Investor · Portland, OR · Member since 2012 · 266 posts · 128 votes
So, my wife and I have run into an investing dilemma that we'd like to ask for some help on.
What are your thoughts on buying a house where we 1) have never seen the house and 2) have never been to the city? We would rely on the perspective of our Realtor and property manager, and do as much due diligence as possible online.a
Our local market (and any market that we are familiar with/close to) has a bad rent-to-value ratio making local investments have sluggish cashflow. However, we have a young family and are not willing to travel.
Has anyone done this? Anyone have any thoughts? Is the cash flow worth the risk?
Greg Hall obviously you need to have a connection and a relationship with whomever you are working with in your target city. If there is any unease at all in the relationship, do not invest.
If you have no idea what a "good" property would look like in the target city, how would flying there help that situation? It wouldn't.
There are people that put their entire retirement savings (which can also be certainly thousands if not hundreds of thousands of dollars) in the hands of fund managers, without ever seeing them or even meeting them. However, they have trust in the company and their reputation to invest their money wisely.
The same is true with working with a partner or a team in another city. You don't necessarily need to meet them in person, but if it makes you feel better, then you do it.
I personally think it's crazy to "buy on the courthouse steps" because that's more risk than I'm willing to take. But other people do it all the time and are successful.
Everyone has different risk tolerances. Calling someone "insane" because their investment strategy is different than yours is not the answer.
Yea that's a tough part about living in an expensive area such as Portland. What are your plans to be able to conduct your due diligence? Where are you looking to invest?
Dan Buck Indeed. We own some places locally, and they are not bad 'investments' but do not cash flow well.
Actually - we are not sure where we will invest... we are just starting look into that. Atlanta? Memphis? Indy? Somewhere in Texas? Columbus?
Due diligence on the city is easy enough; the research depts on Trulia and Zillow do decent work, and wiki/census/housing searches, google fill in the rest. The more difficult stuff is zip-code specific, but I think city-search is a good resource (if I'm remembering correctly).
I am trying to figure out where I am wanting to make my splash outside of the golden state. What kind of investments do you own at the moment? What are you looking into getting into.
This is one of the hardest things to do because I am personally in the industry. Once you are proficient in something, for some odd reason, one feels that no one else can do it better than yourself.
With that said, we have several properties in different states and it comes down the following items that will lead you to the right path.
First and foremost, EVERY location will have a good deal somewhere. So it is essential to find the right team. I'm assuming you are looking for a buy and hold property aka long term rental.
Finding that property. The following questions are good starting points;
1. What is the Days of market for rents in the neighborhood aka vacancy rate
2. What are the current rents in the area
3. What repairs are needed in the short term and possibly long term
4. Who many people are on your property management team
5. What is your average turn over for properties
I'm sure there are hundreds of other questions that can be asked.
Another thing to take into consideration is that you are using the property as an investment tool. It doesn't make a difference whether or not you see it. Treat it as an investment and ensure that it is in habitable and comfortable for your tenants.
Perhaps a method to increase the reliability of the information being presented, ask the real estate agent to be a partner. If the person is unwilling to (as my father would say) get in bed with you, then question the opportunity and the presenter of the opportunity.
Personally, I would advise against any investment when you have no actual hands on experience with or knowledge of the property, neighborhood, target market, and so much more. This would be a gamble. My odds and the winnings may be better in Vegas.
Another consideration, the ongoing management of the property.
Think of your family’s financial condition before gambling.
As a longtime Real Estate Broker and Investor, I cannot stress enough how important the "eyeball test" is too purchasing real estate ! I can tell many stories of how I have helped people get out from under or at least minimize the damage from buying a property site unseen. We have come a long way with the internet as a tool to evaluate a property from afar, but I just do not understand why an investor would spend in some cases hundreds of thousands of dollars for a property but does not want to spend a few hundred dollars on an airline ticket ?
Saying that I am a gambler at heart and put up earnest money on purchases all the time sight unseen but always view and evaluate the property in person prior to closing.
Andy Chu - thank you. I agree that there are many many questions that can be asked; I have a working list of around 40 - most of which could be answered by decent online research.
Tom Goans - Adding the RE Agent as a partner is an interesting idea, and one with a lot of merit. But I can all-but promise that my wife would shoot down this idea due to the complexity and equity of the approach.
Greg Hall - The cash of a visit is not a concern; frankly, spending a night away from my family is simply a no-go right now... and probably the case for another year or two.
Another option that we have considered is hiring a local expert to help, and play them a flat fee per house to avoid a conflict. Their interests would be short-term, but I'd wager we could find a few people on BP in most markets that could do this.
Skip looking at Atlanta. We are down to 2-3 months of inventory and people are biding 20% over ask. The rumor that Atlanta is a good place to buy SFRs is over a year old. I live here and have moved to other areas myself. :)
I'd make my decision on months of inventory. Agents in various cities can give you that info. Anyone know how to find months of inventory without calling an agent in each city?
Jeremiah B. Not sure if you listened to it yet or not, but this is exactly what I talked about recently on The BiggerPockets Podcast: Show 25
My segment comes on around the 48 min mark. Hope that helps.
You're on the right track from what I've read on your blog posts.
People invest out of state all the time! If you have any specific questions just ask. You can always shoot me a PM as well.
Tom Goans Your point about the personal nature of being acceptable is a good one. With that said, personal taste can be the kiss of death in investing - especially real estate investing. Just because I 'like' it doesn't make that it will rent well or resell at a good price. Now - in my local market, I can make the determination of a 'good' or 'bad' property/investment, but short of being an expert in another market, that other perspective is probably more well informed than my own.
Mehran Kamari Thank you for the words of encouragement! That's good to hear. I'm an Andriod user so listening to the podcasts takes a few steps, and I've been a bit behind (and frankly, stuck on Jason the Hartman podcasts), but I just downloaded this and will listen today. Though based on your posts and profile - I had assumed that you were buying locally.
Mehran Kamari thank you again! Your section of the podcast was very helpful indeed. I hope that you can do a full length show at some point, as you are basically the investor I hope to become. :)
If you don't mind my asking, what problems/mistakes did you run into with the out-of-state, site-unseen approach?
Jeremiah B. No problem! I stepped out of my comfort zone majorly to do that podcast (shh don't tell anyone). I knew it would help a lot of people in my same situation though, and that gave me the courage to do it. It's really great to get feedback, thank you!
To be honest, I haven't had any real problems yet. The only thing I can think of is that duplex in Indianapolis. A month after closing the PM told me about one tenant who's been there for 3 years has been asking for new kitchen floors for over a year but the previous owner wouldn't allow it. It wasn't on the inspection report. I had the PM take a bunch of pics before and after. It cost me about $500 and now the tenant is super happy. It feels good to buy right and be able to say "yes" to things like that. If I had been there in person, I'd have noticed the floor and asked the seller for a concession/to fix it. Not a biggy though.
Take your cash (and family, though I'm in the camp that thinks kids in Vegas for vacation are not the best idea) to Vegas and gamble in the casino. At least you'll get some free drinks out of it. And, the most you can lose is the money you put on the table or in the machine.
A month after closing the PM told me about one tenant who's been there for 3 years has been asking for new kitchen floors for over a year but the previous owner wouldn't allow it. It wasn't on the inspection report. I had the PM take a bunch of pics before and after. It cost me about $500 and now the tenant is super happy.
But now the tenant knows that YOU are the one to make her happy, not the prior owner!
Other people have done it, and been successful. It takes having a good contact and/or a good team in the target city. I wouldn't say that's insanity, it's called "proper planning".
Mehran Kamari That's good to hear. That's the type of thing that could happen on most local purchases as well, and $500 is not the type of thing that will keep me up at night.
Dawn A. Agreed. A good 'team on the ground' is a must! And i'm actually somewhat optimistic about my ability to establish such a team as I have a bit of experience owning rentals already, and worked as a recruiter for a bit.
Jon Holdman At the risk of trying to draw constructive thoughts from condescending ones, isn't all real estate (or all investing for that matter) a gamble? Now, I'll grant that doing my due diligence but purchasing unseen situation poses more risk than an in-state investment, but what is the effect size of that risk? What is the nature of that risk? What is the probability of a bad happening, and corresponding effect of that bad?
To say it another way, if a property has the blessing of a RE agent, PM, and I've familiarized myself with the demographics of the area, complete an inspection, etc., what is the residual risk that poses a serious threat?
Sure, it's possible that it rents at 20% below market, but can't I mitigate that risk? I can do a fair bit to familiarize myself with the rental market in the area from afar. And while I couldn't be exact, I would think that even the rental amount would go through 3 audits (PM, Me, appraisal).
I respect you and I value your opinion and insight, and you saying that I'm insane for considering this is indeed concerning. I'd just ask for some more context behind that thought.
I am really surprised at how many people advocate buying real estate sight unseen and spending thousands if not hundreds of thousands of dollars. This is not like buying goods on Amazon.com as no returns are allowed ! There is no substitute for the "eyeball test" and looking your real estate team in the eye and shaking their hands...it makes the relationship personal. I am all for buying properties in different cities/states but spend the dollars to go see the property even if its a fly in/out.
Greg Hall obviously you need to have a connection and a relationship with whomever you are working with in your target city. If there is any unease at all in the relationship, do not invest.
If you have no idea what a "good" property would look like in the target city, how would flying there help that situation? It wouldn't.
There are people that put their entire retirement savings (which can also be certainly thousands if not hundreds of thousands of dollars) in the hands of fund managers, without ever seeing them or even meeting them. However, they have trust in the company and their reputation to invest their money wisely.
The same is true with working with a partner or a team in another city. You don't necessarily need to meet them in person, but if it makes you feel better, then you do it.
I personally think it's crazy to "buy on the courthouse steps" because that's more risk than I'm willing to take. But other people do it all the time and are successful.
Everyone has different risk tolerances. Calling someone "insane" because their investment strategy is different than yours is not the answer.
Hang on. I absolutely did not call any one insane. The question any my answer were:
I am saying that buying a house you're never seen in a city you've never seen is an insane thing to do. The sane thing to do, IMHO, is to go there. Drive the area. Look at the actual property first hand. Meet the people who are going to be looking out for you in person.
who will make money if you buy
who will make money if you buy
Demographics are just one piece of data
By an inspector who has zero liability for anything they say
To do that you have to put your trust in people who stand to benefit from you taking action. You making money is not their top priority. Their interests are not fully aligned with yours. There are many folks out there selling properties to far away investors who are directly in the business of fleecing investors by selling them junk properties that will never generate any returns for the investor and will end up costing them still more money to escape. But these folks will make a bunch of money in the process.
I was in no way trying to be condescending. I just do not see how you can possibly do nothing but talk to people on the phone or by other technologies and then trust them with your money. Yes, I know we do that when we invest in stocks, bonds, or mutual funds. While those business are far from perfect or risk free, they are much more highly regulated than rental real estate. Real estate is certainly gambling. Like a roll of the dice, events that you can't control affect your returns. No matter how carefully you screen tenants, they might still wreck your place or cause you a lengthy or expensive eviction. If you put all your trust into a team of people you have never met face to face you are, IMHO, dramatically increasing the risk.
Don't fall into the trap of thinking you HAVE to own rental properties. Rental properties not only don't have any guarantee of generating income (no matter what the numbers look like) they have the possibility of requiring more money being pumped into them. There are other ways to invest your money that, while still risky, avoid the "margin call" problem associated with rentals.
I'm also not opposed to investing away from where you live. I think the insane part is being unwilling to go there.
Jon Holdman -- or, if you invest with someone that's putting 50% of their own money into the project, then they believe in it, versus the project manager or real estate agent, who just stand to profit.
Jon Holdman Thank you. There are some great points in there!
Seeing a place certainly has value. No one wants to buy next to a drug house or anything like that, and that's something that I'd want to know in advance. I'm just wondering if I could figure that out from afar.
You're spot-on about many of the resources I listed having a conflict of interest. One thought that I've had is to hire someone locally to evaluate the property for me - and pay them a flat fee regardless of the outcome. It's a non-standard approach, and finding someone qualified might be tough, but what do you think?
One are that I don't agree with you on is the ability to judge someone's character from afar. Sure, the PM may be a sleezeball, and may fool me... but if they can fool me by phone, I'd wager that they could fool me in person. Between referrals, recommendations and due diligence, I'm pretty confident that I can remove unethical and idiotic partners early on (or at the very lease, be knowledgeable about their limitations).
You're also correct that I do have a sense of 'needing' to invest in REI. We own a few rentals now, and they have a decent ROI but don't generate any cash - which is why we are looking out-of-state.
And the appeal of an out-of-state investment is... appealing.
The choices for us are purchasing site-unseen soon, or waiting with the cash in stock a few years and buying several places at once after spending some time in the city. My draw to the former is based on the belief that interest rates and property prices will increase over the next 5 years.
Also, i want to highlight that we would have a safety net in place. The property could literally not rent for 12 months and then sell at a 20% discount after 10K repairs and would be just fine financially. We'd be pissed, but that we would be fine in the short term, and still be on track for retirement.