Out of state investing feasibility?
Homeowner · Beaumont, CA · Member since 2010 · 37 posts · 4 votes
Out of state investing feasibility?
Most Popular Reply
Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
14yFirst let me clarify that I know nothing about James' specific properties.
This analysis:
The cash flow analysis looks something like this:
Rehab & Purchase Price $50,000
Monthly Rental Income$825.00
-Principal & Interest $299.00
-Management Fee $65.00
-Monthly Property Tax $92.00
-Monthly Insurance Expense $55.00
-Monthly Maintance Reserve(6%) $48.00
+Positive Monthly Cash Flow$266
Annual Income= $3,192
Rehab & Purchase Price $50,000
Monthly Rental Income$825.00
-Principal & Interest $299.00
-Management Fee $65.00
-Monthly Property Tax $92.00
-Monthly Insurance Expense $55.00
-Monthly Maintance Reserve(6%) $48.00
+Positive Monthly Cash Flow$266
Annual Income= $3,192
ROI= $6.3%
Is missing a few significant items.
Vacancy
Capital
Legal and accounting costs
And those are just the mandatory ones. No matter what, you will have vacancies. You would need to be extraordinarily lucky to have one tenant move out and another move in the next day. I've had it happen, but its the exception not the norm. Over the course of 20 years, roofs, furnaces, appliances and sewer lines need replacement. James' $48 a month is $576 a year or $11,520 over 20 years. That might cover routine maintenance, but it won't cover a roof, a furnace and two hot water heaters you'll buy over that period. And, since you're out of state, you'll have to find someone to do the work and pay them to do even the smallest job. You'll have to file taxes in not only your own state but also the state where the properties are located. And you will need legal assistance at various points.
And then there are the random events like a crazy tenant who won't leave and milks the eviction process for six months. Or the one that leaves but wrecks the place on the way out. If you have one property you may never have this happen. If you have 20, it will be fairly routine. Maybe not every year, but every few years.
A more realistic assessment is to deduct 50% of the gross rents to cover expenses, vacancy and capital. That leaves you $412 from the $825 rent. A $37,500 loan at 6% for 30 years is $225 a month for P&I. That gives you cash flow of $187 a month or $2246 a year. With a down payment of $12,500 that's a 18% cash on cash return. That's still a reasonable deal. If you pay cash, you get $412 a month or $4944 a year for a 10% cash on cash return.
You really must, however, go to the area. Learn the area. Learn the rental demand. Learn the people and the properties. I've looked at a number of turnkey deals. A few have been good deals. Much more commonly the deals are over priced relative to other properties in the area. The claimed rents are above the prevailing rents in the area. Demand is less than claimed. The promoter guarantees the rents for a year. But after that you discover you own a property that still needs work, that can only be rented for a lower rent than you expect and that you can't sell without a big loss. You MUST, MUST, MUST do your own due diligence and really understand the market.
31 Replies
- Property Management · Memphis, TN · Member since 2009 · 668 posts · 362 votes14y
Generally speaking, properties in prime locations have higher GRMs than properties in less desirable locations because of the acquisition cost. Now, when comparing alike properties in the same area, the lower the GRM, the more profitable the property assuming that the operating expenses are the same. My out of state clients are happy with 8% Net ROI who purchase with cash or 6% with bank financing.
The cash flow analysis looks something like this:
Rehab & Purchase Price $50,000
Monthly Rental Income$825.00
-Principal & Interest $299.00
-Management Fee $65.00
-Monthly Property Tax $92.00
-Monthly Insurance Expense $55.00
-Monthly Maintance Reserve(6%) $48.00
+Positive Monthly Cash Flow$266
Annual Income= $3,192ROI= $6.3%
- Investor · Hampton Bays, NY · Member since 2009 · 907 posts · 258 votes14y
I am currently investing In Dayton Ohio and Live in Hampton Bays NY. I chose to invest out of state because the conditions in my market did not fit with my investment needs any longer.
There is an inverse relationship between the quality of the neighborhood and the return on investment when considering buying rental property. Along with the increased returns comes a need for much more active property management and maintenance expense.
An example of a single family rental property boarders on a rough area but one that is improving is as follows.
Purchase price for 3 bedroom 1 bath single family property rented for 588 through section 8: $18,000 plus $6,000 new roof expected shortly. All in for :
$24,000
Rental income; 7056
Annual ins. 560
Annual taxes 860
Annual maint 600
Property management 706.
Total expenses 2726
Net Operating Income 4330Return on investment 17.32%
- Homeowner · Beaumont, CA · Member since 2010 · 37 posts · 4 votes14y
Hey Micheal. Are you a novice or experienced investor? How do you go about actually finding, then looking at the properties and do you do it with a lot of properties at once when youre there? Also, when youre not from an area, how do you find a good property that will screen tenants properly?
- Investor · Hampton Bays, NY · Member since 2009 · 907 posts · 258 votes14y
I have been investing in real-estate for over 20 years but out of state for only the past year and a half. I searched for a market that fit my criteria on line and looked at Memphis, Kansas city MO, Atlanta GA and others. I ended up in Dayton because I had contacts there and acquired a defaulted mortgage that put me in a property in Dayton. Thats a long story by itself. I buy properties with my Self Directed IRA.
I now own 4 properties in Dayton All Located on the same street and am in the process of acquiring 2 more.
the key is to become thoroughly familiar with your market and to make connections with trades people to help repair and maintain properties. Property managers are necessary if you cannot put the time into managing.
- Investor · Hampton Bays, NY · Member since 2009 · 907 posts · 258 votes14y
Nicholas I will try to answer your questions.
How do you go about actually finding, then looking at the properties?
I have made many contacts with RE agents selling REO .
I farm a very limited area and have come to know many of the other investors, tenants, and local property owners.
I constantly review new listings on zillow and trulia.
I have made contacts with many contractors who also are investors in the area.
I look for properties with delinquent taxes and contact owners.Its hard to screen tenants in this area because many are self employed and others are on Social Security. I work with Catholic Charities to find tenants in their refugee placement program along with the state dept.
The trips I make to Dayton are to strengthen relationships with the people I already know and to make new ones. When a property I could be interested in comes on the market I get calls from tenants as well as contractors and others who I have meet and keep in touch with.
- Property Management · Memphis, TN · Member since 2009 · 668 posts · 362 votes14y
Andy, I will be up for it! I will personally take you on a tour through some of our key areas here in Memphis. I'm just a phone call away
Anytime you ready. - Homeowner · Beaumont, CA · Member since 2010 · 37 posts · 4 votes14y
So from just a few reponses it sounds like it may be difficult for a novice investor to start this way.
- Investor · Hampton Bays, NY · Member since 2009 · 907 posts · 258 votes14y
There are several "turn Key" operations that are reputable and many are members here. It is not difficult to start if you determine first what your goals are.
Take the time to look through the threads and blogs and learn as much as you can. Most of the information that people pay for can be learned here for free. I have developed my own philosophy and business plans based on my needs. you can do the same.
It appeasers that you have some capital to invest so you are already miles ahead of the hoards of would be investors who are working hard at wholesaling without any money of their own to invest.
Determine what you want, make a plan, share the plan with colleagues on this site and then pull the trigger.
- Homeowner · Beaumont, CA · Member since 2010 · 37 posts · 4 votes14y
Hey James,
I have a question. On your analysis you posted Principal and interest. So does that mean you came out of pocket 50k and then financed 50k? Because if its 100k and youre getting 825 in rents then i can get that in Cali in a very good area. If its 80% of the 50k then your initial investment is 10k and your roi is 31% (not including tax benefits and principal reduction.) - Property Management · Memphis, TN · Member since 2009 · 668 posts · 362 votes14y
Nicholas its not hard if you find an experience management company that is also actively investing in a area that fits your budget and cash flow strategy. They can greatly eliminate pits falls that you will have no clue about when investing out of state. To protect myself I would find a company that have references that will be willing to speak with me, that can handle the purchase, rehab and management of a property in house, who also owns or manages properties in the areas I will be buying in, who can verify their numbers & show me how they determined the property analysis. I really believe that if you find a good management company that you can trust will be the start of a successful long distance investing career.
- Property Management · Memphis, TN · Member since 2009 · 668 posts · 362 votes14y
The total All In with purchase and rehab was 50k. I only put principle & interest assuming if you were using bank money at 6% ineterest rate for say 30yr. The returns will be much higher if you were using cash. Also Memphis has a lot to offer for 40k to 50k buying REOs.
- Investor · Hampton Bays, NY · Member since 2009 · 907 posts · 258 votes14y
Nicholas: James sent you some good advice . It appears your number crunching of his post is accurate . there are some mistakes in my calculations as well. remember it is now past 11pm in the north east and that is not good for spelling or math. I will look for your posts and for James clarification as well. I believe Memphis is a great market for buy and hold investors.
- Investor · Hampton Bays, NY · Member since 2009 · 907 posts · 258 votes14y
James, I just caught your last post to Nicholas. it appears that the cash on cash return for 50,000 invested would exceed 13% How would you rate the neighborhood.
- Property Management · Memphis, TN · Member since 2009 · 668 posts · 362 votes14y
Here in Memphis, it would be in a (b-) area. Will rent quickly and will not have the problem of break ins when vacant. Some of these homes will have only county taxes as well.
- Investor · Hampton Bays, NY · Member since 2009 · 907 posts · 258 votes14y
Thanks James, your info was helpful to me . Hope Nicholas found it useful as well.
Time for bed here in NY. Hope to see you both on line soon.
- Property Management · Memphis, TN · Member since 2009 · 668 posts · 362 votes14y
Your welcome Michael! We will talk to you later.
- Homeowner · Beaumont, CA · Member since 2010 · 37 posts · 4 votes14y
I appreciate the remarks guys. I am going to have to start trying to network and get some info on certain areas and managers in those areas.
- Property Management · Memphis, TN · Member since 2009 · 668 posts · 362 votes14y
No problem Nicholas. If you think I can help you, feel free to contact me.
- Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes14y
First let me clarify that I know nothing about James' specific properties.
This analysis:
The cash flow analysis looks something like this:
Rehab & Purchase Price $50,000
Monthly Rental Income$825.00
-Principal & Interest $299.00
-Management Fee $65.00
-Monthly Property Tax $92.00
-Monthly Insurance Expense $55.00
-Monthly Maintance Reserve(6%) $48.00
+Positive Monthly Cash Flow$266
Annual Income= $3,192ROI= $6.3%
Is missing a few significant items.
Vacancy
Capital
Legal and accounting costsAnd those are just the mandatory ones. No matter what, you will have vacancies. You would need to be extraordinarily lucky to have one tenant move out and another move in the next day. I've had it happen, but its the exception not the norm. Over the course of 20 years, roofs, furnaces, appliances and sewer lines need replacement. James' $48 a month is $576 a year or $11,520 over 20 years. That might cover routine maintenance, but it won't cover a roof, a furnace and two hot water heaters you'll buy over that period. And, since you're out of state, you'll have to find someone to do the work and pay them to do even the smallest job. You'll have to file taxes in not only your own state but also the state where the properties are located. And you will need legal assistance at various points.
And then there are the random events like a crazy tenant who won't leave and milks the eviction process for six months. Or the one that leaves but wrecks the place on the way out. If you have one property you may never have this happen. If you have 20, it will be fairly routine. Maybe not every year, but every few years.
A more realistic assessment is to deduct 50% of the gross rents to cover expenses, vacancy and capital. That leaves you $412 from the $825 rent. A $37,500 loan at 6% for 30 years is $225 a month for P&I. That gives you cash flow of $187 a month or $2246 a year. With a down payment of $12,500 that's a 18% cash on cash return. That's still a reasonable deal. If you pay cash, you get $412 a month or $4944 a year for a 10% cash on cash return.
You really must, however, go to the area. Learn the area. Learn the rental demand. Learn the people and the properties. I've looked at a number of turnkey deals. A few have been good deals. Much more commonly the deals are over priced relative to other properties in the area. The claimed rents are above the prevailing rents in the area. Demand is less than claimed. The promoter guarantees the rents for a year. But after that you discover you own a property that still needs work, that can only be rented for a lower rent than you expect and that you can't sell without a big loss. You MUST, MUST, MUST do your own due diligence and really understand the market.
- Homeowner · Beaumont, CA · Member since 2010 · 37 posts · 4 votes14y
Thanks for the response jon. I have basically been using a p&i calculator and then estimating expenses at 50% of gross rents, the same as you. My plan is to setup a weekend where i just go down there and look at properties for a couple days and pick a rea's brain about the area. its only a 3 hour drive for me to pheonix and maybe 4 to 4 1/2 to vegas so I think these will still let me view properties and get out there when I want or need to. I think for out of state investing, if i get a hold on what the actual value or properties are in those areas, i will probably go for a turnkey then do some research and get a proper property manager.
- Homeowner · Beaumont, CA · Member since 2010 · 37 posts · 4 votes14y
Hey guys, I got a follow up question. Would you except a higher grm for a property that is newer? Are major expenses generally less on a new property. I am seeing some properties that are 2000 or later that are more expensive but the overall returns with a 20% down are still over 20% (this is using 50% gross rents as expenses) How do you generally view new or newer properties vs old ones?
- Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes14y
Nicholas the answer to that question depends on your exit strategy.
The exit is as important or more important that the purchase.It's always easy to get into something but usually harder to get out of it.
How long do you plan to hold the property?? Who will you resale to home owner,another investor,developer for the land etc.??
A house from 2000 is still 12 years old.Many items can start going bad soon.If you have a house that is much newer say 2008 then you might have awhile before things go out.You have to inspect the property no matter the age.I have seen some builders go under that just threw up the houses and even though they are newer have a ton of issues.
So I make no assumptions when investing and conduct the due diligence on all properties under consideration.I am also amazed that vacancies are not calculated.That is one of your biggest expenses.
I would go further and say to estimate the first month or two the property you buy is vacant while trying to screen for the right tenant.You will save by being strict to locate the right tenant for the property rather than being lax in some parts of your screening process to fill the property up.
Of course even if you do your best to qualify people's job,health,family situation,etc. changes and you have to get them out.It's part of the landlord business.
If you have a 2000 built house and it has 4 years left on the 16 year roof then you know in year 4 to have that cost allocated for repair.If you don't do that you will show higher profit to a buyer when you sell but you will get a lower offer as they now have to fix the deferred maintenance plus you will have tenant turnover from giving the perception you never fix anything as a landlord but are quick to take the rent check.
Nicholas, You have gotten excellent responses on your post question here. I am also replying because I too live in the same state as you, and you cannot get the multipliers and cash flow in CA like you can in other areas. Currently I own no rentals in CA whatsoever. I have them in four other states. There are parts of CA that are starting to look attractive again so you may want to consider some of those closer to home if you have never bought rental property before. That being said, there are areas with much better cash flow out of state. I have found the key to be the same thing everywhere, and that is buying right and getting the right property manager. There are differences in managers, I have six I use right now and each is very different in how they operate, their personalities, etc. States have different laws when it comes to evictions, tenants rights, etc. It really is not that complicated but there are regional differences.
If you have identifed some areas, you need to go there and check them out. Drive and walk the areas, both at day and night, make sure you are comfortable having rental properties there. I have many rentals I personally would never want to live in, but that does not make them bad rentals. I look at everything as a business investment. Others in here have examples of a business plan. I never wrote one but I am thinking I need to. I have learned a lot from many in here, and i have made many mistakes in this business along my way. You have made a good step my joining this forum as people in here have a wealth of knowledge. Good Luck.
- Homeowner · Beaumont, CA · Member since 2010 · 37 posts · 4 votes14y
Hey bruce, as a ca investor, what out of state areas are you investing in?
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