Out of state investing feasibility?
Homeowner · Beaumont, CA · Member since 2010 · 37 posts · 4 votes
I live in california but want to invest for cash flow, not appreciation. I've done some research on prices in some of the areas people talk about on here where monthly gross rent multipliers are as low 30-50. Is this even feasible when youre not in the area and you are starting out with less then 50k to invest?
First let me clarify that I know nothing about James' specific properties.
This analysis:
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.
I bought in TX starting in 05 when CA was just too crazy. I sold out of CA as I knew it was not sustainable. However I never thought it would correct to the level it has. Right now I am invested in NV, AZ, FL and TX. Those markets have been creamed and I believe they have over corrected (NV, AZ and FL that is), just my opinion though. I think there are lots of other good markets out there to look at. I like some of the midwestern states like OH, MO, IN, etc. I think you wlll see less appreciation in those markets, but I do think they offer some nice cash flowing properties. Each area has its pluses and minuses. You have to go to whatever market you have an interest in and see what you think. Don't rely on anyone else until you check it out for yourself. We all are looking for different things.
If you want to stay closer to home, the returns may be less, but I think you have some appreciation that may happen quicker. In So Cal, I like Bakersfield, Palmdale, and the Inland Empire (parts of Riverside County). These areas offer lower prices (and better ratios) than Orange, Most of LA area, etc. These areas have been hit very hard. For a variety of reasons, I think people want to live in CA and prices will go up again.
Hope this helps.
I live in Riverside County, the house I live in now I bought for 175k about 6 months ago. It was a hud that needed paint, new ac, blinds and carpets cleaned (5k repairs.) It is worth atleast 225k now. I have been keeping an eye out around morena valley, beaumont and north cathedral city but nothing is cash flowing like the properties can in AZ that I see on the mls.
Bruce I'm curious man with owning properties in 4 seperate states how often u able to actually visit them yourself
I don't visit them as often as I should but I do travel to the areas. I rely on my property managers and I am sure there is some leakage, but that is the way it goes when you are out of the area. I have hired a group of people that I have to trust. I have let some go that have not worked out. They know i am on top of things as I do keep actively involved, as much as I can in this situation. It is working for me. I am used to buying properties far away now and don't really think twice if I like the deal. Im probably a little crazy but that's me!
I have properties in Canada and the USA and I live in Israel. I own several free and clear SFHs (the dirt cheap kind) for which I have a management company and I believe they are doing more work than they should, but am still making a good return. I am flying there soon to straighten things up.
I have a few condos (each of which is worth much more than the SFHs combined) which have appreciated at 7% a year over the past 3 years, I saw little to no cashflow from these but expenses were HOA+taxes 100% of the time, never had to lift a finger doing anything.
What I'm trying now is to find people to JV with or join funds and syndications who are very specialized (basically doing what I would do on a larger scale if I had the time, experience, and funds), rather than a REIT or something. They allow for some diversification and use of far greater experience and knowledge. I try to be as involved as I can rather than an armchair investor, I go to the properties and I do exactly what I would do if I was going in solo. I also use these opportunities to learn from the people running the venture as much as I can, about the area and about REI in general.
if you stay in one area and don't have the means to invest elsewhere then you are bound to it, for better or for worse. If you can get to know the right people in several markets you will be much more dynamic, and less prone to the whims of one single market that you happen to live in.