesaler or turnkey huckster.
That being said, the area you buy is the most important thing. Are the tenants in the area known for being hard to work with deadbeats living in an area where the "welfare" or "entitlement" culture predominates. Do you want to have rental customers who seem like the characters you see on "Judge Judy's Court"? :-) I don't!
The absolute weakest link in a rental biz is the tenant. Even more important than who manages. With a bad tent, no matter how good the manager is, your biz will suffer. With a bad manager it will be disasterous. I've had 8 tenants in one of my rental markets. Only 2 have been halfway decent. I'd like to shoot the others. I finally learned its pretty much the market (Memphis). Turns out that the tenants there don't have a very good reputation. And I'm not talking anything even remotely resembling a "war zone".
I plan to stick with middle income areas where the underlying demographics and culture pretty much reflect the national average. "Middle America" if you will.
You can invest out of state, but I would not go with a 2-4 unit. There is too much management involved. Buy a single family home, and sell it on owner finance. This way the tenant/buyer will take care of repairs, and you will enjoy a nice down payment, a nice cash flow monthly, and a great back end profit. 3 pay days, and they do the work. Check out Cleveland, or Detroit. both areas have very good deals! Good luck!! :mrgreen:
Social Investor -
Whatever you decide, please make sure you are making the best decision considering all of your circumstances and your future. Without knowing all of the particulars, you did not paint a picture of an investor who is fully ready to go and I want to encourage you to get a solid financial footing first before buying investment property. I promise you that diligent investors are able to find deals in any market and we will continue to see record low prices for a while in some areas of the country. But, I caution you that the question you should be asking is am I financially secure enough to be purchasing for long term investment today.
There are a lot of ways to get involved with real estate that will help build up your finances, but if 15k is all you have to invest (?) and that is a hard cap, you have no room for error. There are a lot of people here on BP who will assist you with getting a good plan together to make sure you have success. When you know you are financially secure to buy an investment property (and that may be today) then its very important if you are going to buy out of state that you buy with a group that provides quality property management. An investment property that sits vacant and has run up in maintenance is not an investment but an expense.
Best of luck and I really hope you have success.
Here is an idea. Once you decide on a target area, avoid the wholesalers and turnkey vendors and join a local REI Club. Talk to fellow investors in that area. You will get the real scoop and not market hype. You'll find out what the tenants in that area are like, and who the good property managers are. They can even set you up with better rehabbers and other vendors.
Oh, and you won't end up overpaying. HINT: if you see an asking price listed someplace that is even higher than what you see on zillow.com, you know it's overpriced.
@Mike McKinzie well said! I 100% agree property managers are so important, especially if the property is further away and out of state. My parents had a property in Las Vegas (we are in LA) with a PM my mom did not like. She was thinking of firing the PM and managing the unit herself. While she is incredibly hard working lady and is an overachiever, it really took some time to convince her that it was NOT a good idea - especially given that she did not know what goes into property management and also only minimally knows how to use the internet and email.
I'm currently looking to invest out of state myself (just started to read David Greene's book) and am getting analysis paralysis for choosing which market to go into. I'm in the process of getting pre-qualified with Wells Fargo, who can lend in any state I choose. Is it advised to also find a local lender once I find the market?
@Vivian Huang stay away from house hold banks. They are just salespeople who don’t know how to present your profile as a non owner occupied investor investing out of state.
@Lane Kawaoka thanks for the tip! I don't know if I've heard the term house hold banks before. Could you expand on that?
Ha! Nevermind - I got it. For some reason, I thought it was some advanced term I'd never heard about
@Vivian Huang its like shopping at Nordstrom. Macys has better value and they know how to make returns. Sorta bad analogy...