Investing outside of your area?

Question

What have been your experiences investing in multifamily in markets other than where you live? I am a newbie so I don't know if this is too ambitious for a first investment. But I would be relying on a property manager either way, since I have a full time job.

Are there any specific things I should be aware of if I were to take this path?

Andrew Johnson · Answer

@Sidney Kanell I think most people will hit on the obvious ones: know the area, PMs are key to success, etc.  What's generally not obvious (that I harp about on here) is travel costs.  If you take $25K and buy a $100K duplex and get a 10% cash-on-cash return that's $2,500 per year.  You'll burn through 1/2 of your cash-flow just to visit the property a single time.  If you're like me and you visit twice a year then you'll likely end up losing money.  Where the rubber really meets the road is juxtaposing the cash-on-cash returns of a property 2 hours away driving vs. 4 hours away flying.  One is a horrible Saturday on the road and one is a flight, hotel, rental car, etc.  If you're trading 8% cash-on-cash for 10% cash-on-cash I guarantee you'll blow that 2% marginal gain in travel costs.

That said, those costs do get easier with scale.  So if you know you want to invest in Pittsburgh (just to make up a random city) and your plan is to scale to 10, 20, 30, etc. units then you really decrease the marginal travel costs.  Or, if you happen to invest in a city that you visit for work, have extended family in that you visit anyway, etc. then it's much easier to offset those out-of-state travel costs.

And just to overgeneralize completely, cash-flow is usually inversely related to the quality/desirability of the area.  Manhattan, San Diego, San Francisco, etc. all bleed cash on a duplex you'd buy and rent out.  Akron, Buffalo, random population <4,000 cities, etc. are places where I'm sure you could have a nice juicy pro-forma.  That's not to say I'd want to buy there...

Gary Swank · Answer

@Sidney Kanell Hi Sidney, as many are saying, do your research. Many Investors are entering remotely into areas that are a better buy-in, with greater returns, than in some of the more highly saturated and pricey markets. For example, Pittsburgh has many cost friendly properties that generate steady income. It all depends on how much you are willing to invest, what areas you are interested in/classes of properties, what your operating costs will be and of course what your end goals are. In other words, a lot of calculations must be performed and compared.

You really do have to reach out to people in those areas for advice on managing remotely and what areas of a city are more inclined to generate positive income. Whatever market you choose, look for those that know that market well and reach out to them.  I wish you much success....Gary

Michael Dang · Answer

Truly think about your risk tolerance level and personality.  Do you trust people and have you formulated a method that works for you on how to build trust?  How much time are you willing to dedicate?  Do you have a detailed business plan?  Do you have contingency plans in case the investment isn't working to right the ship or exit?

To support Michael Le's comment, building a strong TEAM is important.

Real Estate agent, Lawyer, Mortgage Broker, Property Mgmt Company, CPA, etc.

Anthony Angotti · Answer

Hey @Sidney Kanell

My out of state clients make sure to travel to where they are investing at least once to get a lay of the land. They interview a few different property managers and contractors to have a team in place.

I think the important things to be aware of are just the different areas of wherever you are investing, who can help you keep your eye on the property (PM, Contractor, agent, local partner, etc), and to verify the numbers that anyone gives you with impartial data.

It's not impossible and I know a lot of people doing it successfully. That being said if you have the money to invest locally, it's super helpful to be able to drive by the property every now and again.

Dan H. · Answer

Pick the best Midwest city you can find for the duration from the list.   Let's say that 0.5% rent to cost advantage for the cash flow (i.e. if using today I would claim 0.7% to .75% is not too hard to obtain in San Diego (in fact I am closing on one right now in that range) and suspect Midwest large city not war zone maybe can get 1.25%.   In 2012 you could get 1% properties in San Diego (I purchased a 1.05% duplex in 2012) but I suspect Midwest you could have got 1.5% properties.  Appreciation on rent and property is a simple internet search.  You pick from the list of years depicted.  Assume 70% LTV (I have never done that low LTV on an initial purchase but it helps the Midwest case) but it will not matter as the ROI will not be close.

An example: duplex (4/2, 3/1) purchased in 2012 met the 1% rule but in addition I got a great rate so it would have cash flowed good at 0.65%, purchased for $302.5K with 80% LTV.  Appraisal late 2016 places value at $550K (We upgraded one kitchen cheap (free cabinets) and put in split HVAC into both units so maybe $15K cap expense).  Rents started off at $3200 and today is at $3600 but are $250 to $300 below market.  If you think this is some super deal compare the appreciation on this purchase compared to San Diego average appreciation (rent and property) and you will find it was a decent deal but has not done significantly better than average for San Diego (I suspect my actual rent increase will be below San Diego average rent appreciation - Neither tenant has turned over which is primary reason rent is noticeably below market).

So the challenge is open.  Find a Midwest city that with its documented average rent appreciation, average property appreciation, average cash flow that produces better than an average San Diego purchase at 70% LTV for any of the durations listed.

It will not happen.  Again this is looking back in time and does not necessarily mean that the midwest will not produce better ROI than San Diego in the future.  However, when it is true for such a wide range of years why would it not continue to be true going forward if using a long duration?

Cody Evans · Answer

@Dan Heuschele

That is an interesting claim. I am a new investor so I am curious--> How would you go about getting the raw information in order to determine the ROIs are roughly the same? For which Midwest cities do you want to do this challenge for?

Dan H. · Answer

It can be mathematically shown that on average there is no place in the Midwest that on average has produced a better ROI for financed buy and hold RE than San Francisco, San Diego, Los Angeles for 5 years, 15 years, 20 years, 30 years, 40 years, 50 years.    To indicate an investor can find a better ROI on average in the Midwest is simply misleading for they have not (you can run the numbers - the numbers do not lie (pick from the years indicated and take the best Midwest locale and run the numbers against the worst of the 3 CA cities listed).

Your statement is false and can be proven to be false.

I will even help you out.  You pick the Midwest city and provide the numbers for one of the years listed and I will do the work for San Diego over the period from those listed above.  I will let you choose the percent financed within reason (how about up to 70% LTV?).  We both use average appreciation (rent and property) for the locale and average percentage cash flow on day of purchase.  For simplicity no reinvesting of profits as it will not change the results.  I think we both know the ROI numbers will not be close.

Of course past performance is not necessarily an indicator of future performance.

Tom Ott · Answer

MFs can be rough, it just depends on the market. Sometimes they are located in some older areas of the city and may need a ton of work.

However, if you live in a costly market, then it is probably wise to go with another market. Often investors who live in expensive markets will invest into the Midwest where they can find a better ROI.

Todd Dexheimer · Answer

I enjoy out of state investing, but have a lot of previous experience. With out of state the major benefit is that you are forced to form a team to be successful. This forces you to run your investing as a business if you want to be successful. With in state investing it is so easy to manage it yourself and do the repairs yourself, etc. Personally I am not as good of a property manager than a lot of management companies. They take care of my properties and keep them running properly.

Investing outside of your area?

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