Out of state purchase as a first time investment
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Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
14yI urge great caution. This is a bad strategy. You're mixing fix and flipping with rentals and that destroys both approaches.
With a fix and flip, you want to be in and out quick. Less than six months, not 2-3 years. You need a cheap price, enough work to do to push up the value much more than you have to spend, and then you need to get out.
For a rental, you need a cheap enough price to make it cash flow. You need to do a bullet proof rehab job to make it nice enough to rent.
If you buy, do a fix up (almost ALWAYS required for investment properties) and then rent for 2-3 years, you'll end up re-doing the rehab when you sell. Especially since a rental grade rehab (looks good but is hard to damage) is different than what appeals to retail buyers (the nicest finishes that fit within the area.)
Buying and selling costs these days can easily eat up 12-13% of your selling price. I do not believe we will see that amount of appreciation anywhere in the US in the next 2-3 years. Rehabbers make money because they buy junkers for cheap prices, fix them up and sell retail. The rule of thumb is that your purchase plus rehab must be under 70% of the eventual selling price.
I think you need to reconsider your strategy. Either focus on fix and flips (close to home, I cannot possibly imagine trying to do one of these long distance) or rentals. You're trying to skirt a middle ground and getting the bad sides of both appraoches.
19 Replies
- Property Manager · Wilbraham, MA · Member since 2012 · 2 posts · 1 vote14y
Paul,
I would hire a recognized PM company. And keep in mind the landlord/tenant law differs state to state. If you hire a PM company, you can be ok with visiting once a quarter. IF you just hire staff, I would recommend once a month. As long as you set the guidlines you want, you should be ok.
- Investor · Hampton Bays, NY · Member since 2009 · 907 posts · 258 votes14y
Paul S. one important issue is getting to know the neighborhood. I imagine that downtown Chicago is like any other city with its workable areas and its war zones. in many areas just a few blocks can mean a big difference in maintenance and vacancy both can cause losses. You also need to manage the property manager and understand the criterion that will be applied to qualifying tenants and how will repairs be handled. all these are issues for any landlord but they are all amplified when you are out of state.
- 14yChris ClothierBusiness MemberRental Property Investor · memphis, TN · Member since 2009 · 2k+ posts · 3k+ votes
Paul S. personally I would not be worried about investing out of area as long as I had taken these steps:
1. What is the economic situation now and in the future of the location I want to invest?
2. Who are the members of MY team in this area? Who is going to be working for MY best interest?
3. Who is providing long-term property management?On the management side, I have about 20 questions that I suggest you ask. PM me and I'll be happy to send them to you. Michael Lauther advice is spot on. Many people call it passive investing. You cannot be passive about your investing. You have to be diligent and manage your property manager. At this point, they should have a program, IMO, to make you feel extremely comfortable investing from a distance and if they don't I would not use them.
Last piece of advice. Unless you have an extremely high level of comfort with who you choose as your team in Chicago, you should absolutely visit the area before you invest. If you are already familiar with the area that can change things a little, but at some point (and that point is different for every investor), you need to see everything you are doing and who you are dong business with.
Best of luck - Chris
- Investor · San Jose, CA · Member since 2011 · 355 posts · 90 votes14y
Why are you looking at downtown Chicago?
If you're open to out-of-state investing in general, then you need to have a good reason for picking that particular spot as the best place for your money out of the entire country.
I'm not saying Chicago is bad, by the way, I'm just telling you that you need to have good reasons for yourself.
- Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes14y
I assume by your post you are talking about residential houses to rent out.
If that's the case be very careful.Many horror stories and losses for every success I have heard of.
Go see the house and make sure you are dealing with a full time property manager and not someone doing it on the side in between sales.
- 14yPaul S.Arlington, VA · Member since 2012 · 9 posts · 0 votesOP
@Michele - I will be hiring a PM company not just staff.
@Michael Lauther and @Michael D -- I am looking at Chicago because I know it very well. I used to live near downtown and so know the city well. But still I agree, I need to do go visit the city and look at the neighborhood before making a decision.
@Chris - Thanks I will PM you. I really have no idea about Property managers and so will need any help I can get.
@Joel - I am looking at condos or townhomes in possibly a high rise (or a solid brick building). I am hoping it will be less maintanance that way as opposed to a SFR. Am I thinking straight? I know I will have to pay HOA but at least I can deduct it from my taxes.
- Real Estate Investor · Louisville, KY · Member since 2012 · 39 posts · 9 votes14y
@Paul S. at one time I owned three rental properties that were out of state. I've only been reading this board for a couple weeks but in that time I've gathered there are a number of posters here who invest out of state. It may work for them, but unless you have money to burn I would caution you to stick with your local market. Everything is more expensive when you're an absentee landlord. You can't afford to take a "hands off" approach to your investment just because you've hired a property management firm, at least not until you've worked with them a while and they've earned your trust. While I agree that a good property manager is a must, as @Chris Clothier mentioned it's still imperative that you visit the property regularly to ensure that your interests are being looked after, and this alone eats considerably into your cash flow, not to mention your time and energy.
- Wholesaler · Miami Beach, FL · Member since 2011 · 22 posts · 8 votes14y
I think that virtual investing or long-distance investing has become the new trendy thing to do, but Brian H. is right.
For your first deal, I would advise against it. Maybe try a few local deals first and then decide to move onto national properties.
- Foreclosure Specialist · Miami Beach, FL · Member since 2012 · 131 posts · 123 votes14y
For a first time investor, I would never recommend buying out of your area. Even if this is your first time in real estate investing, as a resident you will be quite knowledgeable of the good areas and the "low rent" districts. You will have a better understanding of the economy and rental rates. You are also there to oversee the property - even if you still hire a PM to handle the day to day tasks.
There are some national areas that have super discounted properties, but there is a reason for it. Unless you know why that particular property is so highly discounted, I would never take the risk.
- Residential Landlord · Chicago, IL · Member since 2012 · 356 posts · 81 votes14y
Generally speaking, yes.
But what are your objectives with this purchase (and subsequent ones)?
Are you using the same people to advise you on acquisition and management? These areas should be separated, but may not be.
- 14yPaul S.Arlington, VA · Member since 2012 · 9 posts · 0 votesOP
@Brian, @Rich, @John, @Dave -- I am looking at out of state properties only because the properties at where I live are really expensive and at the same time old that I don't comfortable investing in. I am looking at Chicago because I lived there previously and know the area.
The agent I am working with is referred by a friend. He said he also manages properties but I am hesitant. I am being told its not advisable to buy out of state the first time, but in my situation I see it being the only option if I want to invest.
- 14yPaul S.Arlington, VA · Member since 2012 · 9 posts · 0 votesOP
@Dave -- My objective is to only buy something good when the value is down. I am not planning on holding to it long term. I care about the rental income but I am purely investing to sell in 2-3 years time. So a good area (with good schools, walk score etc) is very important for me. I cannot get that in my area for the amount I am looking to invest.
Generally speaking should the property manager and the real estate agent be different entities?
- Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes14y
I urge great caution. This is a bad strategy. You're mixing fix and flipping with rentals and that destroys both approaches.
With a fix and flip, you want to be in and out quick. Less than six months, not 2-3 years. You need a cheap price, enough work to do to push up the value much more than you have to spend, and then you need to get out.
For a rental, you need a cheap enough price to make it cash flow. You need to do a bullet proof rehab job to make it nice enough to rent.
If you buy, do a fix up (almost ALWAYS required for investment properties) and then rent for 2-3 years, you'll end up re-doing the rehab when you sell. Especially since a rental grade rehab (looks good but is hard to damage) is different than what appeals to retail buyers (the nicest finishes that fit within the area.)
Buying and selling costs these days can easily eat up 12-13% of your selling price. I do not believe we will see that amount of appreciation anywhere in the US in the next 2-3 years. Rehabbers make money because they buy junkers for cheap prices, fix them up and sell retail. The rule of thumb is that your purchase plus rehab must be under 70% of the eventual selling price.
I think you need to reconsider your strategy. Either focus on fix and flips (close to home, I cannot possibly imagine trying to do one of these long distance) or rentals. You're trying to skirt a middle ground and getting the bad sides of both appraoches.
- Residential Landlord · Chicago, IL · Member since 2012 · 356 posts · 81 votes14y
Originally posted by Paul S.:
So a good area (with good schools, walk score etc) is very important for me.Generally speaking should the property manager and the real estate agent be different entities?
Walk score you will have no problem with. Good schools, debatable - if you haven't already google Chicago Public Schools 2012 teacher's strike. Lot of uncertainty in public education here.
But the Chicago market is not as driven by proximity to good schools as many places. Historically, people worked/lived in the city then moved to the suburbs to start a family. If you buy a desirable property the tenant and buyer pools aren't really limited by schools.
The reason I asked about separating PM and RE functions is so you get unbiased information. A RE agent may give you an estimate of what a place will rent for. I would verify that information with several sources. Sometimes they are right on, other times...
- Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes14y
Certain areas around the country are going up in value very fast.Many investors are doing a speculation play.
There are two main emotions that drive a bunch of people.
"fear of loss"
"expectation of a gain"
I have investors who own property in hot markets now where if they sell they get a ton of equity over what they bought for 3 years ago when they got it real cheap.
They want to take that money and reinvest in other markets where they can still get yield.
Some of the core markets now are trading at crazy prices and really low caps.
I have also seen where a house used to be worth 160k and at it's lowest point the value with foreclosures was worth 75k.
Because pre-foreclosure and REO inventory has dropped that same house is trading at 92k within a span of 6 months.I have seen new home subdivisions start popping up as builders feel more confident taking a risk to jump back into the market to sell houses.
I wouldn't really call it appreciation as much as a market correction and recapture as the bad assets are worked through they system.
- Real Estate Agent · Virginia Beach, VA · Member since 2012 · 2k+ posts · 1k+ votes14y
Originally posted by Paul S.:
Hi,As a first time investor is it advisable not to pursue and out of state purchase? I am looking to buy in downtown chicago and I can only fly there if something happens. Can I rely on property managers to rent it out (to the correct party) and also help proactively in fixing things? I understand I lose a percentage of the rent if I hire a property manager but still. Are there any other issues I need to be aware of if I buyout of state?
- Paul
Paul, Not only will you pay a percentage of the rent, but count on repairs and maintenance being higher than if you were there to do it yourself or hire your own people. We had to fly to check on our properties for 3 years when my husband was transferred out to the west coast, and it adds a lot of costs even when there are no emergencies so you can plan cheap flights, rental cars and lodging. We are now back on the east coast, 3 to 5 hours' drive away, and that is much better. We made sure our property manager has no problem with us coming down to inspect and fix what we can, so we just took a weekend, drove down, inspected and fixed a lot of minor problems that tenants just don't report, like the seam in the vinyl floor starting to separate, outside column & door frame needing sanding & paint before rot sets in, etc. We probably did 10 small repairs to each unit that saved us hundreds in repair bills had we waited or had to send the property manager's people out. I would suggest you find and research areas a few hours away driving versus flying.
- 14yPaul S.Arlington, VA · Member since 2012 · 9 posts · 0 votesOP
@Jon and @Dave - Thanks for advise. You make a good point. I need to recalibrate my strategy. Think about it a little more.
@Joel -- I agree mine can be termed a speculative play but am trying to be thoughtful about it. And trying to target a place I am familiar with and can make decisions with comfort. But true, the only reason I am looking out of state is the place I am at is already gone quite a bit and I don't see a point in investing here.
@Lynn - Thanks for the advise. That is my biggest worry and that is why I am hesitant to jump in.
- Foreclosure Specialist · Miami Beach, FL · Member since 2012 · 131 posts · 123 votes14y
Paul,
If you do your homework you will be okay, especially since you are from Chicago. If I was in your shoes, I would first establish any bank financing that I would be needing. Get a pre-approval letter so you know exactly where your investment ceiling will be located.
Then I would plan a trip to Chicago to go look at properties (with my bank letter). Your confidence will increase dramatically if you physically inspect the properties. I would even pay a good highly recommended licensed contractor to accompany you for the day. This way you can get his/her impressions right there on the spot. You can always have a home inspection done after you return home (make a satisfactory inspection contingent on the offer).
A couple of days would be minimum, a week preferable. I know there is a cost to travel to Chicago, but then you can get your network of professionals in place and save some major potential headaches down the road.
Good luck!
- 14yChris ClothierBusiness MemberRental Property Investor · memphis, TN · Member since 2009 · 2k+ posts · 3k+ votes
Paul S. -
I would definitely take Jon Holdman advice and slow down based on your post about investing for a 2-3 year period. ESPECIALLY if you are looking to invest out of state. It is simply not an advisable strategy to go out of state for a 2-3 year investment and Jon nailed all of the reasons. There are many, many strategies you can employ including some where you are not a deed holder, but simply using your funding to supply an experienced investor with capital for a short period of time. IN that case you have a lien to the property and you could do this over and over with a qualified, experienced investor for the next 2-3 years and expect a reasonable and very favorable return with much less risk.
I work with investors from all over the country who are buying outside of their area and if you contacted me, I would tell you that buying in Memphis does not line up with your investment goals. I think you could probably have a great deal of success right here on this site searching for the right experienced investor to work with.
Best of luck - Chris
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