successful RE investors told me to not invest out of state

85 Replies

Recently I had the opportunity to speak with two investors, they are both in their 60’s and both of them have managed to create a great financial freedom for themselves and their families. I was really happy to have this moment to learn from them and to educate my self.

Because the market here is at the top of the k wave it doesn't make sense for me to buy my first real estate investment here (BRRR), so I asked both of them what they thought about investing in other states, in markets with lots of opportunity right now. The answer from both of them was

"I never invest out of state,” and one of them even told me that "it’s a really bad idea.” That was very discouraging for me because in my eyes they are both very successful and they have created exactly what my vision is, as far as the real estate. Because of this it was strong for me to hear that while I’m creating new relationships in other markets in other states and looking for my first deal.

l already read the book "Long Distance Real Estate Investing" by David M. Green (really important one). At the beginning of the book he explains exactly this about the older generation, that some them have a “paradigm" of not investing out of state.

Of course there is a risk in every investment and there are a few additional parts in the puzzle of long distance investing that need to be mastered in order to lower the risk.

I would love to hear your opinions and experiences with investing in other states. If this is my first deal is the consideration different when thinking about investing out of state?

Do you also prefer to invest only in your local market like many people or do you work wherever the opportunity is?

Thank you in advance!

Roee

I would not invest out of state.  you can get burned real good real fast.  Also many of the places where people invest out of state are cities with declining population where as time goes on you will have less demand for the ghetto trash properties people are buying for less than $50k.  It lets someone get started in investing, but long term they will only have the rent they got and will lose their capitol investment.  And many of these folks are netting about $100 per house per month for all their effort.

To invest out of state, many people blindly follow real estate agency and PMs who they do not know and can get cheated by the initial investment value and by the repair/turnover costs.

But the sheep keep flowing each other over the cliff.

@Roee Hazut , clearly there are people that have seen success in out-of-state investing, so it can be done, but I also feel like it is generally a more recent trend. Personally, I would be looking for advice from those that have done it for 10+ years at a similar scale to what you are looking at.  If you are wanting to build an empire of single family homes, find those investors.  Ideally, you can find some that have done it with success and those that have tried it and failed.

Everyone will be biased towards what they do.  I buy properties within a 10 minute drive of me.  So I am biased towards that, and could not envision doing what I do for both rentals and flips remotely.  BUT, my biases do not mean others can't have success doing something different.  As mentioned though, those that have success will say it can be done and while there might be some lessons learned, you will want to hear from those that failed or moved away from OOS investing.  The group that failed will probably have more stories about the true risks than those whose only experience is positive.

As they say, you learn more from your mistakes than your successes.

I am a successful real estate investor. I in fact also invest out of state as well in my local market. I advise people NOT to invest out of state, at least until they have a sizeable portfolio and net worth.

When I was on the BP Pod, they asked me what I thought the greatest thing in the way of investors was, and I said an inability to properly assess risk.  Those drawn to out of state investing, fall squarely in this category. They underestimate the risks in doing so, both because of the logistics of the distance, but also because they misprice the risk in the market and asset they are buying.  David Greene makes it sound very easy....but keep in mind, David Green is a multimillionaire who is a full time real estate professional who is not only able to take on that extra risk with limited consequence to him because of his net worth, but because of his profession, he is an expert, without even really realizing it, at mitigating risks in real estate investment. 

I have heard this piece of advice as well, and it makes sense, except for the fact that I live in one of the highest cost areas of the nation, the San Francisco Bay Area. I think the reason why "invest close when you start" is the rule of thumb is because it is easier for you to adapt to the unexpected, especially as you are learning. 

If you are going to invest out of state as a beginner, my recommendation would be to not do so ON YOUR OWN. Try to work with an established investor that has operations going out of state. www.Betterturnkey.com is a great resource, for example. 

@Even polaski thank you, it's definitely helping to expand my perspective about this subject.
the question Im asking my self is: because the market in my location is so high right now and very little of supply it make incredible challenging to actually buy an investment property's, how can I actually do it right here in my market? (and i'm definitely prefer to build it right here next to me where I know people and can have much more control over the project)

I focus on my local market in Northern California (both rentals and flips) but have invested across the U.S. and still hold long-term rental investments in three other states (Nevada, Florida and New York).  Between 2004 and 2014 I owned a half dozen duplexes in Rochester NY following the model that most now refer to as "out of state" investing (odd phrase as there is nothing especially magical about a state line).  The difference between 2004 and now is that there are far more robust online tools to connect you to the kind of information you need to be successful in that kind of endeavor.  Those tools barely existed then (in fact, zillow had not even reached Rochester back then) and so I muddled through relying on locals for management and market information.  Still, I continue to believe that trying to make money by buying "out of state" properties is fraught with hazards and is unlikely to yield material benefits to the vast majority of real estate investors, especially to rookies.  

Consider this: for every property you buy in, say, Buffalo or Cleveland from a turnkey, there is someone who has far more market knowledge/information than you do selling you that property. if it's such a good investment, why are they selling? Now, you can try to find fixers or otherwise cash-flowing properties on your own with the assistance of a local real estate agent (as I did) but the amount of time and energy required to do this well (again, you are competing with local investors who have vastly greater market knowledge than you - as an outsider- do) requires a massive investment on your part. In my case, the research necessary to identify great deals and to win them was essentially a second full-time job. Do you have the time, hunger and band width to accomplish that?

Bottom line (from my perspective) is that unless you bring something extraordinary to the table in terms of energy and creativity your chances of success are about the same as hitting the lotto.  You would be better off buying a corporate bond or a high yielding dividend stock.          

@Roee Hazut there is always more risk when you are trusting people to manage your assets out of state, country, etc...

For some investors out of state means somewhere they have family ties, friends, whatever so they can check on their asset and meet the team in person.  As opposed to just throwing a dart at a map.  

If you are going to invest out of state you need a legitimate team with transparent business systems created for investors.  You don't want to go with the one man show, local guy who can save you money but is not licensed, or whatever.  If you go down that path you are adding risk.

Everyone should also understand the difference between a physical asset and a projected return on a spreadsheet.  I can go find multiple houses that will look like a 20% return on a spreadsheet but, an in person walk through will reveal old non functioning windows, a decaying roof, lead paint, asbestos tile, and a high risk area for tenants.

Add all of that together and you will get your 20% returns for a month or two, or maybe a year but, the balance will come due eventually and when it does, you may be stuck with an asset that has no exit plan. 

There are ways to make out of state, C class investing, high(er) risk investments work but... you need a clear plan, clear business systems, and as @Russell Brazil continues to mention a clear headed understanding of what risk you are taking on. 

@Roee Hazut

I never invested OOS. Started in Bay Area in 2010, and buys 1-2 properties each year since then.

It's fairly expensive here to get in, however the rent is also higher. The actual cap rate is not much lower than other states.

I contacted someOOS TK operator many years ago, for Columbus OH properties. They were trying to sell me properties in Linden. Unfortunately, I graduated from OSU and knew that neighborhood really well. No way I am going to buy something there. That experience gave me really bad impression of TK providers, trying to mislead OOS investors.

B grade properties in OSU Area are not cheap anyway. The rental return is not much higher than Bay Area. Why bother?

After 10 years investing in Bay Area, the total return from cash flow and appreciation is wya better than out of state.

That is why successful investors do not like OOS, not their age. Money talks.

You will get a selection of different responses here on bigger pockets mainly because you will get a selection of different people with different experiences. The 2 older gentlemen have gotten success from local real estate investing. They have built their craft on it. Thats what they know how to do well. However I know countless of out of state investors that are doing EXTREMELY well. They have also learned a lot from someone else prior to doing it or they have made mistakes themselves and learned from them. 

So the quick answer is yes, you can be very successful investing out of state. 

However it all depends on your experience, your network and footprint in that particular community of where you are investing. What kind of relationships you are building in that community. What kind of team you have in that community. If someone says, you cant be successful investing out of state now or long term thats because they haven't achieved it themselves or cant see how it would work. I have plenty of contacts that have been doing it for 10+ years before it was a bigger pockets thing. I would recommend finding someone who is successful in it and learning from them. I can point you in the right direction if you are interested. 

To David's point, I observed the same phenomenon in Rochester at about the time I started liquidating my investments.  Local turnkey outfits advertising properties in terrible neighborhoods for 2x or 3x their value.  What many new investors do not understand is that real estate can actually have a negative value - actually worth less than the cost of property taxes and insurance.        

That is exactly the problem with OOS. If I called someone in another states where I have never been to, they can sell me a hood property without me knowing it.

You have to know the neighborhood well, before investing in it. Trusting someone else to make that decision, is not a wise investment strategy.

Nobody in this business is really your friend, whether it's the seller, the listing agent, the loan broker, the contractor, the appraiser, the tenant, the neighbor, you name it. They are all against you one way or another. Intrinsic conflict of interest here. So one party wins, the other party usually loses. Rare cases are win win situations.

This is not to say that no one can succeed in OOS investment. A small percentage will do. I would love to see how many OOS investors want to show off their actual returns. Then we can compare notes.



Originally posted by @Darius Ogloza :

To David's point, I observed the same phenomenon in Rochester at about the time I started liquidating my investments.  Local turnkey outfits advertising properties in terrible neighborhoods for 2x or 3x their value.  What many new investors do not understand is that real estate can actually have a negative value - actually worth less than the cost of property taxes and insurance.    

 

Originally posted by @Russell Brazil :

I am a successful real estate investor. I in fact also invest out of state as well in my local market.  I advise people NOT to invest out of state, at least until they have a sizeable portfolio and net worth.

When I was on the BP Pod, they asked me what I thought the greatest thing in the way of investors was, and I said an inability to properly assess risk.  Those drawn to out of state investing, fall squarely in this category. They underestimate the risks in doing so, both because of the logistics of the distance, but also because they misprice the risk in the market and asset they are buying.  David Greene makes it sound very easy....but keep in mind, David Green is a multimillionaire who is a full time real estate professional who is not only able to take on that extra risk with limited consequence to him because of his net worth, but because of his profession, he is an expert, without even really realizing it, at mitigating risks in real estate investment. 

I want to reiterate what Russell said. I prefer to say "out of area" vs "out of state". Out of state could be 30 minutes away and in the same state could be 6 hours away depending on where you live. I always recommend when starting out to invest locally. My first 6 properties were local (think less than an hour away). After that, I did some out of state investing (although it was only 3 hours by car away). Of course, I had good knowledge of the area I was going to, had good trusted contacts there, and felt comfortable doing it. Because of all that, and this is the biggest piece of all, my risk was minimal financially. I started with one SFR and had it failed miserably, it wasn't going to be a financial drain or derail my goals by any large amount. I was ready to tackle the learning experience of investing out of my area. I wound up having great success and got more later (all successful thus far), but I first ticked off all those boxes that without them make it a bad idea. If you're thinking about investing far away just because you've heard it was a good market to invest in, and that's all you've got, it's most likely a bad idea. You might get lucky, by why risk it. There is already enough learning experiences you are going to have starting out. Why add an unknown area that's not easy to visit to that list?

There are certainly some advantages to investing locally.  Being able to drive to the property and look at it directly is great.  However, if you live in a market where the numbers don't make sense, like I do, investing OOS can be a good option.  

There are plenty of horror stories where OOS investors were taken advantage of.  With some common sense precautions and due diligence those risks can be mitigated.  Most of the horror stories could have been avoided with some basic common sense work up front. Put some work into it and your risks will be greatly reduced.  There is always risk in real estate, know the risks, know how to reduce them. 

1) Know the market you want to invest in.  Travel to the market, look at lots of properties, know which areas are desirable and which are not.  Know what houses cost in the those areas.  Be able to identify good deals from bad based on price, location, condition of property, rent rate.

2) Develop relationships with local experts: Property Manager being #1, realtors. Check into them with other investors active in that market, can they be trusted? Do they seem to know what kinds of properties make good rentals and how to find them.

3) Always get a property inspection by YOUR inspector, not one referred to you by the seller, or anyone who may have a conflict of your interest. Always

4) Know trends of that market: rent rate, sales volume, jobs, economic drivers, large employers, population trends, etc.

There is more, but those are the important ones.

This is just a hunch but I think these older investors might not fully understand the impact of technology (as highlighted in Long Distance RE Investing) and how it has changed the game and made it possible to invest out of state. 

Here's a little thought experiment:

Suppose you've lived in a city your entire life, let's say Clarksville, TN. At age 30 you decide to move to California. Once you arrive, you discover Bigger Pockets and really start educating yourself on RE Investing. You quickly realize that your new market is too expensive. 

Now, would it be a bad idea to invest in Clarksville? Technically you would be investing out of state! However, you know the market very well and you have friends and family there. Maybe you already have a team in place!

Investing "out of state" is really just a mental barrier to entry. What's the difference in investing in your own city? What about 15 miles away? What about 100 miles away? What about 500 miles away? If you know the market, do your due diligence, and have a great team on the ground, investing "out-of-state" is really no different than investing in your own back yard. 

I hope that perspective helps!

-John Williams

Investor in Clarksville, TN

Originally posted by @David Song :

@Roee Hazut

I never invested OOS. Started in Bay Area in 2010, and buys 1-2 properties each year since then.

It's fairly expensive here to get in, however the rent is also higher. The actual cap rate is not much lower than other states.

I contacted someOOS TK operator many years ago, for Columbus OH properties. They were trying to sell me properties in Linden. Unfortunately, I graduated from OSU and knew that neighborhood really well. No way I am going to buy something there. That experience gave me really bad impression of TK providers, trying to mislead OOS investors.

B grade properties in OSU Area are not cheap anyway. The rental return is not much higher than Bay Area. Why bother?

After 10 years investing in Bay Area, the total return from cash flow and appreciation is wya better than out of state.

That is why successful investors do not like OOS, not their age. Money talks.

I never invest OOS either! I prefer investing locally in Columbus, Ohio. 

Everyone has an opinion and is always based on where your head is at that given time. Not wrong, just your take on it. 

Follow me on this journey :) 

You have 2 investors: 

1. One lives in Ohio 

2. The other one lives in California 

Both will be scared of each other's state bc of the distance, the lack of knowledge, the lack of control... etc 

Both could be successful in their respective markets and both can fail in their own back yard... So, why make a blanket statement either way... 

I lost $15k in a flip deal along with 5 other people that also lost 15k each in an area only 5 mins away from me here in LA. Why? You may ask... well... simply because at that time, we did not know what we were doing.

1. Lack of knowledge 

2. decision makers in the deal made the wrong decision

3. No formal contracts

4. No exit strategy or reserves 

5. No sense of timeline 

6. Wrong team (contractor, Architect, knowledge of permits and process). 

7. etc etc etc 

You all have a valid point here, 100%, but if you lived in Ohio, or Florida, or anywhere else, how would you go about meeting people for your team? 

People can take advantage of you in your backyard or elsewhere. So, how would you put yourself in a situation to win? 

When it comes to the actual investment: 

There are many different ways you can start: from a numbers perspective, think about this: 

A property in Columbus Ohio say for $200k 

Your down payment would have to be: 20% or $40k plus closing costs etc etc

In your back yard: assuming this is your first property: 

price : $500k at 3.5% : down payment : $17500 plus closing costs... less than the above. At $600k even 5% down : 30k or $40k all in. Similar to the investment. 

and if this is your second property: rent the first one and buy a second 'upgrade' primary home with similar numbers as mentioned. 

The point: 

You see how there are options in your back yard. 

When all is said and done: 

5 years from now : What do you see yourself owning? 

Do you want to be a passive investors (do nothing for the homes) or an active investors (hands on approach)? 

Do you want to focus on appreciation or cash flow? 

Do you love real estate or is this a means to an end for you? (if you love it and breath it: you will also love to learn about it and even like to learn from your mistakes). 

There is risks everywhere and in any investment... 

1. Research (markets, submarkets, rents, building teams, options, financing options)

2. Understand how much you need for your first or second investment etc : and understand how much you (you) need in reserves for the property, for your personal emergency fund, in a worst case scenario i.e. the property burns down, you have to evict tenants and have to carry the mortgage for 6 months plus pay legal fees etc.

3. What's your financial position ? (A lot of people on here pride themselves in using OPM or putting as little as possible on every property... Don't worry about "them" figure out where you are and where you want to be and what your path to that goal will be. 

If you had $1 million dollars sitting in the bank right now - you would be ok buying a rental home for 100k knowing that you can go through any unforeseen storms... 

So what is your position right now? and do you simply need to save more money to feel safe? (Define what safe means to you). 

Good luck. 

@Roee Hazut ,

I thought one crucial line in your original post was very telling and some of the other commentators have stated the same line.  "I have never invested out of state".  If you take advice from someone whom you respect, but they have no experience with what you're attempting to do, the answer may not be very helpful.  The same goes for posters who have never invested out of state.  

It's interesting that the topic of Turnkey and the usual bashing of the niche came up in some of the responses.  Again, from investors who have not purchased out of state nor purchased properties from any of the companies they are so earnestly stearing you away from.  

My point is that you have to be careful who you take advice from.  Don't get me wrong, you have some excellent commentators on here who have been and still are very successful, but few that I have read who invest out of state.  If you want to know the ins and outs and the pitfalls to avoid when investing out of state, you have to go to investors who have actually done it.  When you find them, you want to listen to those who have done it for an extended period of time, preferably have a sizable portfolio (certainly more than one or two properties), have had success and failure and are willing to share their mistakes.  If they relatively new to real estate investing, have no mistakes or blame someone else for any mistakes made, move on, in my opinion.  

One more thing real quick.  Don't simply discount the advice you got from the two local investors or the advice from the other posters on here who have successfully invested close to home.  Knowledge is powerful.  As an investor, there are certainly advantages to investing close to home just as there are advantages to investing actively.  Your first priority should be to learn how to invest close to home and what is required to be successful.  Only then can you make an informed decision on if you need to invest far from home to reach your expectations.  

I speak with a lot of investors who want to invest out of state and my first question is always why.  Most simply say their market is too expensive while reality shows that they are assuming they can't because of price point.  There are plenty of reasons why investors go far from home and they are very successful.  But the most successful ones researched their local markets first and met with local investors to get their advice.  Then through education, they decided they needed to invest in other markets.

I have three basic pieces of advice. First, I would follow the advice that @David green gives in his book because he is very knowledgable. Take notes on the book and pay attention to the steps he advises. Second, continue to meet with the local investors and really dig in to why they invest locally. Ask how the market has changed since they first started and ask what mistakes they have made locally. Don't avoid talking to them about investing out of state, but certainly ask them from their viewpoint and experience, what steps would they take if they were going to move invest out of state. Maybe challenge them to help you think it through. You may be surprised at the answers they give when they come at the question from that viewpoint. Lastly, I would look for local investors who are investing out of state and hitting their expectations. I would be careful at this point because like I stated, you want to learn from investors with some road behind them. The best advice is going to come from someone who has been at it a while and experienced some ups and downs. If they still invest out of state and give good advice about how to do it, I would offer to buy a cup of coffee or a beer and pick their brain.

Essentially, the road to hitting your expectations has already been paved and traveled for years by many investors.  You can miss the mark very quickly if you take advice from the wrong investors or make assumptions about what is possible both locally and out of state.  Be patient and spend some time consuming the success and failure of investors who are achieving what you want.  You'll know when the time is right and you should have clarity in your plan.

I'm pretty surprised at the feedback, my initial thought after reading the original post was that there would be a lot more proponents of investing out of your local area. 

I personally started investing locally and self managed everything. Then bought a 15+ unit mixed-use property 1.5 hours away, got a PM, and forced myself to never visit the property. My intent was to act like I was an out of state investor. If I missed out on some money in the short run, I didn't really mind it since my goal was to prepare myself to be able to manage properties all over the country in the future when I scale. I think this definitely taught me well. I tried my best to set up the systems to be able to manage a PM, but still faced some issues which decreased my cash flow and made it a less desirable rental. Overall, simply due to a good purchase, finding an off market deal, negotiating well, etc. this ended being one of my best investments. 

I would just recommend that when you do invest out of state, just make sure to add in extra wiggle room when you analyze and underwrite your deal, since the local owner selling it will have a large advantage. If you buy from another out of state investor, then I'd say you could get a much better gauge of how you'll have your asset managed once you purchase. The PM will also be a huge determinant in how well your asset performs (or doesn't). 

Like others have said, if this is a route you want to go, then I'd seek the advice of successful out of state investors and learn their methods. 

@Roee Hazut people have trouble accepting that two or more people can be right about a subject. A California investor may say to invest out of stat in Memphis. A Memphis investor may insist that investing in state is the best move. They are both investing in the same state. Who is wrong?

A paradigm is model or theory, often developed based on experience. The 60 year old man may have a paradigm to invest locally and someone else may have a paradigm to invest out of state. They both have their own paradigms developed based on their own different experiences. Both can be successful.

You are looking for a yes or no and the answer is "it depends". It depends on where you are located, your experience level, your comfort level and the tools available to you at the time you are investing. 

My advice is evaluate both options and do what is best for you. 

@Roee Hazut

Whether you invest in state, or out of state. It is about building relationships and trust.

The guy flipping a house down the street can screw you over just as bad as some guy from 3 states away. It just takes a little longer to build your team and develop those relationships long distance.

Set your goals, develop your plan, build your team, and do your thing. In state, out of state, who cares. Same process with a little more effort and research. Depending on what market you are coming from and going to that extra effort and research can pay dividends.

@Remington Lyman

Sure. You live there, and you invest there. That gave you some significant advantage.

If I live in Columbus, I will invest there too.

Different cities may have different price points, but actual returns are not that different.

I am constantly checking on cap rates for commercial and residential properties on loopnet across the country. No real advantage or disadvantage for any particular market within US. Real CAP rates only differ marginally across states.

It’s a dynamic equilibrium, brought by efficient market.

Hey Roee, 

My advice would be to only invest OOS if you are familiar with the market and have connections in that area that could help if you are in a pinch. My first rental was purchased in Florida while I was living in Washington D.C and it was a great experience to see it play out. Real estate is generally much cheaper and the returns in that area are great, especially with everything going on today.

Now living in the Bay Area, I still feel good about the investment and it is doing well now in it's third year. So much so that I have purchased another rental in that area and the process has gone very smoothly, despite not being able to fly cross country. 

Both properties are averaging a COCROI of 20.5% and are cash flowing very well. 

I would definitely do more research, utilize modern tech and look for areas that you have some sort of interest in. I plan on one day moving back to Florida and continue to expand my portfolio but can honestly say OOS investing has taught me a ton and I have enjoyed every bit of it!



@David Song I don't know about commercial cap rates, but in residential there is a big difference between the bay area, and OOS markets. A $1M house in San Jose could rent for $4-5k/mo depending on condition and location. In KC I can buy 7 $140k houses ($1M total) and rent them collectively for $9500/mo. And I can spread the risk over multiple properties. 1 vacancy out of 7, isn't so bad, vs. my $1M SJ house being 100% vacant. AND CA has ridiculous landlord hostile laws.