Long Distance Investing as a Beginner
Investor · New York City, NY · Member since 2017 · 146 posts · 56 votes
Long Distance Investing as a Beginner
Most Popular Reply
Jody SchnurrenbergerPro Member
Investor · Asheville, NC · Member since 2017 · 506 posts · 404 votesI also invest out of state--Auburn, AL. I think that even if you have a turnkey company, you'd do well to have visited the city first, and preferably the houses if you can get there fast enough. I've heard rumor that some turnkey companies aren't reputable (as in every industry) and will sell you things in a war zone type of area, jacking up the price so you don't even realize what you're getting. If you visit the area, you can map out the locations you are interested in, visit the PMs you are considering using, meet with agents if you decide to go that route, etc.
I encourage folks to invest where they have friends and/or family so when they to visit their property (which should be done at least annually, even with everything done for you), they have a free place to stay to cut down on expenses. Also, if there is a hurricane or tornado, the friend or family member can drive past the property and give a basic report much faster than the PM can as they may have hundreds of properties to check on.
When you are picking a PM, be sure to read the management agreements before making a final decision. Also, make sure they handle everything you think you might want to get into. For example, I've decided to start investigating Section 8 properties. Well, my current PM doesn't do them. Now I need to find another PM. I'd rather have everything under 1 roof, if possible. When looking for other PMs, I read one contract that specified that they charge 8% or $100, whichever is higher. If I'm renting out a low income place for $500, I'm overpaying with them. The other 2 agreements I read charge a straight 8%, no matter what the rent is. Also, the required insurance in my agreements ranged from $300k to $1M, so that might play into your decision as well. Basically, read the agreements before making a final decision.
Good luck! :-D
40 Replies
- Rental Property Investor · Durham, NC · Member since 2016 · 7k+ posts · 7k+ votes8yI used to live near Milwaukee and now live in Raleigh. Let me know if you need my help at all. I invest out of state personally in Memphis and Cleveland, so I can provide insight there too
- Investor · New York City, NY · Member since 2017 · 146 posts · 56 votes8y
Yes, absolutely !
- 8yJody SchnurrenbergerPro MemberInvestor · Asheville, NC · Member since 2017 · 506 posts · 404 votes
I also invest out of state--Auburn, AL. I think that even if you have a turnkey company, you'd do well to have visited the city first, and preferably the houses if you can get there fast enough. I've heard rumor that some turnkey companies aren't reputable (as in every industry) and will sell you things in a war zone type of area, jacking up the price so you don't even realize what you're getting. If you visit the area, you can map out the locations you are interested in, visit the PMs you are considering using, meet with agents if you decide to go that route, etc.
I encourage folks to invest where they have friends and/or family so when they to visit their property (which should be done at least annually, even with everything done for you), they have a free place to stay to cut down on expenses. Also, if there is a hurricane or tornado, the friend or family member can drive past the property and give a basic report much faster than the PM can as they may have hundreds of properties to check on.
When you are picking a PM, be sure to read the management agreements before making a final decision. Also, make sure they handle everything you think you might want to get into. For example, I've decided to start investigating Section 8 properties. Well, my current PM doesn't do them. Now I need to find another PM. I'd rather have everything under 1 roof, if possible. When looking for other PMs, I read one contract that specified that they charge 8% or $100, whichever is higher. If I'm renting out a low income place for $500, I'm overpaying with them. The other 2 agreements I read charge a straight 8%, no matter what the rent is. Also, the required insurance in my agreements ranged from $300k to $1M, so that might play into your decision as well. Basically, read the agreements before making a final decision.
Good luck! :-D
- Equity Raiser and Turnkey Provider · Cleveland, OH · Member since 2016 · 4k+ posts · 1k+ votes8y
Originally posted by @Account Closed:
I'm living in NYC but I'm highly interested in investing in rental properties that would provide the best cash-flow out of market. I've been reading a lot about Raleigh, Columbus, and Milwaukee. I'm wondering if I'm better served finding a turnkey provider or making multiple trips to the area to house-hunt with the help of a real estate agent and then find a great property manager to oversee things.
Hello Rob,
Yes, investing in Turnkey can be great for someone looking out of state. Many markets in the Midwest can get you a decent ROI. I would look for the market and then narrow down some providers. Make sure they are TRUE providers and do not just throw the word around. They should own, renovate, and manage the property all in-house. They should not use any third parties or push you off on some management company after the sale. Also, they really should not be a cash-only company. That is a whole other issue.
Try looking at:
The Best Types of Markets for Profitable Turnkey Properties
and
- 8yRobert EllisBusiness MemberDeveloper · Miami, FL · Member since 2014 · 3k+ posts · 1k+ votes
Originally posted by @Account Closed:
I'm living in NYC but I'm highly interested in investing in rental properties that would provide the best cash-flow out of market. I've been reading a lot about Raleigh, Columbus, and Milwaukee. I'm wondering if I'm better served finding a turnkey provider or making multiple trips to the area to house-hunt with the help of a real estate agent and then find a great property manager to oversee things.
Hi Rob,
Investing from out of state is challenging but if set up correctly, it can be a great way to reach areas that can give you a better return. First thing to consider is the team: lender, agent, property manager, attorney etc... Build a local team that is familiar not only with the area but also with the type of property you are purchasing - location, unit count/mix, rents etc...These folks will be your boots on the ground. If you can come to the city to visit that helps but often, as a majority of properties are "curb offers only", buyers will come out for inspections after the offer is made and then go home and complete the rest of deal form there. It's critical as an out of state investor to build a team that you trust to advise you. Good luck with everything!
Section 8 Launch52 Reviews - 8yClayton MobleyPro MemberBirmingham, AL · Member since 2014 · 875 posts · 947 votes
@Account Closed the age-old question of turnkey vs DIY - the query that is never fully answered lol This topic comes up a ton here on BP, so I'm sure you'll find plenty of threads discussing this. The truth is, the answer varies for everyone. Both options are absolutely viable and can be profitable when done well, but they both also have downsides.
With turnkey, you are giving up a portion of your return in exchange for the services of a provider who handles everything once you cut the check. You don't have to fly down if you don't want to, you don't have to deal with tenants, you don't have to handle maintenance, you just collect net rents every month and occasionally give your go ahead if something big comes up. In exchange, the turnkey company charges a % of your rents as a PM fee (like any PM) and gets to pocket the difference between the purchase price+rehab cost and the sale price of the property. We do all the work, and we capitalize on economies of scale to execute high-end rehabs for less than the average joe, so we keep that profit margin. The client gets a tenant-ready (and often pre-tenanted) property with zero hassle, but their ROI comes from rents, the potential for long-term appreciation, and having tenants pay off their mortgage - the investor doesn't benefit from the purchase-sale spread.
If you go the DIY route, you *can* make more money if you manage to find a great deal, get a good contractor, etc - if you get all those moving parts to work together, this option can be fantastic. A lot of people really love the hands-on approach, or even want to do some of the rehab themselves in pseudo-flip fashion. Especially after you get connections in your chosen market, the DIY approach can be a money maker. However, the downside is that you're giving up a lot of time and energy (and this is a very front-loaded learning curve) , and you're taking on all the risks inherent in the rehab process. Any contractor will tell you there's almost always some little surprise once you get into the bones of a house - and the newer you are, the more likely you are to miss the red flags that could help you avoid those surprises. Rehab time is vacancy time, so the longer it takes, the longer you wait until you make money. With turnkey (well, any turnkey company worth your time) you don't close until all the rehab is done and inspections passed. That means that vacancy risk is on them, not you, and they're incentivized from day one to find the best properties and execute the best, most efficient rehabs - because they don't make a dime until its done.
Basically it comes down to your desired risk-reward ratio. Turnkey (when you do your due diligence) is very low risk with a slightly reduced reward (you will pay 8-10% in PM fees, and some kind of leasing fee, but you don't pocket that purchase-sale spread). DIY is higher risk (rehab vacancy, higher rehab costs due to retail pricing, steep learning curve), with the potential for higher reward. In your case, you need to bear in mind that you'd be paying a PM anyway since you'll be OOS, which means the only real difference will be the forced equity you can pocket when you eventually sell the property. Your net rents will be pretty much identical regardless of if you DIY or go turnkey (assuming all other things are equal, like property class and monthly rent), because you'll pay a PM and leasing fee either way.
Both options can work very very well, its all about what you want to accomplish, and how much time and energy you're willing to put in vs how much risk you want to take on. If you're willing to trade a little ROI for a passive investment that allows you to spend your time elsewhere, turnkey is the better option. If you have the time and money to fly to an OOS market, assemble a team on your own, and are willing to take on extra risk for the chance to make a bigger profit, try the DIY route and see how it suits you. Either way, if you don't like it you don't have to stay with the one strategy forever. Your REI strategy can change as your situation and goals do. Have a brutally honest heart-to-heart with yourself (and your spouse/partner, if applicable) about where you are and what you can reasonably take on *right now* and start from there.
Best of luck and happy new year!
Clayton
- 8yClayton MobleyPro MemberBirmingham, AL · Member since 2014 · 875 posts · 947 votes
One more small note:
In doing your research you will definitely see a lot of people saying turnkey is a bad option because you will "always" pay way over market value for a property and end up with negative equity. Not only is this untrue (several great companies charge fair prices for props), it's also a great way to weed out turnkey companies to steer clear of.
If a company pushes up its prices like that to make their cut, they're doing something wrong upstream in their business model, and you should definitely look elsewhere. A good, solid cash flow property from a reputable full service turnkey company should come at market price, and the appraisal should back that up, with maybe a difference of +/- $1,000 or so. You should be able to get a third party inspection if you want to, and you should be able to get a list of exactly what was done during rehab so you know what you're buying inside and out.
I digress a bit - often these discussions of DIY vs turnkey turn into very black and white debates about how one or the other is "always" x, y, or z, so I like to head that off at the pass ;)
- 8yClayton MobleyPro MemberBirmingham, AL · Member since 2014 · 875 posts · 947 votes
Deleted, accidental duplicate post :)
- Real Estate Agent · Columbus, OH · Member since 2016 · 593 posts · 664 votes8y
Hi Rob,
I'm another advocate for Columbus! I know some investors in the area and people working on some Turnkeys, that will be tenant occupied. They are looking for investors like your self. I sent you a college invite. I hope the long distance investing treats you well.
- Investor · New York City, NY · Member since 2017 · 146 posts · 56 votes8y
My work keeps me pretty busy. I work maybe 60 hours a week so it sounds like I need a more passive approach. I think this is why I took to stock investing pretty quickly.
Ultimately, what kind of ROI should an investor be looking for on a Turnkey property? I understand these things vary, but what would be considered Below Average, Average, Above Average? I started this conversation by saying 8%-10% .. Is that reasonable out the gate?
- Roseville, CA · Member since 2017 · 2 posts · 0 votes8y
I am looking ro start investing in commercial property in Bardstown Kentucky. How do I go about building a good team if I do not know anyone there?
Thank you
- Investor/RE Broker · Eugene, OR · Member since 2014 · 3k+ posts · 968 votes8y
@Account Closed Investing OOS can certainly be a scary proposition at first. I know it was for me when I started doing so with a turnkey company some 5 years ago. Your ? about turnkey vs building your own team is one that many people face. I've done both now, and can tell you the turnkey model takes a whole lot less personal involvement and risks are better mitigated for a novice. No matter the market, or the method, I highly advise that you visit any market you are investing in and meet the team you are working with before you close - especially when you are just starting out. Turnkey is not the only "passive" way to REI, and I have a blog post covering Three Key Routes for Passive Real Estate Investing
All best in your REI!
- Fremont, CA · Member since 2015 · 289 posts · 63 votes8y
I can speak from my experience please make sure that you visit the area where you are going to buy. and meet people in person. I live in California and invest in Cincinnati and Cleveland.
- Rental Property Investor · Cleveland, OH · Member since 2016 · 653 posts · 769 votes8y
Aside from what the others have said, I think you should always fly out to the market you are looking to invest in once you get serious about a location. You can learn an incredible amount in just a couple of days even. Sure it's a couple hundred bucks in flights/hotel, but that's nothing when you're looking to save hundreds of thousands by investing in a less expensive market. Nobody is so busy that they can't spare a couple of days to scope out an investment opportunity!
- Developer · Nashville, TN · Member since 2016 · 484 posts · 406 votes8y
Love @Clayton Mobley's post on TK vs DIY. Spot on, brother! I would further add that when you're using a TK, you're also leveraging their expertise on what specific streets are best for acquisition...where you'll have the most opportunity for high returns and long term cash flow. Some TK's are indeed good enough to get you both.
- Investor · Bethlehem, PA · Member since 2016 · 229 posts · 122 votes8y
@Clayton Mobley I took a look at your site and I may be wrong but I don't think your numbers work out as they are presented. Example property: http://www.spartaninvest.com/properties/800-rockingham-road/
"Purchase Price: $115K"
"Estimated Rent: $1,150"
"Annual Taxes: $1,847"
"Annual Insurance: $880"
"Property Management Fee: $1,242" (9% of rent)
"Annual Net Income: $4,004 - 20% down @ 6% APR for the First 30 Years"
I put all these assumptions in my model and I don't get "$333.75 cash flow per month". The mortgage payment on a $115K house after putting 20% down with a rate of 6% over 30 years is $551.59. Monthly tax is $153.92 ($1,847/12). Monthly Insurance is $88 ($880/12). Monthly property management $103.5 ($1,242/12).
+1,150 Rent
-551.59 Mortgage
-153.92 RE tax
-88 Insurance
-103.5 Prop Mgmt
= $252.99 Monthly Cash Flow
All these figures came directly from your site with the exception of the mortgage payment amount, that was derived from the assumptions presented on your site. Also, these figures don't include any vacancy, CapEx, closing costs or maintenance & repairs.
I'm not trying to call you out. I'm just a new guy who is interested in OOS turnkey properties but the above property doesn't get the same result as the calculators on BP or my excel model. Am I missing something?
- ARRT, RT(R) / Rental Property Investor · Newport Beach, CA · Member since 2017 · 360 posts · 242 votes8y
Yes, Ryan Evans!
And you can write off the flight & Hotel stay! $$$ :)
~Daniel F. Harb!
- Roseville, CA · Member since 2017 · 2 posts · 0 votes8y
Hi Daniel,
Do you have to be in business in order to write of the hotel and flight? Thank you
- ARRT, RT(R) / Rental Property Investor · Newport Beach, CA · Member since 2017 · 360 posts · 242 votes8y
Hello Paula P.
I am not an Attorney, but I am just a RE investor. I write off every single thing that pertains to RE investing. Flights, Hotels, Meals (if real estate was discussed in the course of doing business). Make sure to check with your Tax Pro and/or Attorney.
If it moves, I write it off! $$$
(If RE investing related) :)
~Daniel!
- 8yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
Originally posted by @Matt B.:
@Clayton Mobley I took a look at your site and I may be wrong but I don't think your numbers work out as they are presented. Example property: http://www.spartaninvest.com/properties/800-rockingham-road/
"Purchase Price: $115K"
"Estimated Rent: $1,150"
"Annual Taxes: $1,847"
"Annual Insurance: $880"
"Property Management Fee: $1,242" (9% of rent)
"Annual Net Income: $4,004 - 20% down @ 6% APR for the First 30 Years"
I put all these assumptions in my model and I don't get "$333.75 cash flow per month". The mortgage payment on a $115K house after putting 20% down with a rate of 6% over 30 years is $551.59. Monthly tax is $153.92 ($1,847/12). Monthly Insurance is $88 ($880/12). Monthly property management $103.5 ($1,242/12).
+1,150 Rent
-551.59 Mortgage
-153.92 RE tax
-88 Insurance
-103.5 Prop Mgmt
= $252.99 Monthly Cash Flow
All these figures came directly from your site with the exception of the mortgage payment amount, that was derived from the assumptions presented on your site. Also, these figures don't include any vacancy, CapEx, closing costs or maintenance & repairs.
I'm not trying to call you out. I'm just a new guy who is interested in OOS turnkey properties but the above property doesn't get the same result as the calculators on BP or my excel model. Am I missing something?
the reason you don't see vacancy and capex and on going maintenance is that those numbers are not static and or known.. it really depends on each home. Also you need to see if the PM is going to charge a rental placement fee many times this can be one months rent.. and a lot of times its outsourced.. but you do need to account for it.. with rentals in these areas 18 months I think is average.. so you are going to have placement fee's lets say at least every 24 months on average.. so something to think about..
although for napkin math at a 1150 rental.. if you use 40% or so for fixed overhead you should be in the ball park..
as the rent number goes down you may need to move to 50% or even 60% to accurately capture run costs.
Also its important to note in these homes that are being sold they have no rental history to guage them by.. like you would have buying an apartment.. so you could get the tenant from He@@ and your cost are higher..
you could get a fantastic tenant that lives clean pays consistently and lives there 5 years..
However in my mind as long as your not negative and your tenant is paying your house off.. and you have a solid asset that is holding value and going up.. not a bad play.
- Investor · Bethlehem, PA · Member since 2016 · 229 posts · 122 votes8y
@Jay Hinrichs I get what your saying but even if you assume zero for vacancy, capex and maintenance, I still don't get to his number.
Also, I get that capex, vacancy and maintenance are not static/known but shouldn't any investor factor something in for those regardless of how small they may be? assume $1,150 rent as indicated above, a 1 month vacancy due to turn over has an impact of -$96 per month spread out over the year. I think its unreasonable to forecast zero vacancy for any property since we know its a matter of when not if there will be a vacancy. even maintenance as another example, do we know what will break, no, but we know something will break or need to be replaced/updated. so we should put something in to account for it.
I'm a firm believer that anyone presenting financials should account for the unknown. As far as I'm concerned if I purchased a TK property and there was no forecast in the financials for vacancy and a vacancy occurs, the TK provider should be reimbursing me for my loss due to their failure to adequately account for it.
- 8yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
@Matt B. no disagreeing with you !! I was just pointing out why sellers of these properties many times do not put those few items in their numbers..
if you go to Brie Schmidts turnkey-reviews website you will see proforma's on many many properties in a bunch of markets.. some of the companies do all costs some do like what your experiencing and leave out the unknowns and let you put in a number.
there is NO question that you will have lease fee's over the course of ownership.. you will have turn over costs.. and you will have vacancy.. you can't turn over a unit while someone is living in it.. so you are going to lose a month usually right there..
so if I was looking at this for napkin math 1150. X .60 gives me cash flow pre debt service.. 690.00 - 551= 139 a month.. give or take 50 bucks or so.. plus 50 if you have a nice run.. minus 50 if you have a tougher tenant.. or quick turn over move out.. and or section 8.. as you are required to have an annual inspection.. and those are always 300 to 1000 bucks to fix the honey do list they come up with.
- Investor · Bethlehem, PA · Member since 2016 · 229 posts · 122 votes8y
@Jay Hinrichs So I'm going to chalk this one up to my inexperience with TK properties but how can a company pride themselves on honesty then present $333.75 monthly cash flow when it reality its more like $139 (+/- 50) monthly cash flow? To me that's like closing with a rate of 4% and getting the first mortgage statement showing 6% because the lender didn't include the pen fee of 1% and the paper fee of 1%.
- ARRT, RT(R) / Rental Property Investor · Newport Beach, CA · Member since 2017 · 360 posts · 242 votes8y
Excellent conversation. Thank you,
Jay Hinrichs & Matt Bacenet.
Love BiggerPockets... A wealth of experts! $$$
~Daniel F. Harb
- 8yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
@Matt B. I hear ya.. each turnkey is different in how they present the data for their deals.
again if you go to turnkey reviews you will clearly see that ..some companies put everything in there others do as this one did and withhold the unknowns.. assuming that you understand there will be turn over lease fee's maintenance etc. I don't think they are intentionally withholding just to snooker people.
I guess on the flip side if the company represents a maintenance and vacancy number in the profroma and its more than what they projected they don't want to be liable for that.
At the end of the day.. these are not static numbers and its up to the buyer to account for them to their satisfaction.. not take a sellers word for it.
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