Concerned about buying OOS and rental staying vacant

32 Replies

Hey BP, I joined very recently, but I have been interested in purchasing some rental properties for a long time. Because of the low ROI in California, I have been looking into out of state properties.

Many of the locations I have been seeing people recommend have properties that are much more affordable than California. For the price of 1 down payment, I can buy 2 or 3 properties out of state. But my concern is that in these same areas, there are SO MANY SFR's for rent.. so how do you get your property actually rented out when there are so many options for renters already.

For example- Kansas City, Austin, NE Pennsylvania, Tampa, Detroit, many areas of Ohio, are all mentioned in many posts as being options for out of state investors.  But every one of these cities has 500+ rentals available already.  Unfortunately, I don't have any PM contacts (yet) to ask about vacancy rates, but it's very worrisome when I think about purchasing out of California.

You're walking the same path I was a few years back. Bay Area rentals will net you maybe .4 or .3 % on purchase price to rent ratio while out of state 1% is doable. 

A good agent will help you value potential rents and time to lease. Understanding the fill rate for each metro is also important. As with most rentals, you want to concentrate in markets that have population and job growth. Try to narrow down your search to just a couple then focus on finding a good team to purchase and operate your property.

As Tony mentioned, your goal is not the volume of rentals on the market, but rather how quickly these rentals are getting filled. This will give you a better pulse on the market. You can easily get this information by connecting with a Realtor or property manager in the markets you are interested in. Good luck!

Originally posted by @Kevin Chan :

Hey BP, I joined very recently, but I have been interested in purchasing some rental properties for a long time. Because of the low ROI in California, I have been looking into out of state properties.

Many of the locations I have been seeing people recommend have properties that are much more affordable than California. For the price of 1 down payment, I can buy 2 or 3 properties out of state. But my concern is that in these same areas, there are SO MANY SFR's for rent.. so how do you get your property actually rented out when there are so many options for renters already.

For example- Kansas City, Austin, NE Pennsylvania, Tampa, Detroit, many areas of Ohio, are all mentioned in many posts as being options for out of state investors.  But every one of these cities has 500+ rentals available already.  Unfortunately, I don't have any PM contacts (yet) to ask about vacancy rates, but it's very worrisome when I think about purchasing out of California.

 

Fix it up to an above average standard and charge an appropriate amount of rent. Overpricing or low quality finishes will kill you. In addition don't buy in the roughest neighborhood in the urban core. Pick a solid B-Class suburban area. Perhaps a nice 1950's built bungalow.

also to give U perspective in those areas far more SFR's are rentals than on the West coast.. so its normal to have that many available since there are far more of them in the market place.

@Kevin Chan Quality rentals are in high demand here in Columbus. Additionally, if your property is sitting on the market for longer than you want you can always lower the price. I have never had an issue finding someone to live in my rentals here.

@Kevin Chan , I agree with @Remington Lyman . I have yet to have an issue renting anything in Columbus. I probably have rented upwards of 20 units within the past four months alone. If something isn't getting much action, I just lower the price. 

@James Wise nails it.  If you have a good quality product with above average finishes at a fair price (in a decent location) you shouldn't have any trouble filling the property.  

I would also follow up fairly regularly with the leasing agent (say once or twice a week) for status updates if the rental hasn't been filled.  Being proactive is helpful and should ensure the property is filled quickly assuming quality, location and price are in line with the area.

@Kevin Chan . I do OOS investing and my rentals never sit vacant for long in fact I recently purchased another sfh and I had a tenant before I was done with Reno.. most of the time it depends on the class of asset you're investing in C class they find you they know who has been there and they know when you don't live there especially when they see Reno going and my truck sets me apart from everybody in a c class neighborhood so I guess they know I scream landlord and they ask how much is rent

Thanks for the input everyone.  I guess I really need to try and focus on getting to know a property manager and an agent I can work with and trust.  If there's anyone out there looking for another California investor to work with.. please send me a message.  I'm very motivated to get my first investment property under my belt.

Originally posted by @Kevin Chan :

Thanks for the input everyone.  I guess I really need to try and focus on getting to know a property manager and an agent I can work with and trust.  If there's anyone out there looking for another California investor to work with.. please send me a message.  I'm very motivated to get my first investment property under my belt.

Hey Kevin, I know exactly where you're coming from. My wife and I relocated to the Detroit area from San Francisco 2.5 years ago. In the last six months we've purchased 9 rental properties in Detroit. We never have an issue renting a house, generally in <2 weeks (usually faster). I often see houses on the same street listed for rent before mine hits and still listed after I fill mine.

Here's why.

I am not a slumlord. We fix up our houses nicer than most folks. A lot of owners in Detroit won't fix anything, won't update stuff, and don't even pay their taxes. This is changing, but it's unfortunately still very common. When prospective tenants see our places, it's extremely clear that we're not those type of folks. I'm now filling properties without even listing them for rent because I have a backlog of prospective tenants that are literally begging to rent from me.

I also only buy houses in nicer areas. I don't focus on the nicest, hottest neighborhoods, but I stay far away from the dumpy war zones, too. Offering an above average rental in a solid area at a reasonable price goes a long way.

Lastly, do not fixate too much on credit score. A lot of management companies have minimum credit score levels that will eliminate plenty of strong applicants. I always tell people credit score is where we're "most flexible". I generally want to see at least a 5 in front of it. Some of my best tenants have credit scores in the low 500's.

In short, don't be intimidated by the large number of rentals on the market. There are also a large number of real estate agents, but does that stop anyone? It shouldn't! You can be a better agent than 80% of folks by simply picking up your phone. It's the simple 80/20 rule.

I don't know where you are in California, but I'll be visiting family for a month starting mid-February. I'll be in Los Angeles for most of the trip, but I'll be shooting up to San Luis Obispo also. Happy to get together and talk shop if you're in any of those areas.

 

Originally posted by @Kevin Chan :

@Travis Biziorek That's a very kind offer.  I am actually in the suburbs of Los Angeles, so it would be great to try and get together and hear about your experiences and maybe connect with some people you work with as well.

That’s where I’ll primarily be. Oak Park, to be exact.  

Originally posted by @Travis Cowdery :

@Travis Biziorek what zip codes do you focus on? I’m headed out there next weekend to meet up with a few property management companies. It would be nice to cross reference areas 

Zip codes mean absolutely zero in Detroit. Search the forums and you’ll see that question asked and answered dozens of time. 

Those that know what they’re talking about will tell you what I just said. The city is too block by block (in a literal sense) to target zip codes. I target pockets I like that I’ve spent hundreds of hours uncovering.  

Originally posted by @Greta Grakowski:

You should be gravely concerned.  You can't listen to a guy who actually lives in his investing area.   You need to rub elbows with fellow Californians who are losing 💰 like there's no tomorrow on out of state rentals.

That's definitely one group I'm hoping not to become an active member of.. but just in case, is there a meetup for that? Lol

 

Originally posted by @Greta Grakowski:

You should be gravely concerned.  You can't listen to a guy who actually lives in his investing area.   You need to rub elbows with fellow Californians who are losing 💰 like there's no tomorrow on out of state rentals.

 I genuinely can't tell if this is a joke or not. I do think it's a good idea to talk to folks that have had their asses handed to them in Detroit. You'll learn a lot about what NOT to do.

A lot of folks also don't realize that most locals won't touch Detroit. I didn't understand it at first, but it's largely because they're too close to the situation. It's the typical inability to see the forest over the trees. Living here for years has degraded these folks' view on Detroit. It also doesn't help that they tend to consume mass media whose focus is more on the bad rather than the good. Few people will venture out and see what's going on for themselves, choosing instead to stay set in their ways in the suburbs.

Coming from California gave me a very different perspective. My wife and I spend time downtown Detroit and marvel at how cool and fun it is. We can't help but see the recovery because we have that different perspective. 

Don't get me wrong, there are still many traps and pitfalls to avoid, but I can't imagine not investing in Detroit. I'm thankful every day I ignored all those telling me not to do it.

California investors are regularly having issues with out of state investments. Vacancy is just one of many problems. There is weekly discussion threads about these problems. 

In these markets, local investors do better than out of state investors for several reasons:

1. They know the good neighborhoods. Even one block can make all the difference. 

2. They are their own "feet on the ground". That means local investors can be at the property to get it shown quickly, keep an eye on it or keep an eye on the property manager. Phone calls, texts and e-mails only get you so far.

3. If you are local and self manage, you can be more flexible. Most the property managers I know refuse to show a vacant property at night or on the weekend. I have rented properties to people on a Saturday, who were only in town for the weekend house shopping. They tell me other companies didn't even return their calls on the weekend or wouldn't show until Monday. I also show my properties before they are vacant, so I often have no vacancy. Many property managers only show vacant properties (for good reason).

4. I see property managers over charge rent. They either push large rent increases forcing vacancy or market too high. I drop price quickly if it is not renting. This fall, I had a property that came on the market one month after a similar house that was a half block away. I priced it at the same rent but had low interest. I dropped rent after a week and had it rented by week two. The other property sat for four months vacant. They finally dropped the price to what I had rented my property at.

5. Out of state investors can get gouged for repairs. The reality is "California Investor" (to some people) is a license to overcharge or do unnecessary repairs. Without the ability to go physically look at the problem, you are at the mercy of others. Unfortunately there is a perception that in California the streets are paved with gold, so people justify their own bad behavior. It is not right, but it is a real risk.

Some of these things can be avoided by picking the right local team, so I am not saying you should not invest out of state. I am just saying be careful.

The reality is we are later in the recovery cycle. There were plenty of out of state investors who purchased in 2010-2016 and are doing great. The problem is now with prices inflated, there is less room to make mistakes. Also many of the cheap properties are still cheap for a good reason. They are run down and in a bad neighborhood. 

Indiana is not California. Stop thinking about "deals" meaning low cost. Stop thinking about return as only being gross cash flow. Expenses, vacancy and appreciation are all factors beyond gross cash flow. One good property is better than three crap properties.

I am not saying you cannot be successful. I am just saying many (maybe even the majority) have had problems. Some of these markets are only seeing appreciation because of out of state investors. I see it in my state. Out of state money is pushing prices up to levels that the rents do not support. Forced appreciation only works if there is a tenant pool to support it. Lower salaries and abundance of build-able land are factors that California investors do not consider.

As a real estate agent in the Detroit area, and having grown up here all my life, I can tell you that Detroit is amazing right now and only getting better! Our daughter goes to Wayne State University in Detroit and also lives there. She absolutely LOVES it! The culture, growth and spirit of the city is coming back in full force and I'm so excited to see it happening. Yes, there are still blocks of the city to stay out of for now. However, in time I feel those will improve as well.

Originally posted by @Joe Splitrock :

California investors are regularly having issues with out of state investments. Vacancy is just one of many problems. There is weekly discussion threads about these problems. 

In these markets, local investors do better than out of state investors for several reasons:

1. They know the good neighborhoods. Even one block can make all the difference. 

2. They are their own "feet on the ground". That means local investors can be at the property to get it shown quickly, keep an eye on it or keep an eye on the property manager. Phone calls, texts and e-mails only get you so far.

3. If you are local and self manage, you can be more flexible. Most the property managers I know refuse to show a vacant property at night or on the weekend. I have rented properties to people on a Saturday, who were only in town for the weekend house shopping. They tell me other companies didn't even return their calls on the weekend or wouldn't show until Monday. I also show my properties before they are vacant, so I often have no vacancy. Many property managers only show vacant properties (for good reason).

4. I see property managers over charge rent. They either push large rent increases forcing vacancy or market too high. I drop price quickly if it is not renting. This fall, I had a property that came on the market one month after a similar house that was a half block away. I priced it at the same rent but had low interest. I dropped rent after a week and had it rented by week two. The other property sat for four months vacant. They finally dropped the price to what I had rented my property at.

5. Out of state investors can get gouged for repairs. The reality is "California Investor" (to some people) is a license to overcharge or do unnecessary repairs. Without the ability to go physically look at the problem, you are at the mercy of others. Unfortunately there is a perception that in California the streets are paved with gold, so people justify their own bad behavior. It is not right, but it is a real risk.

Some of these things can be avoided by picking the right local team, so I am not saying you should not invest out of state. I am just saying be careful.

The reality is we are later in the recovery cycle. There were plenty of out of state investors who purchased in 2010-2016 and are doing great. The problem is now with prices inflated, there is less room to make mistakes. Also many of the cheap properties are still cheap for a good reason. They are run down and in a bad neighborhood. 

Indiana is not California. Stop thinking about "deals" meaning low cost. Stop thinking about return as only being gross cash flow. Expenses, vacancy and appreciation are all factors beyond gross cash flow. One good property is better than three crap properties.

I am not saying you cannot be successful. I am just saying many (maybe even the majority) have had problems. Some of these markets are only seeing appreciation because of out of state investors. I see it in my state. Out of state money is pushing prices up to levels that the rents do not support. Forced appreciation only works if there is a tenant pool to support it. Lower salaries and abundance of build-able land are factors that California investors do not consider.

I don't disagree these challenges are all real. It's really an issue of having a poor ground team though. There really aren't many (if any) good property managers that serve Detroit. The best PM's in the Metro Area specifically do NOT service the city (I know, I've tried/called). And I realize my statement is unpopular among PM's operating in Detroit, the truth is the "good" ones I see suggested and active on BP aren't great. I've heard plenty of horror stories from every single PM referenced and active in these forums. I'm largely self-managing by default.

The thing is... I get it (kind of). When rents average $800/unit and a PM is charging the standard 10%, they have to literally do double the work than if they operated in a market where rents are $1,600 on average. Add in the unique challenges of the Detroit market, and you're looking at more than double the work. So they make up this "difference" by overcharging or being shady. And really, how many smart, capable folks is a business like this attractive to?

I'm by no means saying that's right, because it's not. But if OOS investors want to be successful they should start trying to figure out how to better align interests of folks on the ground. I've had numerous opportunities to work with OOS investors as a local on the ground, but have declined because it's just not worth the effort for me. I'd rather spend the time on my own properties.

And that's what OOS folks are left with... the guys that aren't doing it on their own and attempting to create a profitable business in a market with low rents on top of unique challenges.

One thing you might want to consider is do you expect more cash flow, or do you invest for appreciation, which is not guaranteed. If you invest for cash flow, then Austin is probably not on your list.

As for rent, the number of rentals doesn’t tell anything. Even in a same city, Certain area is hot and has very limited rentals, which you don’t need to worry about the vacancy. 


What I feel is that I'm late to get into these primary markets, as the prices have already increased to the point where turnkey or light rehab won't have great cashflow.  It seems I might need to start looking into suburbs where the growth will overflow into these areas.

For just appreciation, I might as well just stay in the SoCal market. Right now, as long I can get into a property which pays my LLC cost and gets some safe returns.. and I am able to develop relationships with people I can trust, I would find the experience invaluable.

Originally posted by @Kevin Chan :

Thanks for the input everyone.  I guess I really need to try and focus on getting to know a property manager and an agent I can work with and trust.  If there's anyone out there looking for another California investor to work with.. please send me a message.  I'm very motivated to get my first investment property under my belt.

 Out of curiosity why not look into a turnkey? I'm also looking to get into my first investment property and leaning that direction to minimize risks.