Need help with out of state

20 Replies

Hi, I am finally ready to get into real estate after making a lot of excuses for myself. I live in California where for me it would be next to impossible to purchase a rental property. So I was thinking about buying out of state. Would turn key properties be a good idea? I was looking into those since I don't know anyone in other states so I have no one on the ground somewhere more affordable for me. I was looking in the market place here and saw some in Cleveland, Ohio for pretty cheap(at least compared to here). Would it be smart for me to do that or wait until I can afford a house here. I am looking more for multi families.

@Kristian Fernandez Get with David Green. He wrote a book on buying and managing properties out of state. I’d do research for rental rates in the area you’re looking. I use realtor.com and also check out crime rate. California isn’t landlord friendly. So you are on the right track.

On BP, picking a great deal -> rehab it -> either hold or resell it, or do the BRRRR (Buy -> Rehab -> Rent -> Refi -> Rent) strategy, you will love it, people on BP think this is an art, we enjoy the result as much as this process, if you buy a turnkey project, you'll lose half of the joy, also probably a great portion of the profit. Have fun!

Originally posted by @Kristian Fernandez :

Hi, I am finally ready to get into real estate after making a lot of excuses for myself. I live in California where for me it would be next to impossible to purchase a rental property. So I was thinking about buying out of state. Would turn key properties be a good idea? I was looking into those since I don't know anyone in other states so I have no one on the ground somewhere more affordable for me. I was looking in the market place here and saw some in Cleveland, Ohio for pretty cheap(at least compared to here). Would it be smart for me to do that or wait until I can afford a house here. I am looking more for multi families.

 Welcome to the site. If Cleveland is on your radar as a place to invest you'll want to give The Ultimate Guide to Grading Cleveland Neighborhoods a read. Tons of money has been made & lost investing out here. Make sure you know the types of neighborhoods you're getting yourself into because they vary widely. Some best practices to live by when investing in Cleveland or any out of state market for that matter are as follows.

  • Don't buy in the roughest neighborhood in the urban core. Pick a solid B-Class suburban area. Perhaps a nice 1950's built bungalow.
  • Always hire a 3rd party property inspector to give you an unbiased feel for the home. The reports are 40-90 pages long and go through the entire house in great detail.
  • Get an appraisal. If your using financing the bank requires this. This is good. The bank isn't going to let you blow their money. They have more skin in the game then you do.
  • Make sure you get clear title. If using a lender this is a non issue. They will make you do this. It's those maniacs that buy homes cash via quit claim deed off of craigslist that really get screwed.
  • Make sure your property manager is a licensed real estate brokerage.
  • Understand you can not eliminate all risk, only mitigate it. If you are risk adverse real estate, (especially out of state) is not for you.

@Kristian Fernandez Welcome to BP! I think you will find that you are in the same position as a lot of other new investors, and many very experienced ones. People that live in CA, NY, HI, or places like Seattle just don't really have a chance at investing in their home markets, esp in the beginning. I'd suggest doing a quick search for 'new investor investing out of state' or something similar to read up on other people's experiences. This could also be a great way to network with people who are, or have been, in your same position.

As for your question re: turnkey, the quick answer is 'yes', that can be a great way to go. Now, I'm a turnkey guy myself so no one will be surprised with that answer ;)

The long answer is that, while I am definitely a huge proponent of turnkey for both new investors and any investor that needs to look OOS (out of state), it's not the only option. As someone else mentioned, you can also go a BRRRR method, or some variation thereof. This investment style requires more day-to-day involvement and more legwork building a team etc, but gives you greater control and, if done very well (ie your agent finds you a good deal, your contractor does a great job in a timely manner and no weird surprises turn up etc) you can end up with higher returns than turnkey because you buy properties that need work and then 'force appreciation' by doing a rehab that results in a finished product that is worth more on the market than the sum of what you put into it. This is essentially how turnkey companies make money, except we then sell the properties to investors and manage the rentals for them. But the management side is definitely not where the money is. Good turnkey companies do this hundreds of times a year, (should) have in-house contractors that do the rehabs, have streamlined processes that result in consistent quality products and lower overheads per door (if you rehab a lot, you pay wholesale prices for things like toilets and flooring and HVACs), so it's easier for us to make money through forced appreciation because of economies of scale.

So, if you want to put the work in and take on the risk, you could end up with a higher return doing something like a BRRRR at a distance - where basically you do what a turnkey company does, but then keep the house as a rental or sell it. It will depend almost entirely on your team (even more than market), and it's higher risk - but that's because it's also higher potential reward.

Turnkey is a less labor-intensive investment (though I hesitate to say 'passive' since there's still a lot of vetting and research that goes into choosing a provider), and once you pull the trigger on a property you should have to do very little day-to-day. In return for you not taking on the risk of rehab etc, you don't get the benefit of forcing equity in a property you bought cheap. You pay a percentage of your rents (usually 8-10%) to the company for their management services. So, in simple terms, you give up some of your returns in exchange for an easier investment - low risk, somewhat lower reward. If you go the BRRRR (or as I call it 'DIY') route, you take on a lot more risk but you get more control and could end up with a higher return.

So both options are absolutely viable, it's just a matter of what your goals and needs are. Like deciding between an indexed ETF and building a portfolio of stocks you think are poised for huge gains. One will most likely produce consistent, reliable mid-range returns over time, one could end up a major winner or major loser, or somewhere in between. How much volatility are you comfortable with? How much risk are you willing to take on for higher reward potential? The same questions you should ask about any investment apply to choosing your REI strategy.

For people that are new to investing, don't have time to build and manage a team, or simply aren't interested in making REI another 'job', turnkey is the better answer, in general. For those who love getting their hands dirty, have a good network, or know a lot about a good rental market OOS, going DIY can be super lucrative.

I should also second @James Wise , as usual, for his list of things to be aware of for new investors. A solid and useful list as always.

I think his first point is huge for new investors, especially those who have to go OOS. When you're priced out of your own market, or just starting out with minimal capital, there can be a tendency to just look for the cheapest investment because then you can 'make your capital go further'. But in the case of lower-tier properties, this absolutely not the case. For any OOS investor, especially a new one, I recommend never going below a B-class property. Whether you go turnkey or DIY doesn't matter. Stay in solid neighborhoods that people want to live in - maybe not the ones people dream of living in, but areas and families grow up in. If you look at a property or an area and think 'anyone that could afford not to live here would run', then you should be running too. Some people make careers off of low-tier props, but they are almost always experienced investors who self-manage properties in their own market, it's not an investment strategy for new investors or those who don't have time to make landlording their job.

James' other points are all really worth jotting down as well. 3rd party inspection, appraisals, checking the title, all crucial. Whether you go turnkey or DIY, the people you work with will make or break your investment. I always say 'people before market' because you can have an amazing investment prop in a hot market that turns into a giant money pit if the people you trust to rehab, manage etc drop the ball. 

Choose the right strategy for you, then start looking at building a team or choosing a provider. As for referrals from other people that have done it before and been successful, build your network on BP. Ask questions, lot's of them, of any turnkey provider or team member you are considering.

When you've narrowed down your choices to one or two markets, or one or two teams/providers, make the trip out to meet the people who will be responsible for your investment on the ground. See their handiwork, tour the neighborhood, look them in the eye. Any agent, contractor, management team, or turnkey provider worth your time should be happy to accommodate this, or even have scheduled tour dates available already.

Most importantly, don't jump into something that only 'sort of works' because you're excited to get started. This is a huge issue for new investors, and understandably so. Once you see how REI can benefit you, you want to jump in head first right away! But if an investment requires that you massage the numbers, make assumptions about rent increases, or under-budget the rehab, walk away and wait for the next one.

Best of luck!

Clayton

@Kristian Fernandez    First thing you should do is get pre-aprroved with a lender.....I used Shawn Huss with Chemical Bank in Ohio.....Until you do that you won't know what you can and can't do.

Then determine if you want cashflow,...or appreciation or both......I decided strictly cashflow....and chose Cleveland....flew back to Ohio twice to check out areas and brokers and property managers....2 SFR's and 2 duplxes later I have all 6 of my OOS under Holton-Wise....check them out.

@James Wise Thank you for responding as well as linking me to your Cleveland blog post it will be very helpful if I decide to invest in Cleveland. All the tips were very helpful as I didn't know some of them I still need to do a lot  of research and read more books before I pull the trigger. I hope I can come to you if I have any questions about Cleveland.

@Clayton Mobley Thank you for responding. Yes the BRRRR method would be ideal but I would rather do that with homes in my backyard so I can see as they are doing the work as I can't fly to other states very often. I am also one who usually go in head first which is what I was going to do until I decided to post here and see what other investors thought and get some pointers, which I got a lot of. I think I just need to learn how to be more patient.

Originally posted by @Kristian Fernandez :

@James Wise Thank you for responding as well as linking me to your Cleveland blog post it will be very helpful if I decide to invest in Cleveland. All the tips were very helpful as I didn't know some of them I still need to do a lot  of research and read more books before I pull the trigger. I hope I can come to you if I have any questions about Cleveland.

 Sure. Feel free to tag me in any Cleveland related post anytime. 

@Kristian Fernandez

If you decide to go turnkey, most operators have tie ins with lenders. 

At this point, you need to focus on what city to invest in and down payment needs.

BTW if you go east from LA in riverside and san bernadino county, you do see cash flowing rentals in SFR and multi family

Hey @Kristian Fernandez turn key isn't for everyone and there are very few solid operations. It's not impossible to invest out of state...you just need a good team that has a lot of experience with assisting out-of-state investors. 

p.s. we were in Oxnard not too long ago. great spot ;) 

@Kristian Fernandez the biggest risk for an out of state investor without a lot of cash is to buy something cheap in a bad area because it's affordable. Be careful of that and make sure you know the neighborhoods and areas. I've seen too many people get lured in to these $40K-$50K properties which you can find plenty of them in Cleveland and lose alot of money because of high vacancies and tenant caused damage. Get to know what rents are in whatever market you're considering so you can better evaluate the neighborhood. For instance, in Indianapolis where we're active, rents in C class neighborhoods are in the $800-$900 range. If you see rents of $650 or so, you know it's it's going to be a rougher neighborhood. I don't recommend any new, out of state investor buying these low end properties.