Accountant · Los Angeles, CA · Member since 2018 · 8 posts · 3 votes
I own a few rental properties here locally by I’m thinking of buying some more in another state. My question is what are some of the mistakes that newbies make when investing out of states?
Like many here have said not knowing the area has to be the biggest mistake. Everyone will give different ratings on the area from A-F but everyone's idea on those will vary so you need to go there and decide for yourself.
Finding the right agent is probably the hardest thing because most agents don't have the level of skill or time to look in depth into a property and come up with the correct analysis. When I purchase out of state I find the deal myself I analyze and if I like it. I will call my agent to show my family member. From there I will decide if I will buy it or not. In my case I have actual boots on the ground I trust. This makes a huge difference.
In your case, you need to develop the skills to analyze a deal and decide if you want your agent to look at it further. You will need to come up with a list of questions you want your agent to answer and ask your agent for specific photos and video. Makes it much easier for the agent to get you the answers.
Another mistake is thinking its easy to do this out of state. It's very very hard. You have to trust a lot of people with your money.
If it's your first deal choose a property that needs interior rehab or something minor. You don't want a big project.
@Ryan Nguyen I agree with @Aaron K. on not knowing the area. Many people study an overall market and do not understand that there are many pockets and submarkets within that market. Just because a certain city/market is hot does not mean that you can just buy anywhere. You have to go visit that market and fully understand the area and neighborhoods you are purchasing in. The other mistake I would say people make is trusting too much on your "boots on the ground". Again tying this into visiting the market and getting a feel for it yourself, trust but verify!
@Thomas S. I’ve read a few post from some of the people here who invested out of state relying on real estate agent to properly screen houses and neighborhoods for them. Is that something you don’t recommend doing?
@Ryan Nguyen I too have been looking out of state and tend to stick to markets I have personally visited before but that's just my comfort level.
David Greene wrote the book on out of state investing (you can find it here in the store) and he recommends having checks and balances by way of multiple people you can rely on. I personally wouldn't rely solely on an agent because they may just be hungry for a deal. However if you have a PM and contractor you're working with you can get a better more honest feel about a neighborhood or property based on all of their responses.
Like many here have said not knowing the area has to be the biggest mistake. Everyone will give different ratings on the area from A-F but everyone's idea on those will vary so you need to go there and decide for yourself.
Finding the right agent is probably the hardest thing because most agents don't have the level of skill or time to look in depth into a property and come up with the correct analysis. When I purchase out of state I find the deal myself I analyze and if I like it. I will call my agent to show my family member. From there I will decide if I will buy it or not. In my case I have actual boots on the ground I trust. This makes a huge difference.
In your case, you need to develop the skills to analyze a deal and decide if you want your agent to look at it further. You will need to come up with a list of questions you want your agent to answer and ask your agent for specific photos and video. Makes it much easier for the agent to get you the answers.
Another mistake is thinking its easy to do this out of state. It's very very hard. You have to trust a lot of people with your money.
If it's your first deal choose a property that needs interior rehab or something minor. You don't want a big project.
@Ryan Nguyen Make sure to have good infrastructure in place. People you can trust that do good work as well. Learned the hard way trusting the wrong people!
You need to know the area and have a team on the ground that you can trust. My father passed about 2 years ago and I inherited a number of units out of state. When I acquired the properties we had to evict about 8 tenants, rehab the units and get them rented. Not an easy task.
Even though I didn't live there, I found a Property Management Company which referred me to a number of great contractors. I have been lucky and able to build a great relationship with them and now they can be trusted.
Currently, I travel there twice a year and do walk throughs in all of my units with my PM. I meet the tenants and make sure everyone is happy.
Its been quite a journey but I love a challenge and I have the termination to make it work.
Running into the newest 'hot' real estate market that already has been 'discovered' and the prices have been driven up to a point that its not longer a deal. Often these prices get driven up to the point that only investors wanting a stake into the hot market can afford the houses.
The locals have long been priced out of the area. Their salary only supports a certain rent level, and it won't go up as fast as investors want. When you want to sell, and everyone knows it is not a hot area anymore, you will take a big loss to sell it to a local.
@Ryan Nguyen I too have been looking out of state and tend to stick to markets I have personally visited before but that's just my comfort level.
David Greene wrote the book on out of state investing (you can find it here in the store) and he recommends having checks and balances by way of multiple people you can rely on. I personally wouldn't rely solely on an agent because they may just be hungry for a deal. However if you have a PM and contractor you're working with you can get a better more honest feel about a neighborhood or property based on all of their responses.
I agree for the most part here, but I will say that we as agents can't "steer" you into an area or away from an area as there are rules and regulations that would get us in trouble. At least that is how it is here in Connecticut. I do a lot of work with west coast / out of state investors, so even if you aren't necessarily interested in a realtor or property manager in CT, I can still give you some advice and things to look out for when evaluating "boots on the ground" in other areas. Feel free to reach out.
@Ryan Nguyen One important thing is what @Frank Wong mentioned about needing to go to the property and decide for yourself since Ratings from A-F will vary by person. I'm from Southern California and when I went to Cleveland to look at a few Class A- and Class B properties, In my opinion these were Class C-, and Class D properties and neighborhoods. Another reason you will want to visit the area is because neighborhoods can be broken down into blocks as far as property class, I've seen a nice property on a nice block in a crappy neighborhood, If I had not gone to visit the property I wouldn't have seen the "Corner Boys" working two blocks away from the potential property, knowing potential renters will see these same guys working the streets I passed on the nice property on the nice block, luckily I went to see the neighborhood.
My advice is to factor in a travel budget for your OOS properties so you can visit them before and after purchase, that's what I do.
I am a firm believer that owning real estate near you has many benefits. Now, you are from Los Angeles, so that's a good market. I know the prices are expensive there, but there is a reason for that. Supply and demand. There is an inadequate supply of housing. That is a good position to be in. Do you due diligence with any turn key providers of out of state real estate.
@Ryan Nguyen by far, the biggest and most costly mistake new investors make when buying out of state is not knowing the areas and buying in the wrong neighborhoods. If a deal looks too good to be true, it probably is. You can recover most other mistakes but you can't move a house that is in a bad neighborhood. In a lot of markets like Indianapolis and Kansas City which we are in, things can vary street to street and block to bloc. You either have to know the areas very well yourself, or have someone on the ground that does.
@Ryan Nguyen All the other great advice here aside, I wanted to point out that Trulia.com and Realtor.com, among others, have a nice little "crime in the area" map for almost any US address. While it won't replace a reliable "eyes on the ground" from someone local that you trust, it's at least a quick and dirty spot-check before deciding whether to investigate further.
I own a few rental properties here locally by I’m thinking of buying some more in another state. My question is what are some of the mistakes that newbies make when investing out of states?
Buying a property without an inspection is a big one. You don't need to hop on a plane & personally tour every $50,000 house you buy but you'd have to be a madman to buy one without hiring a 3rd party inspector to give it a thorough inspection.
Using cash. Yes properties are cheap in the Midwest but you should still use leverage to buy them. That is the biggest benefit to rental real estate, on top of that the bank will make you get an appraisal. Always a good safeguard when buying a property in a market you are not familiar with.
A very simple tool, that is over looked. Read the local news paper! It will educate you on so many issues and the over lay of the area. I make it a daily routine to read the local paper, it has paid off very well.
@Ryan Nguyen I invest out of state and at first I trusted my brother to walk the area since he lives in that state (Indianapolis, Indiana) him not being a real estate investor only saw the negative of the neighborhoods as a whole. Not taking into consideration new sidewalks being built by the city, new parks in the area, rehabs going on in the block or a few houses down. My point even having some eyes on the ground is not enough, data on paper doesn't beat taking a few days and staying in an Airbnd for example to get a sense of how the neighborhoods are during all hours of the day.