Hey Everyone,
I live near Tracy, California (near the Bay Area) and I am looking to invest out of state for cash flow properties. I am not really sure what states/areas to look at. I'd like to invest a maximum of 100k.
I'm open to hearing any ideas of what I could do locally as well. I really want to start my real estate investment career this year.
Thanks for the help in advance.
@Zo A.Here's what the majority of investors don't seem to understand. Let me do my best to explain. Hopefully this helps you.
The investor community sees the options for investing out of state in a way that's far too black and white, especially when considering turnkey providers.
As an example. The turnkey option is typically viewed as pay a little more for the property but off load all the headaches of learning the market, buying, rehabbing, finding a PM etc. So option 1 is buy a rough property and rehab it yourself, building equity through the rehab, and option 2 is buy from a turnkey provider, let them do the work and forgo the upfront equity. The big decision becomes "is the equity worth the headache?"
Here's the problem. This assumes turnkey providers are going to sell you a property you want. It assumes you discuss with the turnkey provider what your goals are and if you prefer A, B or C areas, the provider then shows you the inventory they have that meet your qualifications and you choose which looks the best...
It's ********. Here's why...In a sellers market (and this is key) it's extraordinarily difficult for any investor to find attractive deals, this includes local investors who have been in the market for years (often decades) and turnkey providers. The turnkey providers have to have inventory to sell, therefore they buy properties local investors don't want (or they don't want for their own portfolios) and sell them to out of state investors because they're oblivious to the issues with the areas, neighborhoods, or specific properties.
I'm not saying the turnkey providers will sell a C property as a B property etc. (although many do), I'm saying all A, B and C areas aren't created equal.
Let me give you a specific example here in Kansas City, more specifically Jackson County. The best suburbs are Lees Summit and Blue Springs, they'd be considered A areas. But there many smaller micro areas within Lees Summit or Blue Springs that are no where near A quality. In fact there many areas where one street all the properties will be A and the next street over all the properties are C. Or there many areas currently A, but mass multi family is being built near by, most likely taking it down to B or C within the years to come.
On the flip side of the coin, there areas currently C or B that a huge new home development is being built right next door, corporate campus or gaining "trendiness" giving tailwind to the area potentially propelling it from C or B to A. This is paramount for out of state investors to know. It's the edge local investors have and what most turnkey providers won't tell you.
Let me be clear. I'm not implying turnkey providers have zero attractive A, B or C inventory. I'm simply stating, in a red hot sellers market, the majority of the inventory will be undesirable and it's up to you to educate yourself and cherry pick based on your individual goals.
The reason this is most often hidden is because out of state investors don't consider inflation when looking at their supposed paper appreciation and they don't sell so they don't truly know the market value of the property. The only thing they have as a measuring stick is the cash flow. As long as the properties cash flows as advertised they assume they got a good deal. What they're not factoring is the inflation adjusted depreciation of the asset. This needs to be deducted from the cash flow to have an accurate assessment of the properties performance.
Let me give you another real example. If you purchased a property in 2010 for 100k and today it's worth 100k you lost approximately 10k. Why? because in order to have the same amount of purchasing power today as you had when you bought the property in 2010 for 100k, you'd need 110k. This is due to inflation or the price of goods and services increasing. Often asset prices don't keep pace with inflation and sometimes they exceed inflation.
So using our hypothetical scenario we'd need to deduct the 10k from our cash flow to get the real ROI. How many investors do this?
An even more alarming example would be the same scenario but using 2006 to 2012. Our hypothetical investment property would have to be worth 113k in 2012 in order to have the same purchasing power it had in 2006 (100k). How many properties do you know that went up in value between 2006 and 2012? Most likely it would've gone done in nominal value making the inflation adjusted paper loss even more severe.
This is applicable to out of state investing because most turnkey providers inventory (in my opinion) will struggle to keep pace with inflation and therefore under deliver without the investor even knowing.
WHAT'S THE SOLUTION? If you're considering an out of state investment select the market(s) first. Take a month or at least a couple weeks and go to that market(s). Get a rental car and drive for dollars. In other words, drive up and down every street in your targeted zones, take notes. Talk to as many local investors as you can face to face when you're there, meet with property managers, agents, bankers, general contractors and turnkey providers face to face...give yourself that local knowledge and "edge." Then and only then can you truly make an educated decision when buying.
Use that information gathered to buy a property and rehab yourself or cherry pick the turnkey providers inventory knowing you're buying precisely what you want...
If you don't have time to do that don't invest out of state.
Hope that gives you some food for thought.
Good luck,
George
Hi @Zo A.! Great question!
OUT OF STATE INVESTING
For out of state investing, I would highly recommend using a turn-key investment property provider. Investing "turn-key" typically means that a third-party investor finds the property, rehabs it, rents it out, then sells it to you and offers property management services. All you really need to do then is "turn the key" and buy it.
The challenge about out of state investing is sourcing deals, hiring a local rehab team, and market knowledge. These can be huge obstacles, especially for a new investor. An oft-repeated piece of advice is "invest where you know" and when you can't do that, your best option it to invest turn-key and let another investor do all the hard work for you.
The main challenge is working with a turn-key provider is finding someone that you can trust. You'll find some horror stories here on the forums of investors who didn't vet their providers enough and failed on their due diligence, and paid a costly price for it.
Luckily, our own member Jay Hinrichs runs a site called Turnkey-Reviews.com where you can read reviews other investors have posted on various turnkey-providers. This will help you avoid many of the mistakes previous investors have made and choose a trustworthy and successful provider.
Here are some articles on the subject that will help you get started in the right direction:
LOCAL INVESTING
The good news is that there are plenty of local investment opportunities available in the Central Valley and Sacramento, where are all within a couple hours drive. And it's not going to cost you an arm and a leg either. I work with a lot of investors in the Bay Area who have the same goals as you, and I frequently recommend Sacramento as the best option for Northern California Investors. And here's why:
Name another market set to have 7.2% appreciation and 10% rental growth this year... you can't. And that's why it's a HUGE opportunity for local investors to ride the roller-coaster California market and experience 12-36 months of appreciation and then sell at the top of the market. Sit on those profits for a couple years and hopefully you'll be able to pick up homes for pennies on the dollar next time the market bottoms out. Or if the cash flow is good enough, hold onto it. Either way you win.
My advice would be to spend the month of January educating yourself on turnkey-providers and the markets they operate in, and also learn about the local opportunities available as well. Then you'll know which option offers you the best possible opportunity and matches well with your investing goals. Then you can take action and purchase your first investment property, cash flow, and win!
@Zo A. @Wes Blackwell did a great job of mentioning turnkey options and the potential dangers of this type of investment. He nailed it on the head with the mention of some horror stories from investors that were taken advantage of. Education is key when dealing with Turnkey properties, as there are some pitfalls to be aware of. I would avoid any operator that does not own and operate their own property management company. The disconnect is where turnkey rentals fail a lot of the time. We work with investors in over 14 different markets, I'd be happy to assist if you need additional information. Best of luck!
I assist many out of state investors with their purchasing of turnkey properties in Kansas City, MO. We see great cashflow in the growing market and provide excellent property management while you are afar! Let me know if I can be of any assistance!
I live in Ventura county CA and invest in Tennessee and North Carolina buy fix and hold mostly. Mind you I got my start in here in CA in 2008 so I did have some experience before going out of state. If you do want to invest out of state and will not be using a turn key company be prepared to spend a lot of time there at first. I the past year and a half I have bought 4 properties in Charlotte NC 2 needed extensive rehabs. I have made 7 trips to NC in that time and probably spent a total of 5 or 6 weeks in Charlotte. You need time to develop relationships you'll need for your business. Once you have things set up you can spend a lot less time on it but I recomend visiting out of state properties at least once or twice a year.
@Dustin S. I'd love to pick your brain a bit sometime. I live in Ventura county (Thousand Oaks) as well, and have been looking into investing out of state. I currently hold a property in Thousand Oaks and one in Big Bear Lake, but am looking to begin purchasing out of state, and TN/NC were both areas I was looking into. Charlotte was one of the areas of interest, but where in TN did you invest? Which area have you seen better performance? Thanks!
@Tyler Wade Can't say as far as appreciation is concerned on my Charlotte properties. I haven't held them long enough. Cash flow on them is very good. In Tennessee I have Property in Rutherford County just South East of Nashville. Appreciation on this one has been pretty good, better than I expected and cash flow has been decent. My view of performance is a combination of how many phone calls I take on a property and how much money it makes me. My TN house would rank above most of My CA places mostly on Phone calls. If you'd like to meet up I attend the VCREIA meeting at Mimi's in T.O. next meeting is next Thursday the 12th at 6:30 and you can look up details on meetup.
Thank you all for this information, I really appreciate it. This forum has been incredibly helpful for someone who is new to RE investing.
I am a bit hesitant in buying a turnkey property because it's a bit marked up. I know it's a lot easier working with turnkeys when dealing with out state properties. Has anyone here done any flips or non-turnkeys from out of state? I have some time to travel and visit these places if needed.
I'm way late to the conversation, but just saw your most recent response and thought I'd jump in.
As far as the markups on turnkeys, I wrote this a long time ago, in case it's of any help. The thing to realize is trading time for money and risk for money. If you weigh those into the equation, the markups on turnkeys can oftentimes make more sense.
https://www.biggerpockets.com/renewsblog/2013/02/1...
There's not a right or wrong answer, it's just completely dependent on your own personal situation and/or preference for effort levels, risk levels, involvement levels, etc.
Hi @Zo A., I wanted to offer an alternative, if you are an accredited investor and interested in a “hands-off” experience I wanted to share some information on DSTs (Delaware Statutory Trusts). DSTs allow the individual investor to purchase a portion of larger institutional quality commercial property with minimum investments as low as $25,000 for straight cash into funds. Investors may develop their own personal portfolio of institutional properties using DSTs as cash investments. Professionals with decades of experience and very impressive track records do all the heavy lifting for you.
@Lane Kawaoka I actually did search on the topic, but was also interested in how to find local deals near me as well. Either way, I will take your advice.
@Leslie Pappas thanks! That might be the best option for me!
I think experienced investors can do well with remote or out of state investing. Having the right contractor and someone to help manage rehabs is a huge part of that success. Being able to know day-to-day what is going on is also very important. If technology is used - there are ways to make it work really well. Probably works better for more seasoned investors.
Hey Everyone,
I live near Tracy, California (near the Bay Area) and I am looking to invest out of state for cash flow properties. I am not really sure what states/areas to look at. I'd like to invest a maximum of 100k.
I'm open to hearing any ideas of what I could do locally as well. I really want to start my real estate investment career this year.
Thanks for the help in advance.
Hi Zo-
Welcome, this is a challenge that is commonly trending on BP, luckily this community has a solution for that, along with many other helpful topics and suggestions.
Checkout the following blog: A Simple Guide for Buying Out of State Turnkey Investment Property
Much luck with your investing in 2017!
I invest out of state as I live in a similarly ridiculous market for acquisitions. In NY and the Bay Area you get killed on price and tenant-(over)-friendly legal climates.
Out-of-state, you can easily get killed with bad management and low local knowledge. We started with Turnkey, and then we started doing our own deals. We made a few mistakes moving away from Turnkey, and the big lesson was that you need to focus and know what/why you are buying in a place before you get it. Create a story around your tenant profile, and back that up. Finally, figure out why you're going to have an edge over other local operators. Some out-of-state edges may include:
- More money & thus staying power (most common advantage).
- Better systems for communication with service providers.
- Better relationship (example Always pay on time) all service providers.
- Better accounting practices (the government is your biggest expense, get your deductions).
- Unique tenant profile.
Just some ideas. If not going Turnkey, I suggest crafting what you want to get out of your market and why you can do it better. Many people end up finding out that the best market for them is actually not the best in terms of numbers, it's usually somewhere in the middle. Instead, the best market is often one where you know something or have family/friend connections.
@Zo A. I too invest out of state for years and started with turnkeys, and agree with @Trevor Ewen when you move away from turnkeys you take on a whole lot more risk and challenges. One very passive investment strategy I favor these days and that is producing very nice returns involves investing in portfolios of 10 SFR at a time, co-owned with the managers. I blogged about these investments quite extensively. Have I Found the Holy Grail of Passive Real Estate Investing?
@Dustin S. and @Tyler Wade I also own a couple properties in Rutherford County. I have owned them since 2006 and they went down in value just like the rest of the country in 2008 and they have gone up alot in value the last few years. The first year was rough because of poor property management but it has been fine ever since. The toughest part about investing out of state is the property management. I had to deal with a crook in St louis last year.
@Gordon Cuffe I got into my property in Rutherford County in 09 and the very first tenants I had weren't great but since then I have had nearly zero problems. My worst performing property is a 4-plex that I have about 2ish hours away in a smaller desert town here in CA and its entirely because of the Property Manager but unfortunately they are the only game in town. So I'd have to agree with you 100% on the property management being vital.
Thanks @Larry Fried
@Zo A. Out-of-state investors, turnkey investors, and people that invest passively can also get in a trap with local full-time investors. If you make a 12% cash on cash, reliably out-of-state, you will inevitably meet local folks who scoff at anything below 15%. The flaw here is that they do this full time. You need to factor in your bay area existence as part of your overall plan to make money. Ostensibly your wages there are higher than you could command in Arkansas, Indiana, Texas, or {Insert Investor Friendly Market Here}. If they're not, it may be an existential question for another day.
If your wages are (as expected) higher, then you need to focus on getting that money out of your market. Between the restaurants, the cost of housing, and the taxes, California is attempting to strip you of your wealth. SF is a great place to live, but like NYC, you're best to focus on getting the money safely into a place where you can make some more.
Try not to get demotivated by lower returns for out-of-state. From my perspective, I am primarily trying to beat the stock market and the tax man. Chasing out-of-site returns creates an unrealistic expectation for out-of-state investing.
@Trevor Ewen. That is really helpful and puts out of state renting in perspective for me. My goals are similar. Thanks!!
Zo,
You might want to look at the Northwest Indiana market. We're about 40 minutes from Chicago. John Matthewson is correct about the $100k mark, in the south suburbs of Chicago. However, in Northwest Indiana, you can buy properties for under $100k and that's turn key. Let me know if I can be of assistance. Good luck.
@Zo A. Investing out of state does create more challenges than investing in your own back yard but if your own back yard doesn't cash flow, you don't have much choice. We sell turn key properties primarily to out of state investors (a high number in CA) and understand the challenges and concerns. You can find a lot of info on our webinars, podcasts and articles on our website that should help. Feel free to reach out if you'd like to talk further.