Wholesaler · Miami, FL · Member since 2010 · 346 posts · 3 votes
Ok If this is ok with Josh I would like people to chime in with what are the top mistakes when people invest out of state. I haven't seen much of a list besides a couple other threads about this but hopefully trying to get a bigger list. I have no experience and am interested in a couple different markets but a list that I can think of would be this.
1) No research on area/house. ( Some people won't even take a plane to see the house they are buying. Can be set up for code/building violations).
2)Property management issues (as always they won't take care of your property as much as you will, so maybe not doing enough research on a certain company)
3) No research on vacancy/neighborhood (maybe the area is extremely vacant and people don't visit and don't do the research to get it rented right away, also the neighborhood can look great in a picture but can be in a war zone..)
Everyone please input, if you have experience I want to make sure I cover all the aspects before deciding to invest out of state, this can be a great thread for anyone looking to do the same thanks!
John,
We do all of our investing out of state.
In normal real estate it is location, location, location. In out of State investing it is contacts, contatcs, contacts; verify, verify, verify; and spread, spread, spread.
What I mean is:
Contacts
You have to build relationships, just as you would locally - these can be built "virtually" but it takes time. You start with a couple of core contacts and build out from there. You also have to learn about the market sufficientlly so that you can speak with a level of authority about it - i.e. understand the difference from buying in Grant Park or Decatur (Atlanta GA) and how the client base differs based on your decision. You need to be informed - but allow your local contacts to be the experts.
Verify
Once you have the contatcs built you still have to verify the data. So, for the contractor example, you need to not only verify the history, reputation, licence, insurance, etc but once the project is underway you need a third-party inspector to verify the work is completed prior to a draw request being paid. That will cost around $200 for each verification; but will keep the contractor honest. The same goes with value estimates - always verify with a desktop appraisal ($85) or perhaps a BPO ($100+). And if your gut tells you different from what you are hearing from your local expert - go with your gut.
Spread
Assume something will go wrong and build a 10-15% spread. In Chicago we had a water leak in the basement that cost us $1,500 to rectify, in Phoenix we had a swift market downturn that kicked us in the rear on two properties (illegal immigration checks policy). In Atlanta we had one property that took us 6 months to move.. mainly because we wanted more that it was realy worth on the market.
Other than that it is really not that different than investing locally - in fact it has its advantages as you cant just drop by the job site to check-in on the action; so you go home and play with the kids instead.
We invest out of State because we want a shorter sales cycle and a lower entry point to provide a good cash flow product. It works for us!
Oh, one other thing - automate as much of the process as you can and get local representation (Attorney, Title, etc). That way you standardize your process and are certain you have complied with the local regs.
Add to your list contractor issues. It may be tough to find contractors who will do quality work at a good price when you live out of state and can't inspect their work on a daily basis.
I've heard plenty of stories of contractors taking advantage of out of state investors.
Thanks for starting this thread. There was a time I was looking at an out of state investment, but never went through with it. I will be interested to see what other issues are brought up. I passed because I was a newer investor and the thought of not being there to check up on things made me too nervous.
John,
We do all of our investing out of state.
In normal real estate it is location, location, location. In out of State investing it is contacts, contatcs, contacts; verify, verify, verify; and spread, spread, spread.
What I mean is:
Contacts
You have to build relationships, just as you would locally - these can be built "virtually" but it takes time. You start with a couple of core contacts and build out from there. You also have to learn about the market sufficientlly so that you can speak with a level of authority about it - i.e. understand the difference from buying in Grant Park or Decatur (Atlanta GA) and how the client base differs based on your decision. You need to be informed - but allow your local contacts to be the experts.
Verify
Once you have the contatcs built you still have to verify the data. So, for the contractor example, you need to not only verify the history, reputation, licence, insurance, etc but once the project is underway you need a third-party inspector to verify the work is completed prior to a draw request being paid. That will cost around $200 for each verification; but will keep the contractor honest. The same goes with value estimates - always verify with a desktop appraisal ($85) or perhaps a BPO ($100+). And if your gut tells you different from what you are hearing from your local expert - go with your gut.
Spread
Assume something will go wrong and build a 10-15% spread. In Chicago we had a water leak in the basement that cost us $1,500 to rectify, in Phoenix we had a swift market downturn that kicked us in the rear on two properties (illegal immigration checks policy). In Atlanta we had one property that took us 6 months to move.. mainly because we wanted more that it was realy worth on the market.
Other than that it is really not that different than investing locally - in fact it has its advantages as you cant just drop by the job site to check-in on the action; so you go home and play with the kids instead.
We invest out of State because we want a shorter sales cycle and a lower entry point to provide a good cash flow product. It works for us!
Oh, one other thing - automate as much of the process as you can and get local representation (Attorney, Title, etc). That way you standardize your process and are certain you have complied with the local regs.
Many out of state investors hop on the first deal they see at a good price.
For instance, I could get an out of state investor a property here in Tampa for between 8k and 15k. Thing is, they are usually in warzones and it takes more work finding a renter than getting them into move in condition.
Now don't let this deter you but it happens. Me personally, I would not sell a house in a warzone unless an investor insists on getting those dirt cheap properties. I'd flip them to them all day. Many wholesalers don't care and only think about one deal.
My saying is "i don't want to get a Lamborghini off our first deal; I'd much rather get one after our first 10"
I got involved in a commercial project in a neighboring state. Failed to do a lot of due diligence. Also put a lot of faith in the broker representing me.
IT WAS A DISASTER and I'm still cleaning up the carcasses.
Be very careful!!
In my view, not getting on an airplane, visiting the property, and driving the neighborhood is the biggest mistake any real estate investor can make. I know more investors than I’d like to count who are still in trouble with out-of-state properties they’re underwater on that they still haven’t seen.
The best money I never spent was for a few long weekends driving around Florida and Ohio in early 2007. Saved myself a fortune.
All the hype and sale tactics never seems to match the properties and I consider myself lucky for doing what I consider the minimal amount of due diligence.
1) Thinking values in some far away place you don't understand have some relation to prices where you live.
2) Thinking the folks who are selling you the deal put your interests ahead of their own.
Values are local. Just because a 1000 ft. 3/2/2 is $250K or $500K in your area doesn't make that $50K 5/3/3 2000 sq.ft house far away a deal. Maybe it is. Maybe it isn't get on a plane or jump in the car and go learn the area.
Everyone who stands to make a dime from your deal must be vetted. Nobody is going to just help you out for free, so they're going to get paid in some fashion. Nothing wrong with that. What is wrong is if you pay from one thing and get something else and have no way to find out. You have to have trusted people to work with on the other end. Locally you can be on top of a contractor, property manager, or whatever. Far away, you're much more at their mercy.
1. Big thing I see is not being familiar with the areas as to which are best to stay away from and which are cherries waiting to be picked.
2. Another item is not being familiar with the State and Local laws. You may do things one way in one state and they are backwards in another state.
3. Some use security cameras to monitor their properties from another state. If something is going on - you can't just jump in the car and get right on top of the situation.
4. Delays in being informed of problems. Management company does not think it is important enough to mention to Owner. Meanwhile, the tenants are seething because they are not getting any results.
5. Opportunity for Management Company to defraud Owner for repairs billed, but never getting done or being completed in a slip-shod manner.
That is about all I can add for now.
Out of State investing is not for everyone, and usually is for the more experience investors.
First Time investors usually like to be so hands on, to make sure everything is on track. Anyone who understands investing in real estate, understands that real estate investing is a numbers game. Knowing the market and understanding what the market will bare and what it wont.
Out of State investing is very systematic. A strong Power Team is needed and the due diligence period is very very important. Typically if you were to take 10 pictures of your properties you are interested in, out of town investors would be taking 100 pictures of everything of the property, to even the streets and other neighbor houses. Also using the internet websites like google maps and bing maps to their advantage. 3D images give a pretty good indication of local areas. But you can't rely on just this, partners and local eyes are needed in order to make the system work.
Because extra work is needed, since you can't do some of the little things some investors would do themselves such as check up on rehab work, a bigger spread is needed to cover the extra cost.
Investors who get good at this type of investing, can buy anywhere. Emerging markets are always coming up and allows them to take advantage of this, without every leaving their home. Extra time with the family!
It's kind of like investors who buy stocks for a living, they get familiar with a company, based of numbers and make their choice on when to buy and sell. They never leave their homes. The only better thing is in real estate at least your buying something you could go in live in one day, or rent out if needed to.
thanks for all the responses guys! How would the best way to be with going about finding a team in a specific area? For example would it be a good idea to try to fly out to that area to look at the properties the same time as a REIA meeting takes place in that city. Seems like a decent idea if it happens to fall around a certain date, because you can meet others there and build a relationship in the meetings that would take a while to build otherwise with contracters, PM company's etc.
Also maybe just looking at that REIA websites for advertisement may be a good idea. I know the CTREIA has a section where the y have inspections, insurance, lenders, etc.
I would say the single largest mistake is not knowing the market. What would be a great deal in your area may be not so much out of state and is where alot of new investors get confused.
If you are going to invest out of state know the market and who you are dealing with.
thanks yes, I think alot of knowing the market is just doing your homework. I still called PM companies and got ideas of rents up here, even with CList adds and that has given me the confidence as I get ready to close on my first deal needed to do the same to other markets.
Like the above person said his mistake in ATlanta was his rent was high but could of been avoided if he did his research before to know what others were paying