Investing out of state for cash flow

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Investing out of state for cash flow

Ron Karr
San Jose, CA · Member since 2014 · 8 posts · 0 votes

We are based in San Jose, California. Given the bay area prices, the rent to price ratio is terrible here. We are exploring investing in other states where houses can be purchased for $10,000 to $250,000 a piece.The goal behind this is to improve cash flow and generate passive income.

  1. What are the pros and cons of investing out of state?
  2. Which cities are relatively safe, offer low-maintenance (not much weather / nature related damage), and positive cash flow with 25% down payment?
  3. What occupancy rate should we factor? 
  4. What else should we know?

We can't leave the bay area for the next 10 years for various reasons. Therefore, these out of state properties have to be remotely managed with the help of a property manager.

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Account Closed
Investor · Honolulu, HI · Member since 2013 · 3k+ posts · 1k+ votes
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Originally posted by @Ron Karr:

We are based in San Jose, California. Given the bay area prices, the rent to price ratio is terrible here.  

Are you really basing a decision to invest thousands of miles away based on price to rent ratio?  Do you realize it has little to do with profitability?  This is your first big mistake.

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  • Joe VilleneuvePro Member
    Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
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    Michigan.  I have a program in place specifically for out of state investors...it wa designed with CA in mind

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  • John Nicholas
    Mission Viejo, CA · Member since 2015 · 31 posts · 2 votes
    11y
    Originally posted by @Joe Villeneuve:

    Michigan.  I have a program in place specifically for out of state investors...it wa designed with CA in mind

     Could you share your program details?

    Thanks 

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  • Joe VilleneuvePro Member
    Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
    11y
    Originally posted by @John Nicholas:
    Originally posted by @Joe Villeneuve:

    Michigan.  I have a program in place specifically for out of state investors...it wa designed with CA in mind

     Could you share your program details?

    Thanks 

     Can't do it on this forum.  Glad to do it through messaging.  Just connect with me and I'll fill you in. 

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  • Account Closed
    Investor · West Los Angeles, CA · Member since 2014 · 230 posts · 239 votes
    11y

    @Ron Karr

    May I suggest you connect with local investors either via bp or your local real estate mtgs. There are some experienced investors that are making money in your backyard. Perhaps you could partner with them.  Be careful who you take advice from, especially someone who's trying to sell you something as this "advice" is biased.  If you decide out of state investing is still the best option listen to @Mehran K. podcast as he successfully invests out of state and he lives in Los Angeles.

    Good luck

    2Reply
  • Ali Boone
    Real Estate Coach · Venice Beach, CA · Member since 2012 · 6k+ posts · 3k+ votes
    11y

    What are the pros and cons of investing out of state?

    The pro is that you can maximize your returns! The con is just needing to confirm you have a good property manager (can be hard to find). Otherwise, if you work with the right team, no major cons. All my properties are out-of-state and I love it.

    Which cities are relatively safe, offer low-maintenance (not much weather / nature related damage), and positive cash flow with 25% down payment?

    Birmingham is great, if snow avoidance is one of your weather things. Houston is a good one. Atlanta and Memphis aren't as good as they used to be but they are options. Birmingham is your best for cash flow! If you don't mind snow, Philly and Indy have good returns.

    What occupancy rate should we factor?

    Completely depends on where you buy and what quality of property you get. Different markets and neighborhoods have different vacancy rates, and if you buy lower quality, you'll likely have lower-quality tenants who will likely be much more transient which will cause a bigger vacancy rate.

    What else should we know?

    Success with buying out-of-state is completely dependent on how good the team you are working with is! And secondly, confirm all the numbers you are given, and know how to weigh those against the risk level.

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  • Mehran K.
    Investor · Wichita Falls, TX · Member since 2010 · 3k+ posts · 603 votes
    11y

    Thanks for the mention @Account Closed I live in CA and only invest out of state. CA dollars go a long way in other markets :) Check out the podcast interview I did with BP (below my post) and let me know what you think!

    1Reply
  • Ron Karr
    OP
    San Jose, CA · Member since 2014 · 8 posts · 0 votes
    11y

    @Account Closed Thanks. I will look into the details for local meetings. 

    @Mehran K. thanks for the link. I listened to the podcast and it has a lot of useful tips. Yes, CA money doesn't buy much in CA, but is huge in other areas. Where are you focusing now? Still Wisconsin? Are you looking for local partners given that LA is still a cheaper market than SF.

    @Ali Boone How are you finding good property managers? I'd hate having to trust someone and not able to have full control of my funds / investment.

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  • Ali Boone
    Real Estate Coach · Venice Beach, CA · Member since 2012 · 6k+ posts · 3k+ votes
    11y

    Well, but you do have full control of your investment. Any property manager you use works for you, and you have full say over what happens and doesn't happen and whether you continue to work with them or not. You are the boss, they work for you. So in that sense, you do have control. Owning rentals using a property manager is just like owning a business and having employees who work for you--you don't lose control over the business just because you have people working for you. 

    As far as finding the good managers, there are a few ways. The best way is to ask for referrals (yay BP forums) for the area you need one in. If no one uses a manager in that area, you can just start googling or yelping and interview various ones. But getting referrals is really the best. And know too that it may be a little trial and error sometimes too, and that's okay. All of my properties have been turnkey, so they have come with PMs. So that's the other thing about out-of-state, if you go the turnkey route, if you work with the best turnkey providers out there, they are likely to have good PMs. It's part of their business model, so those PMs have more enticement than regular ones usually.

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  • Laura Williams
    Kansas City MO · Member since 2014 · 357 posts · 349 votes
    11y

    @Ron Karr

    I agree with @Ali Boone that the property manager and team you have is the most important thing. If you get that right then your problems will be minimal. I wanted to add that it's also important to choose good quality properties that are going to attract good quality long term tenants. Don't just look at the numbers on paper. I've heard many stories now about the out of town investor chasing the high returns that got burned buying in bad areas. I think it's especially better if you are an own of town investor to take a slightly less cash flow on paper to be in a better quality area with less tenant headaches. 

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  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    11y

    @Ron Karr  there are literally hundreds of turn key operators in the US.. you may want to narrow down to a region ... then narrow down to a certain market.

    also don't think you can't get cash flow in CA or OR or WA.. you can.. just not 20 miles or closer to the beach  :)

    buying out of state presents a different set of obstacles that are very real.. 

    I wrote a little e book for Australians when they were buying turn key and you talk about out of state they were on the other side of the globe and the horror stories abounded with them.  Its the do's and don'ts I make no recommendation on markets or companies, just things you need to look our for that no sales folks will mention to you ...you need to pull the curtain back AND have a general foundation of knowledge so you don't make a mistake. the wrong turn key or out of state investment can cost you your entire investment. so choosing wisely to begin with is paramount. 

    Also one key thing to remember.. unlike buying multi family or commercial assets were your due diligence package is usually going to be ACTUAL income and expense data.. if your looking at fresh rehab SFR's there is no actual data the house is brand new to the rental market and any performance numbers are best case scenario.. that is the other glaring issue I see with those that market these homes... it becomes a keep up with the Jones thing.. one company adversities 14% return but neglects to put in a maintenance and vacancy factor... other companies that have all the running cost s show the same asset makes 8% its a marketing perception.

    Any way good luck and PM me if you want my free e book on the doe's and don'ts and insiders view to out of state investing... I owed over 350 of these homes over the years so I have some experience at this  LOL  and what I write about is my personal experiences.

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  • Account Closed
    Investor · Honolulu, HI · Member since 2013 · 3k+ posts · 1k+ votes
    11y
    Originally posted by @Ron Karr:

    We are based in San Jose, California. Given the bay area prices, the rent to price ratio is terrible here.  

    Are you really basing a decision to invest thousands of miles away based on price to rent ratio?  Do you realize it has little to do with profitability?  This is your first big mistake.

    2Reply
  • Mehran K.
    Investor · Wichita Falls, TX · Member since 2010 · 3k+ posts · 603 votes
    11y

    @Ron Karr

     Still operating in WI and nope, not operating here in LA!

    1Reply
  • Ron Karr
    OP
    San Jose, CA · Member since 2014 · 8 posts · 0 votes
    11y

    How are you managing contractors & handymen for repairs? Even locally, it is hard to build a long-term relationship with these folks. 

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  • Ron Karr
    OP
    San Jose, CA · Member since 2014 · 8 posts · 0 votes
    11y

    @Account Closed Can you elaborate? 

    Investing 250K here gets a place in a bad-to-not-so-bad neighborhood with perhaps 2K revenue per months. Whereas that 250K goes a long way in a different state with much higher rental returns. For instance, you can buy a decent house in Ohio for 20K with 1.2K per month return.

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  • Account Closed
    Investor · Honolulu, HI · Member since 2013 · 3k+ posts · 1k+ votes
    11y
    Originally posted by @Ron Karr:

    @Account Closed Can you elaborate? 

    Investing 250K here gets a place in a bad-to-not-so-bad neighborhood with perhaps 2K revenue per months. Whereas that 250K goes a long way in a different state with much higher rental returns. For instance, you can buy a decent house in Ohio for 20K with 1.2K per month return.

     Well what did that $20,000 house sell for 10 years ago, how about 20?  And how long has it rented for $1,200?  

    What rents for under $1,200

    http://cincinnati.craigslist.org/apa/5006140779.ht...

    What $20,000 buys  http://cincinnati.craigslist.org/reo/4964554730.ht...

    @Ron Karr  If a property rents for 2% of purchase price, WHY?  For a $1,200 rent the market is only willing to pay $60,000.  But in a .9% ratio area the market will pay $133,333 for that same rent.  Why?  If your 2% ratio property never appreciates your rent will stay at $1,200.  The .9% area will probably see 50% appreciation in a few years and rents would increase to $1,782 and you'd have the $65,000 + equity.  

    See how the .9% rent ratio beats the 2% rent ratio?

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  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    11y

    @Ron Karr

      Ron  I seriously doubt a 20k house in Ohio is going to rent for 1200 a month.. 400 to 600 yes  but not 1200...

    Bobs point is that with many of these markets your buying into non liquidity and no appreciation.. And much of RE wealth is gained by a combo of cash flow and appreciation like what has happened for 100's of thousands of west coast investors who bought in CA or other west coast markets.. or the higher priced East coast markets or better parts of Chicago etc etc.

    However if this is what your set on doing then my advice is to select a market and make sure you can buy at least 10 of these and then set up your PM and try to keep maintenance something you control. 

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    JLH Capital Partners51 Review
    WebsiteView Page
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  • Ron Karr
    OP
    San Jose, CA · Member since 2014 · 8 posts · 0 votes
    11y

    Thanks @Account Closed and @Jay Hinrichs for your valuable inputs.

    We are not set on doing this. We are just exploring possibilities at this stage. West coast certainly offers appreciation. While positive cash flow can be accomplished, the challenge is to get enough to offset employment. How are you guys going about generating great cash flow in the west coast?

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  • C Meddy
    Entrepreneur · Irvine, CA · Member since 2008 · 17 posts · 3 votes
    11y

    Interesting thread and good to see so many people helping with advice.

    0Reply
  • Alyssa Dyer
    Rental Property Investor · Oklahoma City, OK · Member since 2017 · 1k+ posts · 694 votes
    7y

    I'm a little late to the party. But this info might help someone who's still looking!

    1) What are the pros and cons of investing out of state?

    Pro - You've got more options as far as going to where the numbers make sense & finding a team you love. 

    Con - It's a little scary sometimes, but make sure to talk it out with the teams you interview, ask to be connected with people they've worked with more than once and also ask to connect with someone they worked with where the deal didn't go as smoothly as planned. See if they're willing to show you their pros and cons! 

    2) Which cities are relatively safe, offer low-maintenance (not much weather / nature related damage), and positive cash flow with 25% down payment?

    I'm die-hard OKC focused. It's incredibly insulated to recession, all of the off-market deals I've seen in the last year have met the 1% rule, we do have a bit higher insurance (1% of purchase price per year) when compared to some markets but it's only due to wind and hail affecting your roof. That's only as scary as your deductible is. Choose a policy of which you're comfortable spending the deductible every 10 years, when you get some damage, just make a claim, pay your deductible and you're good to go! 

    3) What occupancy rate should we factor?

    I factor at 5% vacancy in OKC! 

    4) What else should we know?

    PM or ask me any questions here! 

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