Out of State Investing For First Time Investor

22 Replies

I live in Long Island, NY.  This is an expensive area to get started up as a first time Real estate investor as most 2 families and up are in the $400k and up range. My other option is owning a property out of state, but I do not think this is a great idea for a first time investor + the additional cost of a property manager.  Any thoughts or advice appreciated.

Hi @Anthony L. I'm also on Long Island and own an entire rental portfolio in the Mid-West. Havn't invested anywhere else since my first SFR. Don't shoot yourself in the foot, you just need to take mitigated risk. You should come out to a REI meet up that I'm attending on 6/7. You can learn what others locals are doing out of state.

@Anthony L. I just started out recently and just closed on 2 SFH both outside of NY (Memphis and Dallas). I went the turnkey route since i don't have time to manage myself and found a property manager to take care of everything. It works for me right now.

@Shawn Ackerman Mind sending me the info to that?  Also what type of % does a property manager take? 

@Joseph Salegna Also curious what kind of % a property manager takes?

Were you guys both referred to these managers, how did you go through the vetting process? 

@Anthony L.

Take a look at noradarealestate.com

They are a Turnkey provider of rental properties.  Marco Santarelli (Norada) host a Podcast as well.  Take a look at there website.  It might be a way for you to invest elsewhere. His podcast is called Passive Real Estate Investing. 

Good Luck. 

I have been investing out of state (OOS)for about 15 years and have been doing it on a large scale and in many area. 
My take is that I owe it to myself to check the best options to invest my funds.

If investing OOS is slightly better than what I can get locally than maybe not worth the trouble but if the returns are much better worth looking into it. 

Due to our scale we negotiate w/ PMs to get better fees and service.

I think it is better to focus on the bigger picture and not the PM's fee. If your rent is 1200/mo and the fee is 10% or 120/mo vs 8% or 96/mo - a 24/mo saving is small number compare to other aspects of the deal such as cashflow, ROI, cost, etc.

@Shawn Ackerman which REI are you attending melissa LIREIA in Melville? Are there any other ones? I heard Carl's out west on 28th is a very good one big on networking and education with little or no selling. I have 2 flips currently going on and about to heavily market as soon as I get foundation finished but I really want to start getting rental income. What areas are you investing?

@Anthony L. if you don't mind going little east you can still find some decent multi family's that cash flow in patchogue. Area has had a lot of gentrification and money dumped into down town. Watch out though there are a lot of legal 2 families BUT they have to be owner occupied and village is cracking down so if you try to rent all 2-3-4 and don't live there they will come after you potentially 

@Anthony L. - for about 2 months, i did nothing but research and call as many people and read as much as i could on what to ask and look for in a property manager and about investing. I still continue to read and research as much as i can in my spare time. 

PM fees generally run 8%-10%

PM fees are MUCH greater than 8%-10% if you factor in ALL the fees they charge, including lease fees, repair mark-ups (both over and under the table), late fees that they keep, re-lease fees, inspection fees, etc., etc., etc. Best case, it is around 15% of GROSS rents, which is closer to 30% of net income before you even pay the mortgage. Are your local investments really so bad that you are willing to give up 30% or more of your cash flow? That is just with the PM ... that does not even consider the many other advantages and discounts from staying local. Investing out of state is just about mitigating risk?!? Really? How does one mitigate risk by giving up complete control over their investments, in a market that they are less familiar with, in a market where they have severely limited ability to buy below market and do value added rehab, where they will be 100% dependent on the kindness of strangers to make or break their investments? If you want to mitigate risk, then stay local and hands on. If you want to give up control, and be 100% passive, then just buy a low cost S&P500 index fund and be done with it, at least then you will be diversified.

BTW, this advise comes from an investor with 15 years of experience buying and renting properties both in and out of state, and unlike many other posters I have nothing to sell you either way.

@Anthony L. -- Welcome to BiggerPockets.

It might sound counterintuitive, but it's very likely a better idea in your situation to build your portfolio outside your local market for the simple reason that the numbers don't make sense there.  This is a common problem in many states right now, particularly the coastal markets, D.C., Hawaii, etc.

The cost of property management is not an additional cost; but rather a necessary business expense.  They're a very important part of your team.

The biggest hurdle people have with out-of-state investing is simply psychological.  People invest all the time in stocks with companies all around the country.  Real estate can be the same.

Continued success!

@Anthony L. Welcome to BP! I've been fiddling with the idea of acquiring a turnkey property just to test the waters. I've seen many people have great success with it with the proper property management team in place. It seems like most property managers charge about 8-10% and the good ones are those who know their markets well, answer their emails back promptly, are extremely accountable, and easily accessible. For the most part, it seems like the consensus is that property managers are worth it given that they follow through with all of their claims with how they will manage your property. If you're unsure about it, many guests from the BP podcasts suggest you look right outside of your market, maybe 1-2 hours away, and see what you can find. 

I have partners who specialize in turnkey properties. PM me and I will refer you to them. 

Good luck with all your endeavors! 

@Anthony L. Welcome to BP! I'm going to agree with @Shawn Ackerman that you shouldn't hobble yourself by writing off OOS investing. Many, many people here on BP are in the same situation you are - pricey markets like CA, NY, and HI - and have entire REI portfolios in other states.

While a PM is a cost, I agree that it's a business expense. If you invested at home, you could manage yourself, but as a new investor is that something you *want* to be doing or that you simply *would* do to save money? Depending on what class of property you invest in, MFR or SFR, A/B/C/D, there are going to be different challenges that you may not be expecting, so managing yourself may actually end up being more costly due to the inevitable (and totally normal) learning curve. Especially if you're looking at sub $50k properties (C and D) I wouldn't recommend managing it yourself regardless of where you invest until you have more experience under your belt. The vacancy, turnover, and (often) Section 8 red tape are likely going to cost you more than a PM.

However, you shouldn't be working with a PM that hits you with a lot of fees. From my perspective, there shouldn't be much else other than the annual fee and a leasing fee. If there are late fees charged to a tenant, you should be splitting them with the PM - after all, they do the work of chasing up those payments - but they shouldn't be pocketing the whole amount because that could incentivize lax rent collection practices. 

In fact, considering what kinds of decisions a business' model incentivizes is a great exercise when vetting investment partners of any kind. Like everything else that you don't do 100% on your own, the most important factor in OOS investing is the people you work with, even more so than market. You want to make sure that the PM you work with has a business model and fee structure that incentivizes them to make client-centered decisions from day one. Many OOS investors go the turnkey route because it takes the legwork out of the investment once it's made (you still have to do a lot of work before hand to vet the team). In that case, again, you want to make sure that the way the business is set up incentivizes practices that are good for the investor. 

In the case of turnkey, this means making sure it's a full service  - they scout, purchase, rehab, market, tenant, sell, and manage the properties all within the same company- which means it behooves them to purchase good properties, execute efficient high quality rehabs, find the best tenants, and sell to investors whose goals align with theirs. In the case of a standalone PM, it means looking for a team with a transparent model and a clear fee structure that doesn't penalize you for things beyond your control and puts them in the position of being the responsible party (that's what they're there for, after all). You want someone with lots of experience in the market you invest in, with people on the ground (not managing from a distance) to ensure you keep good tenants happy (quick maintenance turnaround time etc) and can minimize the risk of bad tenants damaging your property if a move out or eviction gets messy. 

Regardless of which route you go, I suggest doing serious due diligence and then making a trip out to visit the one or two 'finalists'. Looking someone in the eye is still the best way to suss out the scammers or get peace of mind that you're working with a pro. Scheduling a visit is also a telling experience in and of itself, and will give you a lot of info about how the company treats prospective clients and how highly they prioritize service in action, not just in writing.

You're in the absolute best place to learn from experienced investors and professionals, so make the most of this powerful space. If you do decide to go OOS, mine BP for all its worth looking for real experiences and recommendations. If you see someone who looks like they have the experience you need to learn from, reach out to them, most people here are happy to help out new investors however they can.

On that note, feel free to shoot me a PM if you have any questions - and best of luck in your new adventure!

Clayton

Thanks all for the advice, I appreciate the insight.  For alot of you that have invested into these turnkey properties, are you taking the extra time to fly out to these areas as well?  How much time do you take to actually learn the area, before putting money into it? 

@Victor So I like your suggestion of looking 1-2 hours away.  Properties in New Jersey/PA areas are priced better, I just need to do extra DD.  

@David Faulkner thanks for your reply, I definitely appreciate your brutal honesty.

As a wannabe investor currently in the bay area, where everything within driving distance has a rent-to-value of 0.4% or less, are you effectively saying that one is better to just forget about building rental income and really just stick to the stock market? It's really hard seeing how well people are doing with cashflow properties :(

Other assumptions:

- I have the funds to buy here in the Bay, although I don't want to gamble on further appreciation, I really like the idea of cash flow

- Other than building wealth, another main goal of buying an out of state property would indeed be diversification from the stock market, which is wise in my opinion considering the crazy run of the past 7 years

- I am aware there are other passive options such as investing in debt deals via crowdfunded portals, but those to me just seem a meat marketplace, plus you don't recoup any of the advantages that come with leverage, tax efficiency and building equity

Thanks

Originally posted by @Gianluca B. :

@David Faulkner thanks for your reply, I definitely appreciate your brutal honesty.

As a wannabe investor currently in the bay area, where everything within driving distance has a rent-to-value of 0.4% or less, are you effectively saying that one is better to just forget about building rental income and really just stick to the stock market? It's really hard seeing how well people are doing with cashflow properties :(

Other assumptions:

- I have the funds to buy here in the Bay, although I don't want to gamble on further appreciation, I really like the idea of cash flow

- Other than building wealth, another main goal of buying an out of state property would indeed be diversification from the stock market, which is wise in my opinion considering the crazy run of the past 7 years

- I am aware there are other passive options such as investing in debt deals via crowdfunded portals, but those to me just seem a meat marketplace, plus you don't recoup any of the advantages that come with leverage, tax efficiency and building equity

Thanks

I'm saying that if you want to invest in REI, then hands on and local is the only reasonable way to start. Rent-to-value means very little ... just another useless metric made up by those trying to make their markets look attractive to out of state suckers that don't know any better. The lower the quality of the neighborhood, the lower the appreciation and rent growth, the weaker the jobs and population fundamentals, the higher the rent-to-value ratio will be. If you don't believe this is true, then test it out ... go to any market you choose and look in the nicer neighborhoods, figure out what places rent for and what they sell for ... then go to the bad side of town into the ghetto and look at what places rent for and what they sell for ... see which side of town has the higher price-to-rent ratio. So, in essence, when you are targeting high rent-to-value ratios, you are actively seeking out the weakest markets you can find, you are even going thousands of miles away to try to buy in a weaker market than you already live in because you think you will make more money over the long term investing there. Does that make any sense? It sure as heck does not make sense to me. You can build rental income in expenses

I invest in SFR in Southern California, just a bit less expensive than bay area, in a place where I hear all day long on these forums that cash flow is bad. My cash flow is phenomenal over the long term ... much, much better in fact than what I could achieve out of state, and I know because I've tried that too and no longer do because it is not nearly as profitable. How is this possible with a low rent-to-value ratio? I increase my rents each and every year, while most of my expenses don't increase nearly as much ... my rent and prices have increased well ahead of inflation here, and they have been doing so for DECADES ... even more so in the Bay Area. So, my purchasing power increases ever year I own my properties. Compare that to out of state markets with high rent-to-value. Take a $50k property that would cost ~$150k if you had to build it new from the ground up, and that's if the land had zero value (which it does some places) ... right off the bat, you can tell that property values have not kept up with inflation, and it is seriously doubtful that rents have either. But you don't care about that, because you are not selling, right? Well, what is CapEx but you replacing each and every system in the property over time at replacement cost, so putting ~$150k into a property that is only worth $50k and has been worth that for the last 10 years. Is that good economics? What sort of tenants do you think you will be getting in these type of neighborhoods where you could buy a property for $50k but rent is $800/mo (what a great rent-to-value ratio!)? Why would anyone rent there instead of buying? What does that tell you about your tenants? This is before even considering the lack of control you would have ... I could go on and on and on for other reasons why it is a bad idea (look at my previous 2k posts if you want more details), but will leave it at that for more.

My comment about the stock market is that the S&P500 index fund is a much better investment choice than out of state REI (but not as good as hands on local if you are willing to put in the work), so if you don't want or can't afford hands on local REI, then I'd advise S&P500 instead. Why? Because all of the things that make REI an attractive investment is that you have complete control over the investment and can use your investor skills and knowledge to increase your returns. When you go out of state, not only will you learn these critical skills, or those lessons will be very slow and likely very expensive, but you also give up the very control that makes RE an attractive asset class. Once you do that, the REI advantage essentially goes away, and stocks outperform and you are diversified which is very important if you are passive and give up control. Of course, all of the out of state providers, many of them commenting on this post, will insist that this is not correct, and that you are better off buying RE out of state ... I never ask my barber if I need a haircut, and neither should you. I've done both in and out of state investing for the last 15 years, through both boom and bust markets, with multiple properties and multiple price points, I have absolutely nothing to sell you either way, and this is the conclusion I have reached and the rationale. Good luck whichever path you choose. Happy investing.

Updated about 4 years ago

Last sentence of first paragraph go truncated, should read: You can build income in expensive neighborhoods close to home.

Updated about 4 years ago

Last sentence of first paragraph go truncated, should read: You can build income in expensive neighborhoods close to home.

@Anthony L. , I am from NYC myself, where everything is crazy expensive and I invest in NJ, I would not invest anywhere more than 2 hr driving distance away for the first few properties. Investing in a place within driving distance will allow you to learn more about the area, be on top of your investment, not just have to rely on the word of your property manager and make your investment more safe. There are plenty of great areas with decently priced multi-families within 1-2 hrs driving distance of Long Island.

@David Faulkner thank you for that, much appreciated. I will pick your brain one last time.

What is your opinion then on a "mixed" approach where you still hire a "hopefully trusted" property manager so that the investment can be mostly passive, but you buy in a market that is then likely to see above-inflation appreciation and rent increase over the years (e.g. CA)? That would cut your profits obviously compared to a full hands-on strategy like you said, but on the whole spectrum, would you consider that a risk-adjusted more profitable strategy than SP500 or not? And again, I'm not talking about full replacement of capital. My portfolio is currently 100% in stocks/bonds (all broad indexes), and I want to reach a point where I deploy ~40% of that (possibly entirely by new contributions since my income is not too bad and am able to save quite a bit) to REI, for diversification rather than chasing stellar yields.

Originally posted by @Gianluca B. thank you for that, much appreciated. I will pick your brain one last time.

What is your opinion then on a "mixed" approach where you still hire a "hopefully trusted" property manager so that the investment can be mostly passive, but you buy in a market that is then likely to see above-inflation appreciation and rent increase over the years (e.g. CA)? That would cut your profits obviously compared to a full hands-on strategy like you said, but on the whole spectrum, would you consider that a risk-adjusted more profitable strategy than SP500 or not? And again, I'm not talking about full replacement of capital. My portfolio is currently 100% in stocks/bonds (all broad indexes), and I want to reach a point where I deploy ~40% of that (possibly entirely by new contributions since my income is not too bad and am able to save quite a bit) to REI, for diversification rather than chasing stellar yields.

 I stand by my previous statements. In order of risk adjusted returns, it is IMO, back tested with historical data and lots of experience:

  1. Hands-on local REI (which can include your primary residence, a great place to start)
  2. S&P500 & REITs (if you want passive REI exposure)
  3. High quality out of state REI (higher price, lower rent-to-price ratios)
  4. Low quality out-of-state REI (lower price, higher rent-to-price ratios)

3&4 are HIGHLY dependent of the quality of management in place, a vast majority of PMs suck, and you as a newbie will not necessarily be able to pick out that good PM ... a good PM is a needle in a hay stack thousands of miles away when you don't yet know what a needle looks like nor what a hay stack looks like either (no offense intended, but I think it's the truth).

@Anthony L.

As someone who has been involved in out of state investing for almost a decade now, I truly believe there are great investments.  I have to respectfully disagree with those that believe this method of investing does not work as well as buying locally.  With the proper system and resources in place, you CAN be on top of your investment and have it work well.  If I had used similar funds to invest by me instead, I would not have made the rate of returns I made investing out of state.  Again this is based on my experiences being in the game.

Originally posted by @Anthony L. :

I live in Long Island, NY.  This is an expensive area to get started up as a first time Real estate investor as most 2 families and up are in the $400k and up range. My other option is owning a property out of state, but I do not think this is a great idea for a first time investor + the additional cost of a property manager.  Any thoughts or advice appreciated.

Many people invest out of state for their first time. Turnkey investing is probably something to look at since most things are taken care of. You do not need to visit the property all the time if you go with a decent provider. Just make sure they are an all in one stop for your investment.

Good luck!