Your thoughts about MF investing out of state

15 Replies

I'm working up the nerve to invest in a 60+ MF in Arizona. CAP is about 9% ( with property management) which sounds pretty good compared to 6% in Miami, where I live. I have next to zero experience in MF properties and will definitely have property management do everything. I really like to hear your thoughts on this, especially if you invested out of state and had PM on board.

I thought about investing in smaller properties or even something closer to home but again I don't have any experience and would need a PM anyways so wouldn't economies of scale work out better on a larger property with a higher CAP rate especially if I have the capital for it? I've always thought it might be wiser to buy a property that I could readily get to . But then I ask myself, why is that important if I don't manage it myself anyways?

Please help.

Confused and Not even a rookie yet 

A 9% cap rate in AZ!  Is this on actual numbers?  I live here and can't find anything like that.  I am selling well located properties at rates under 6% right now without listing them.

There are certainly reason for finding locations outside of your state that have more upside potential than where you live.  There are downsides as well.  I have done it successfully and less successfully.

Read the book "How to Buy and Sell Apartment Buildings" by Vollucci.  They talk exclusively about buying in areas that are ripe for purchasing.

If any of these deals that you are looking at are in the Phoenix metro area, I would be happy to give you a quick opinion.  The issue might be that I am looking to buy as well.  I will assume that I have seen it already if it is out on the market. If you have uncovered something that is not out on the market I may not have seen it.  Make an offer and tie it up.  Then send me the property information.  I can't do the due diligence but I can give you my opinion.

@Steve Olafson Im sure you seen this one and passed on it already. Its MLS # 5153441

Why did you pass on this one? I was told that these are actual numbers, though Im not sure.  Also, Steve, could you please tell me which ones caught your attention at first but didn't make the final cut ?  I'm just curious on what savy investors are looking at.  Im embarrassed to admit this, but I always look at the physical appearance of the property first then the numbers.  Ugly ones never make the cut for me because I wouldnt know where to start with rehabs. I rather buy one thats up and running like a well oiled washed and waxed Harley Davidson. 

I look at the physical appearance as well.  Rehabs are my game because that is what I am good at.  It is nice to find a good property that is running decently that is selling at a reasonable cap rate.  This would interest me if it were there.

I don't want to tell someone where or how to invest because I could be wrong.  With that said, I am selling most of my multi-family while it is hot.

My advice, if starting out, would be to consider investing close to your home and to maybe start out at a level that you feel comfortable with. There are major advantages to a larger concentration of units (more units per building) but the mistakes are a lot more costly as are the general operating expenses should something not work out just right. Investing out of state: my current rule is that I have to be able to get to the property (by car) within a 2 hour drive. Having a building out of state is not easy and the PM will be a critical part of your success. In fact, your success will almost entirely lie in the hands of your manager if you have no one else that you trust living close to the building. I have an apartment building approximately 2 hours drive from my home and I can honestly say that in the beginning I was there all the time as I worked to reposition the property. It wasn't easy. I also had a very difficult time finding the right manager due the size of the building (37 units). Many great property management groups do not like buildings that small (whereas a 60 unit may or may not fit into their "sweet spot.") If you are selecting a professional property management company, with a good reputation, you will likely have better luck than I did in the beginning. I had to interview and hire individual managers that would live on site and manage the building by day. A big part of the out of state question, in my opinion, also relates to the current status of the building. If it's a turn-key, Core or Core-plus property (not needing a major overhaul), it will likely be much easier than a Value-Add property to manage right out the gate. A good manager could jump right in and send you monthly reports and you could make adjustments from your home state. In my humble experience, there is simply no better substitute than starting out small, getting your hands dirty, and learning the business step by step. You can gain priceless knowledge that will serve you well if you decide to continue investing. Just a few thoughts from my personal experience...

Diem,

The numbers sound good and this could be a fantastic opportunity. If you understand the investment and all the circumstances about investing in property out of your immediate range of distance and you are prepared mentally and financially, then go for it! 

@Diem Tran ,

First of all, get educated. "The Complete Guide to Buying and Selling Apartment Buildings" by Steve Berges is a good book to start with.

Second, find people in your area who are already doing MF and get as much knowledge and information from them as possible.

Third, find out if someone is putting a deal together and is looking for investors. If the deal is good and the lead has a strong track record become a passive investor in that deal.

Then and only then start looking for a property for yourself (or become a lead investor after you've seen them in action).

My $.02

Nick

My personal take:  DON'T DO IT!

I believe that investing out of state is a great strategy.  It's one that I only started doing about 2 years ago, and one that is leading me to place financially that no other path could have led me to. 

But out of state investing is a skill... and learning new skills has the bad habit of resulting in a bunch of mistakes.  I only invested out-of-state after I had local properties for a few years, and spent 6 months researching the topic.  And even then, I really really messed up my first several purchase attempts, and it's only by luck that I didn't take a bigger haircut that I did.  And while I don't know your finances, there aren't many people who can have a 60 family deal go south and be in good shape financially.

If you want to purchase a 60 door MF out of state, that's awesome - and you have nothing but my support.   I just think that you should do it the right way, and build up that point.  Buy a few SFRs.  Get to know a few agents.  Get to know some PM... get an attorney, insurance, etc. lined up.  Then, when you see the 60 door place, you will have the team and skills to evaluate the deal, and if necessary, manage it.

Best of luck either way - and let us know what you decide/how it goes!

Diem you are getting various opinions based on individual circumstances.

First thing I look at with clients is what is their expectation for active and passive and what is their current skill level for experience with their PFS statement?? The financial capability will determine what type of properties are open to them for investment.

Then I hop on a call and I give them my opinion.

If you just want nice passive cash on cash it's all about the location of the property, the size from a management aspect, and the debt structure that dictates returns.

I hear this all the time where people say " I have all this money but what do I invest in??" The answer is you talk to multiple people to gain insight into what the markets are doing for varying asset classes. Then you start defining a clearer picture of what you might want to look at investing in.

Apartments might no even be the right investment for you period. You need to gain insight first. What people perceive something to be is different than their reality more times than not.

For many with apartments if you are a value investor now might be the time to sell. If you are a buyer wanting great cash flow on a stable asset now might be the time to buy with debt cheap before cap rates compress further. It's all about your objectives and your goals.

If you have 500k to invest in something for value add and that constitutes almost all your money then it is a huge risk out of state. If you are buying a stabilized high quality property with proper size and still have capital left over then that is a different picture.

The 9 cap you save the sellers often underestimate true expenses and immediate capex needed to the property so likely once you UNDERWRITE the property properly it will likely be a 6 to 7 etc. 

@Diem Tran there are absolutely properties in Arizona in the 9% CAP range. You will not likely find them listed though - properties like that trade privately. If you would like to see deals like that, I would be happy to assist.

Shine on,

Jack Martin

Thls will my shortest post ever. If this is your firat investment simply DO NOT DO IT. Get your feet wet local first. And learn the pitfalls of this business first,

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@Diem Tran  , I wish I had 1/100th the experience that @Joel Owens  @Steve Olafson  and @Jeremiah B.   seem to have, so take this with a grain of salt!  I agree with everything they said.  I cannot imagine buying a 60+ unit out of state as your first one.  There are so many ways it can turn out badly that its not even funny.  Starting smaller sounds great, and its what I did (32 units), but its true that they're almost more difficult than larger.  Very tough to come up with good management options that don't involve a lot of your time that aren't really expensive.  

I wrestle with the out of state dilemma all the time, as I know there are people on BP that do it successfully all the time.  I'm looking in OKC while I'm in DFW, but only because I've studied this junk for two years now, and have self managed a property for almost a year so I feel better prepared to watch over a PM company.  Plus I can drive there fairly easily.  I probably shouldn't have used the word junk......