First out of state purchase done - here are some lessons

14 Replies

Earlier in January I closed on my first out-of-state rental. As a former lender and current realtor with a focus on real estate investors, I am happy to say that of the variables known, I was prepared for any eventuality. However, nothing ever runs perfectly smooth and here are some of the newly learned lessons.

  • It is impossible to get a conventional loan where the loan balance is less than $55,000
  • don’t schedule a home inspection if the roof is covered by snow. The home inspector will say that because of the snow they were unable to thoroughly examine the roof. This means you will have no idea if the roof needs to be replaced immediately!
  • make sure the home inspector is able to inspect a detached garage
  • make sure at closing your agent gets all keys, including the ones to a detached garage or other outbuilding
  • if possible, it’s best to purchase a rental that is vacant. This way, the property management company can vet the tenants (correctly) and you will not be relying on the word of the previous seller or property manager. I realize that a property manager may charge an entire month’s rent to find a tenant as opposed to a modest fee to assume the management, but it is worth it...
  • If you intend on renting to a section 8 tenant, try to find one in which the voucher amount is considerably larger than the tenant’s portion. This can be tricky with anti-discrimination laws but suffice it to say that the larger the voucher, the less the chance there is for a tenant to miss rent

That’s about it. I am sure that the next purchase will yield a few other little goodies. 

Patrick Britton, Real Estate Agent in WA (#120557)
360-927-0959

Thanks for sharing. Did you use a turnkey company, if so which one? Also, which state did you buy?

Great post! This offers a lot of insight into becoming a Landlord.

Originally posted by @Patrick Britton :

Earlier in January I closed on my first out-of-state rental. As a former lender and current realtor with a focus on real estate investors, I am happy to say that of the variables known, I was prepared for any eventuality. However, nothing ever runs perfectly smooth and here are some of the newly learned lessons.

  • It is impossible to get a conventional loan where the loan balance is less than $55,000
  • don’t schedule a home inspection if the roof is covered by snow. The home inspector will say that because of the snow they were unable to thoroughly examine the roof. This means you will have no idea if the roof needs to be replaced immediately!
  • make sure the home inspector is able to inspect a detached garage
  • make sure at closing your agent gets all keys, including the ones to a detached garage or other outbuilding
  • if possible, it’s best to purchase a rental that is vacant. This way, the property management company can vet the tenants (correctly) and you will not be relying on the word of the previous seller or property manager. I realize that a property manager may charge an entire month’s rent to find a tenant as opposed to a modest fee to assume the management, but it is worth it...
  • If you intend on renting to a section 8 tenant, try to find one in which the voucher amount is considerably larger than the tenant’s portion. This can be tricky with anti-discrimination laws but suffice it to say that the larger the voucher, the less the chance there is for a tenant to miss rent

That’s about it. I am sure that the next purchase will yield a few other little goodies. 

 Any more specifics on the property and where you found it? I am just curious.

Tom Ott, Real Estate Agent in OH (#2016003865)
440-749-4043

@Soh Tanaka   not a turnkey company for the house, but a turnkey company gave me a lot of insight into the area.  the turnkey company and the property manager are the same.  check out Mark Ainley here on Bigger Pockets.  

@Tom Ott   purchased it for $65,000, zip code 60617.  rent is $1,250 with utilities paid by tenant except water and snow removal.  Property needed a few minors things that were fixed by seller prior to closing but turns out roof needs to be replaced in a few months.  We weren't expecting 100% turnkey since they sell for no less than $87,000 in that area so a $4,000 new roof on a $65,000 home is not awful.  

It's a 2 story brick home with 4 bedrooms, 1 bath, detached 1-car garage.

I was able to get financing thanks to Guaranteed Rate (Marc Bristol). Got 4.875%, 30 year loan with total PITI costing me $499.

Patrick Britton, Real Estate Agent in WA (#120557)
360-927-0959

@Patrick Britton is this a single family or duplex ? What did it appraise for?

I wouldn’t say it’s impossible to get a loan for under 55k. I’ve gotten one for 28k on a conventional 20 percent down. I also know another lender that does loans as low as 35k

These are both large lenders who lend in many different states.

@Caleb Heimsoth SFR. i put down 20%. When did you get that loan for 28k? In 2015 when they introduced the new TRID regulations loans like that must have become "high cost loans." Appraised for $65k. i would love to know who your lenders are :) :)

Patrick Britton, Real Estate Agent in WA (#120557)
360-927-0959

My advice, especially for  OOS investors, would be to steer clear of S8. You want to reduce risk, not increase it, since OOS investing is higher risk to begin with.  

S8 will increase management costs and expences.  

@Patrick Britton thanks for sharing!! Very intrigued with the concept of investing out of state since the numbers in my area, which is the north side of Chicago, generally are much more deflated than the ROI I’m seeing from many people on BP. On the northside, we are happy with a “1% rule” of ROI. Then I hear Brandon on the podcast saying he doesn’t like anything less than the 2% rule.

How did you pick 60617? Honestly, the north/south sides of this city are polar opposites, especially with investing. For me, “investing out of state” would begin with “investing in the south side” first. I see the COC returns on some of these properties down there and I’m super intrigued.

Just wondering how you found this home and if you traveled here first to view it before buying? $65,000 purchase for a $1250 rent looks amazing to me. How did you then find a property manager?

At any rate, Congrats on the purchase and best of luck for sure!!

Ted Kuhlmann, Real Estate Agent in Illinois (#475.122470)
(773) 640-1089
Originally posted by @Ted Kuhlmann :

Patrick Britton thanks for sharing!! Very intrigued with the concept of investing out of state since the numbers in my area, which is the north side of Chicago, generally are much more deflated than the ROI I'm seeing from many people on BP. On the northside, we are happy with a "1% rule" of ROI. Then I hear Brandon on the podcast saying he doesn't like anything less than the 2% rule.

How did you pick 60617? Honestly, the north/south sides of this city are polar opposites, especially with investing. For me, "investing out of state" would begin with "investing in the south side" first. I see the COC returns on some of these properties down there and I'm super intrigued.

Just wondering how you found this home and if you traveled here first to view it before buying? $65,000 purchase for a $1250 rent looks amazing to me. How did you then find a property manager?

At any rate, Congrats on the purchase and best of luck for sure!!

Ted, I seriously laughed out loud at “investing out of state” would begin with “investing in the south side” because I feel the same way. Patrick, I would love to know why you chose this zip code as well. 

Originally posted by @Thomas S. :

My advice, especially for  OOS investors, would be to steer clear of S8. You want to reduce risk, not increase it, since OOS investing is higher risk to begin with.  

S8 will increase management costs and expences.  

I think that completely depends on what state you buy in and what the Section 8 laws are. Some states are great with Section 8. I have some Section 8 tenants and there can honestly be a lot of perks with it. 

As with anything, there are pros and cons. But I definitely don't think it should be a blanket idea to avoid it. Totally situation-dependent.

Originally posted by @Thomas S. :

My advice, especially for  OOS investors, would be to steer clear of S8. You want to reduce risk, not increase it, since OOS investing is higher risk to begin with.  

S8 will increase management costs and expences.  

 but but but... how am I supposed to hit the 2+% I read about all the times and get to my 100 door freedom number? 

@Thomas S.   I am not going to get into a philosophical debate about Section 8 tenants.  Some investors love them, others don't.  There is no right or wrong answer since everyone's tolerance for risk (even if only perceived) is different.  It's worth mentioning that the majority of landlords (i have spoken to) who have section 8 tenants prefer them to non-section 8.  

@Nikki Kofkin @Ted Kuhlmann    As for the zip code, it was brought to my attention by a turnkey provider.  I had been under contract to buy something from them, but it didn't appraise.  Still though, I found the area's risk to be acceptable,  so I simply bought a listed property down the street.  As for seeing the property in person, I didn't.  However, I had spent a good amount of time in the immediate neighborhood while under contract with the turnkey provider's listing.  I was very impressed with what the locals have done to rid the area of crime (basically instilled martial law).  So it's not what one would expect of the Southside :)  

It's worth noting that this rental is nothing more than an asset to me.  It's no different than any other investment.  It is not a house.  There is no tenant.  It's numbers in an excel spreadsheet and schedule E.  Sometimes the asset requires an influx of cash, sometimes it misses a dividend payout, but hopefully over the long run (15 years and more) this asset will appreciate and the cashflow provided will allow additional acquisitions.    

In essence, it's a bond, which was priced at a C-, but provides a B+ coupon.  Call it a high yield corporate bond, call it a junk bond, it doesn't matter.  What matters is that it's appropriate for me.  

In short, the intention of this post was to help others avoid the mistakes I made and I hope I have succeeded.  But most importantly, one should always invest with their tolerance for risk and time frame in mind.  This means quite frankly, ignoring what everyone else is shouting, and doing what is appropriate for you.  It's important to recognize what assets you need to acquire today, to achieve whatever financial goals you might have at some point in the future.  Who knows, maybe you don't need to take on as much risk as others say you should?  

Patrick Britton, Real Estate Agent in WA (#120557)
360-927-0959

@Patrick Britton Great to hear your thought process, I was just genuinely curious! Thanks for sharing. 

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