Out of State Investing Advice for a newbie
Los Angeles · Member since 2016 · 48 posts · 7 votes
Hi everyone,
I live in LA and have started looking at OOS investing seriously and some of these homes I see in the midwest for example go for 80-100k turnkey ready. That's not even enough for a downpayment for a shack where I live. =(
Anyways, what are your thoughts on OOS investment , especially those that are turnkey ready, basically Im interested in purchasing a turnkey from one of those companies that already rehabbed the home and has a tenant/PM in place etc. Any tips or even how the process generally goes would be great. I'm really looking forward to getting my feet wet with OOS investing and hope to build from there. Looking forward to any advice.
I got alot of info from reading the forums when I first started...just wanted to share my experience and the steps I took investing OOS:
1) Research a market that works for your goals (whether that be employers in the market, job diversity, population growth, price of homes, etc.) I liked Memphis (Near airport), Little Rock (Similar to KC/Indy - low unemployment, growing economy, population), Ohio (Cinncinati, Columbus), Kansas City (missouri side), and Indianapolis (Near downtown).
I researched them all through biggerpockets, talking to most providers in each of the markets (about 25 calls made), and also reading data on sites such as zillow, neighborhoodscout, city data, etc. My strategy I am looking for homes around 7-80K that rent for 1000-1200, so Indy and Kansas City were perfect for this strategy and it had a growing population, strong/diversified economy. (i.e. memphis also has cheaper homes but its mainly renters and population was stagnant/decreasing). Looks like you're looking at higher range homes B+ to A, at 120K+ which is totally fine, but I just wanted to scale quicker with high cash flow.
2) Determine your criteria for investing: Single vs multi family, price range, rent to value ratios, age of home, how many bed/baths, etc.
3) Find a provider in the market (if going TK) that you would like to work with. Start by doing a search on BP about the different TK providers i.e. "Memphis Turnkey providers" and create a list to call. After coming up with a list based on your strategy I would call all providers (i just took 2 months calling and interviewing all TK, PMs, realtors, etc.) so that you can form your own opinion. Feel free to use me as a sounding board (I made about 20+ calls myself)
Starting out I would say its easy to be swayed by other investors and think "oh yea, thats actually a great strategy, etc." So i would try my best to write down your goals and strategy first!
My Criteria is ever-evolving, but this is my current list:
A) When Financing: Net monthly cash flow > $200 (after PITI, PM fees 8-12% (can vary), vacancy reserve 8%, maintenance reserve 8% (can vary depending on what capex was replaced)
B) Neighborhood Rating: C+ or above (Note that each company may rate neighborhood's differently
For example, A/B/C based on renters vs owners or A/B/C based on crime, school, other statistics.
C) Property Type: Single Family 3 bedroom 1 bath (or more), ideally with a Garage in snowy areas like Indy and KC.
Note: Some markets (i.e. Memphis/Little Rock), it is common to have a carport instead of a garage
D) Year Built: Post 1940s (ideally, but for example my duplex in Indy is 1905, so its also case by case)
E) Cash on Cash: 12% or higher
F) Rehab including updates to CapEx items 5 years life or less (Water Heater, HVAC, etc.) 10 years life or less (roof)
G) Rent to Value Ratio: At least 1% or higher, ideally 1.30% or higher (this is generally a buffer to protect me when the market corrects in the near future)
I highly recommend you really invest the couple hundred bucks to fly out there cheap/stay at an airbnb couple days and check out the different providers and their quality of rehabs, as well as see the neighborhoods for yourself. A B class in indy stated by your turnkey company might seem like a C class in the Coastal Markets in your eyes, so its good to set expectations up front, etc. Hope this helps.
@Richard Phan
Congrats on the decision to pursue out of state investing! While it can be daunting, make sure you do your due diligence on the market (and focus on the respective neighborhood/community) as well as those who you're dealing with.
Run your numbers of the turkey property you're interested in and be comfortable with them. Also do thorough research on the market economy, growth, path of progress, demographics, etc.
Don't overlook how important it is to understand the neighborhood you're buying into. Talk to local experts in the area who have nothing to gain from your purchase. BP is a great place to start finding contacts to vet. As a first out of state investment I would recommend buying into a B neighborhood or better.
Good luck Richard!
@Alex Mao
Thanks Alex, looks like I got a lot to look into before jumping in!
@Alex Mao Has a lot of good advice to offer.
I would caution that your typical Turn Key company prey on OOS investors who simply don't know anything or know anybody. I would first try to makes friends (Bigger Pockets is your greatest resource) in the market you have chosen to invest in, fly out there to see it and meet people and get driven around, and get a feel for what you're getting yourself into.
In my opinion, and this is coming from someone who has been in your shoes, is to meet the Turn Key people 1st so you can see the brand new units and get the shock of how nice they are out of your system because most of the time it doesn't matter; the units likely either cost too much and come with strings attached in the form of a crappy property management contract. Not to mention the property is likely in a C grade neighborhood (even though they tell you they're not) and the only people who will live there will be hell to deal with.
After all that your returns probably will be moot. Should have just invested in a Mutual Fund.
Then do yourself a favor and meet the other people grinding and hustling just like you - you'll get a more realistic perspective of how to be a real estate investor in the area and have a better experience.
Yes, fly out to see the company you're working with. Make sure they have good processes in place....
@Rob Bianco
Thanks for the insight. All good things to consider! The turnkey company is actually local to me, but deals with oos properties. I’ll definitely spend more time on here and try to network with people in the markets Im interested in.
@Richard Phan You've gotten some great responses on how to choose a turnkey company. I'll add just a couple things to look for/ask about:
One thing you noted in your last post warrants a comment as well. You said they are local to you but invest in other markets? That my friend is not a full-service turnkey company, that's almost definitely a marketer (a company that advertises turnkey properties owned by other companies in other markets and collects a referral fee for sending qualified buyers). While there are some reputable marketers out there, it does mean that you need to do one more level of vetting - vetting the marketer (the people you buy through) AND vetting the turnkey company (the people you actually buy from and work with long-term).
Generally speaking (and yes I am biased here) I recommend working with the turnkey provider directly if at all possible. It means there's one company to vet, one company to build a relationship with, one team responsible to you. It also means that you're working with people who really know the market they are selling because they live there. Marketers typically sell in many different markets and often don't have staff in any of them, so you are taking third-hand info about the market you're investing in - again it's just another step of separation between you and your investment.
I'd say you should do some more research here on BP about what constitutes a true full-service turnkey company (everything done by one company) and how to vet different providers and markets. Don't pull the trigger on something without really digging into the research.
Good luck!
@Richard Phan although inheriting a property will save you a bit on the lease up fee I would get your PM company to vet the tenant themselves.
That said I would not use the turn key property to manage the property. I would get another firm for that.
@Richard Phan Just make sure that the numbers make sense and read reviews! I shoot to buy things that cash flow and that aren't at top of the market value. Which market are you looking in?
@Alyssa Dyer
Im looking at st louis or cleveland areas currently, but open to other areas. Still a bit of research to do for sure. What markets do you invest in and why?
@Clayton Mobley
Awesome advice! I definitely will do some more research.
@Richard Phan I'm Oklahoma City all the way. I live and work here so I'm biased, but I've seen hundreds of out of state investors come here in the last year, so I'm not doing anything out of trend haha.
Our C class is priced at 60,000 - 80,000, has 8%+ rates of return and that's with a tenant in place, no rehab cost, cash flowing from day one.
Depending on your rates, after mortgage, you could be cash flowing over $200 a month after only bringing $17,000 to closing.
On top of all of that, the market is super stable. In the last downturn when other markets saw huge drops, we dropped at maybe 6%, but most of the rentals I see have about 5% equity buit in from the start, so you're in a really good place even after a downturn.
OKC is just a lot of wins!
@Alyssa Dyer
Hey Alyssa,
This is great information! Any suburbs of OKC that you recommend to invest in?
I love the idea of getting a good property with hardly any rehab into it and cash flowing from day one.
@Alyssa Dyer
Wow, that sounds great. Is there anyone you recommend I can contact to get some more info about properties in your area? Thanks so much for the info!
@Daniel Mendez Del City and Midwest City are awesome. They're awesome because they're not super ran down or scary areas, they're just older suburbia. Also, Tinker Air Force Base brings action to the areas, so there's a decent amount of commercial activity and a lot of jobs, which drives people to want to live there more! I see some of the very best rates of return without giving too much in condition and area in those two suburbs! I've got friends that live there for good rent rates while they're finishing up grad school, but mostly it's blue-collar families taking advantage of living that's even more affordable than OKC!
@Richard Phan I sent you a connection! Most of what I see is off-market promoted through private buyers list etc. There are just so many pain points to playing on market!
@Alyssa Dyer
In regards to your investments in OKC, are you finding them through the MLS? Or are you finding them through wholesalers ?
@Daniel Mendez I do all off-market deals. So not usually wholesalers, but a lot of relationship development with investors who are looking to sell off their portfolios to move up to commercial or investors who are getting older and getting out of the game.
Hi @Richard Phan I'm a buy and hold investor in the St. Louis area. Feel free to PM me if you have any questions about the St. Louis market.
@Alyssa Dyer
Im looking at st louis or cleveland areas currently, but open to other areas. Still a bit of research to do for sure. What markets do you invest in and why?
Hey Rich since you're comparing Cleveland and other markets I figured i'd drop in with some info for you. I'm not interested in engaging in a discussion on whether you should or should not choose Cleveland as a place to invest in. However if you do want to invest in Cleveland I just want to make sure you've got as much education as possible on the different types of neighborhoods we have here. There are some great rental neighborhoods and there are also some incredibly blighted areas. Prices will vary widely and you need to know why that is. As such I created The Ultimate Guide to Grading Cleveland Neighborhoods so out of state investors can get a firm grasp on the Cleveland market.
Knowing the pros and cons of each type of neighborhood is very important. Take a look at some photos below to see some of the things you should be prepared for if you engage in investing in these blighted areas. Note; these are all photos of properties in my company's rental portfolio. We have a portfolio of over 1,000 rentals in a wide range of neighborhoods in Cleveland.
Tenants got into a fight over a nominal sum of money. Burning one parties car was the way one of the parties involved decided to handle the situation.
Best part about the car fire was one of the parties forgot which car was owned by the tenant. They just knew it was gold. So they set all of the gold cars they saw in the parking lot on fire.
No caption necessary for this toilet from hell.
This is what a kitchen can look like when a low income tenant moves out of it.
This is what a backyard can look like when a low income tenant moves out of it.
If tenants in these tough neighborhoods don't have yards, don't worry they will light off their fourth of July fireworks in their bathrooms.
Don't worry though. Sometimes when they move out they forget about their unregistered firearms.
Another point i'd like to make is you can make or loose money in any market. Don't think that one particular out of state market will shoot you to success or abject failure. It's not really that complicated to buy out of state. It only becomes complicated when investors try to over complicate or over think everything. Whenever you are buying a property out of state you should do a few things to ensure it's as smooth as possible.
@James Wise
Great advice James. Appreciate the insight!
@Richard Phan I'm Oklahoma City all the way. I live and work here so I'm biased, but I've seen hundreds of out of state investors come here in the last year, so I'm not doing anything out of trend haha.
Our C class is priced at 60,000 - 80,000, has 8%+ rates of return and that's with a tenant in place, no rehab cost, cash flowing from day one.
Depending on your rates, after mortgage, you could be cash flowing over $200 a month after only bringing $17,000 to closing.
On top of all of that, the market is super stable. In the last downturn when other markets saw huge drops, we dropped at maybe 6%, but most of the rentals I see have about 5% equity buit in from the start, so you're in a really good place even after a downturn.
OKC is just a lot of wins!
What do you budget for Homeowner's/Landlord's insurance in OKC? I've been running an analysis on a few duplexes for house hacking, but I can't find anything that works. I'm using $2,900/yr or $242/mo because that's what Geico quoted me for one of the properties I was looking at, but I'm wondering if maybe I'm using too high of a number?
@Richard Phan I would say make sure that you invest with an end goal in mind and not just because numbers look good. Think about the property as a strategy to your goal and assess the deals based on that.
Also think about who and what you need as far as resources after you buy to make sure they are aligned with you and help you with your goals.
That's about what I would use. For investment properties, I use 1%, but when you're renting one side and living in the other it's more.
I could make an introduction to the insurance advisor that almost every OKC investor I know is using if you'd like to compare rates.