Out of state investing in cash flow sfr's

41 Replies

I have never listened to a pod cast before.. but I thought I would try one on BP and listened to one last week about a nice young man who is buying out of state and was all excited about it.

The really important factor when listening to that pod cast was HOW he was investing out of state.. It was obvious he was investing in low end rentals.

However he was doing it with a partner who is an expert in the market ( or he hopes they are) and they are investing side by side.. With him being in CA and bringing in Capital and this person being local finding the deals (and according to the pod cast the local was ALSO contributing cash to each deal) then they were splitting cash flow at what ever deal they put together.

From my point of view many newbies or CA investors should really listen to that one and keep that scheme in mind if they are bound and determined to go out of state and go for low end C type units. In my mind its the ONLY way are not only but pretty close to only way that you will be successful over the long term of the investment. To have a local partner with true SKIN in the game and when they drive up to the property they own it and they are at risk financially as well.. That is a true alignment of goals as opposed to trying to do it all on your own and trust for profit folks putting you in the deals.

Nice Pod cast from a NEWBIE podcast listener.. Probably be my first and last.. But it was a good one to share with others.

Caveat   Don't run out and go into business with anyone with out fully checking them out.. IE credit check Criminal background check references visit them in Situ etc etc.

It was a good podcast, With some good advice to take away from it. You are just scratching the surface there Jay throw a few more on and enjoy :)

@Jay Hinrichs

I would encourage you to listen to more of the podcasts if you have time ... they are fun and provide useful info at the same time. 

Another takeaway from Podcast 73 is that the person interviewed did visit the city in which he invests in person.  He drove around in a rental car up and down the streets so he could get a feel for the neighborhoods.  (What wasn't mentioned in the podcast is that he also visited a "not so good" area of the city so he could see a comparison between where he invested and that area.)  Actually visiting the city where you invest isn't an absolute requirement but it can be a good idea.

Having trust in a business partner is very important.  If someone doesn't feel that they can trust someone, why go into business with them?  Trust can be earned via vetting and reviewing past performance.  This is why you invest your money with "T. Rowe Price" and not "Bubba's House of Mutual Funds and Fried Shrimp".

This was a good podcast. I think Mehran has a good business model that has worked well so far, but imo the elephant in the room is what happens if/when the "boots on the ground" business partner is no longer there.  I'm not suggesting Dawn will do anything unethical but sometimes life happens and the relationship comes to an end.  It seems like  much of the success of the operation hinges on the local partner with skin in the game, otherwise he would just be another out of state investor using a PM.  Not that there's anything wrong with that, but as @Jay Hinrichs  pointed out the current way he's doing it is superior.  I'm curious as to what's plan B if the local partner is no longer in the picture.  Liquidate the properties?  Find another city/partner?  

@Jay Hinrichs  Thanks for listening to the show and taking the time to comment about it here on the forums.  I like what you're pointing out, as I strongly believe that it is vital to align your interests with your partner on the ground. 

I think you can accomplish the same thing with a good property manager also. If you are purchasing multiple properties, referring other investors who are doing the same, and do what you can to be a model "client", a smart person would place a value on your success. You start bringing in that many units, that's a lot of monthly income for them. Smart people are a rare commodity though :) I haven't done this with my PM in Indianapolis and it's been rough because of that.

@Bryce Y.  I think it's definitely important to have multiple contingencies in case things change with my partner on the ground. I've done business with one other PM in Milwaukee who has been doing a satisfactory job managing one of my properties who could keep things afloat in an emergency. I've also connected here on BP with many other investors in the area. I would definitely have to align interests with another sharp, talented, and motivated individual, like @Dawn Anastasi  ,that I could trust on the ground if things went sideways. 

Liquidation is always another option, but I plan on holding my properties indefinitely! 

@Mehran K.  

  as you state going the PM route will have rough patch's no matter the city area etc.. And yes the PM wants to make money.. But believe me there is a huge difference in a PM and an OWNER PARTNER 

Its how I ran my 350 houses  and the only way it worked and I could truly be taken out of the day to day of PM and managing my PM..

I mean just think of the savings.  with  partner like you have which I assume is 50/50 on the up front cash and they are managing the deal.

1. Maybe they don't charge the first month rent as a leasing fee ( as an owner why do that)

2, Your partner is managing the property no monthly management fee.

3. Your partner is getting maintenance done at cost no mark up.. And even bigger can triage things to see if you really need work done or not.

So with the average PM arrangement your only getting 10 months of rent if you have turn over yearly which you will have in the lower end.. You will get some that stay but you will. And you save another maybe 5% on unnecessary maintenance and or mark up on the work.. you don't have re leasing fee's you keep the late payment penalties.. ETCETC.

So by taking on a true partner like this you can save 25% a year in fixed costs 15% at a minimum that is the difference between hitting your numbers and thinking hey I should have bought apple stock and got the 7 to 1 split. 

I enjoyed all of the podcasts and how these 2 are partnering up is, in my estimation, the only way to invest in CF properties remotely. I'm just hoping Dawn can handle all of the increased business that is sure to come her way and would take the drive over myself is she is not too busy, hint, hint, lol

Kelly

@Kelly B.  

 Well from Dawns perspective she will want to choose partners carefully as well plenty of money out there... But some people can drive you bonkers with questions, worry wartism, second guessing what your doing, not understanding how things work in C class, not understand how section 8 works.. Not understand most of the basics of owning these properties.. they are the most popular investment with many wanting to get into the RE game because the cost of entry is so low and the sophistication level of the investor does not need to be anything more than they have money.. Yet these are some of the toughest properties to run and manage bar none. So you take an experienced investors match them up with tough properties and that's why you have so many vacant houses in the low end the newbies and out of state folks give up.

By bringing in a local partner who has their S%$# together and has some CASH.. NOt just your cash and their brilliant Ideas you have the makings of a true beneficial partnership.

@Jay Hinrichs  

Is there a mistaken impression that all of the properties Mehran has, he has partnered on 50/50, and he is not making money on his own?

@Dawn Anastasi  

 not from me He stated he has some in INdy and in Milwaukee that he is handling on his own and he stated those are rougher to manage ( investor talk for not hitting the numbers ) and other problems.

If there is that impression is it mistaken? I think Jay was pretty clear and accurate in his assessments. While I don't remember a specific breakdown of ownership shares the podcast seemed pretty straightforward.

Great post @Jay Hinrichs  

He is spot on.  It amazes me talking to out of state investors that purchase properties off of pro formas and never go to the city.  On top of that they are surprised when they don't make their numbers.  Being a landlord is not as passive of an investment as it is made out to be, and I believe that is often overlooked.

Boots on the ground that you know has your best interest at heart is key, and probably the most difficult to find.  PM's have a profit motive.  There is very little money to be made on the monthly management fee.  The real money comes from the $50 dollar charge to plunge a toilet, the full months rent to fill a vacancy.  The 10% general contractors fee.  The list goes on and on.

Lastly,  if you are an out of state investor looking to partner with someone, you need to do your due diligence on both the properties you are investing in and your partners.  I would hire a private investigator.  This is a tip I got from a sophisticated investor when angel investing.  

I couldn't agree more with what @Jay Hinrichs  and @Cliff Mccue are saying. I almost bought a package of turn key SFH in Milwaukee - the numbers looked great and they seemed to have the operation set up efficiently. We live only 90 minutes away and insisted on inspections. They seemed surprised and told us nobody ever needed inspections because they had developed such a trusting business relationship with them. Well, we quickly realized that our cash flow for the first 18 month would go entirely just to repair the current issues, let alone things that would come up later.

Luckily, I can easily commute to Milwaukee and NW Indiana and do my own due diligence.  But if I had to fly to a market I wanted to buy in, I would find somebody on the ground to do most of the leg work and then fly in for a day or two and meet them and see the properties. 

@Cliff Mccue  

agreed until one has owned a SFR rental for 3 to 5 years return on investment is just a guess.. And of course the marketing companies have to top one another in advertising returns.. so they leave a few key numbers out. So they can compete with each other.

biggest one is under stating on going maintenance when your buying these older homes your just going to have issues come up through out the year...

I think the statement "live were you want and invest were it makes sense or is affordable" leads many down a very bad path if they try to do it on their own with little or no ability to analyze the risk and are putting 100% of there outcome in for profit companies. .  ....

Investment properties are not passive investments as you stated . And out of state is very difficult at best..  ( Caveat I am talking about low end rentals) not A to B grade properties or nice condo's that have management in place for a lot of these things.

@Jay Hinrichs ,

Spot on with this post on the side-by-side, aligned investment. That's what I've done on my last 2 deals, including the Oakland 4plex I recently closed on and rehabbing/leasing up now. I always bring at least a few tens of thousands in on the deal, representing 25-50% of the cash investment, along with strong equity dilution in the contract for any defaults, and performance-based payment releases.

I think it's the only way to go. Both for the investor, and for a person on the ground like myself. They need to know that I'm fully invested in the project and that it is worth my time and energy. And the same with me: I need to have enough equity interest in the deal to make it worth my full attention to make it run at peak performance, because I have a strong vested interest to do so - and not just another of 100 or 1K rentals I property manage..

@Brie Schmidt  ,

Good for you on doing your own due diligence and insisting on your own inspections. I've met people that buy out of state without seeing the property, ONLY listening to the advice of the salesperson/turnkey operator, and I am shocked! @Cliff Mccue   . It's not uncommon!

I personally walk the neighborhoods of properties I am in contract on and ask everyone in the neighborhood what it's like, and perform the inspections myself, with qualified people I trust. But at a value of a few hundred to $500K/apiece and the returns they are producing (15min from my home), it's well worth my time. (at least at this point in my young life ;)

@Jay Hinrichs  I can definitely can tell the amount of experience you must have to understand the thought process BOTH from my end and on Dawn's (Taking on new partners). The full tally of what it really costs to operate with a PM is important for investors to see, especially if they're thinking it's just going to be the 10% monthly fee. 

Although our first few deals were 50/50, she was still separately compensated for her time with portion of the management/leasing etc. Since then we've adopted a new structure and she manages those properties with the same care and attention as the ones we own together. 

I'm really enjoying this thread :)

Originally posted by @Jay Hinrichs:
So you take an experienced investors match them up with tough properties and that's why you have so many vacant houses in the low end the newbies and out of state folks give up.

By bringing in a local partner who has their S%$# together and has some CASH.. NOt just your cash and their brilliant Ideas you have the makings of a true beneficial partnership.

I think you meant in the first sentence "take inexperienced investors".

I believe that those who have been around the forums for a while have seen the posts about how new investors are sometimes ripe for people in various markets to take advantage of them.  I've read some posts about people from out of the country who buy in the worst D-class Detroit-like areas because someone sold them some numbers that "looked good" on paper.

This is why I've stressed in many of the "2% rule" posts about how that "rule" doesn't apply in all markets.  This is why I've commented several times about how it can be very beneficial to actually visit the market you intend to invest in.  Is it required? No, it's just a good idea.  It's smart to educate yourself about anything you intend to invest in, whether its real estate, stocks, mutual funds, gold, stamps, or cars.

Jay, it sounds like, from reading your other posts, that you want to ensure that people from out of state know exactly what they're getting themselves into. That's my goal as well. I've written blog posts and forum posts about what it means to invest in a cold weather climate, how you can't invest just based on pictures on an MLS listing (and why), and so on.

There are scammers and bad individuals in any industry.  But there are also the good guys (and women) who are trustworthy and competent.  I have never posted anything in a forum telling anyone to invest with me and they will become rich.  After the couple podcasts aired, my inbox literally gets flooded with emails about how people want to partner with me.  I even make a tongue in cheek note in one of my responses to a forum post about how every time a podcast airs, people are chasing the next thing to make money.

It's understandable of course, that people want to make money.  But I don't take partners on willy-nilly.  I genuinely want to help people make money, but I'm very cautious.  I'm not a guru, or have any type of get-rich-quick type scheme going on.  I'm just an average person who's had some success.  If there's something I can do to help other people have some success too, I'm all for it.

I really like this discussion overall and I'm glad you took the time to post it.  Sometimes, when reading posts, I don't completely understand if there's any subtext behind it or if you're trying to make some point I'm not getting.  There's no tone or inflection or body language to go based on.  So I ask clarifying questions.  I hope you didn't take it the wrong way.

The podcast with @Mehran K.   was bringing up.  You cannot just "meet" somebody on BP and expect them to be trustworthy.  While it has worked out for them it will not always work out for everybody.  And whatever due diligence you normally do for a property in your backyard should also be done out of state

Originally posted by @Bryce Y.

" I think Mehran has a good business model that has worked well so far, but imo the elephant in the room is what happens if/when the "boots on the ground" business partner is no longer there. I'm not suggesting Dawn will do anything unethical but sometimes life happens and the relationship comes to an end. It seems like much of the success of the operation hinges on the local partner with skin in the game, otherwise he would just be another out of state investor using a PM."

I think the big advantage of having a "boots on the ground" partner with skin in the game is in the understanding of the market and the neighborhoods and overseeing the renovation. I disagree that he would be "just another out of state investor using a PM". With carefully selected properties by a local partner and properly rehabbed, the risk is minimized significantly. With a good and trusted PM, I don't think investors need to be driving around looking at their properties. That's the difference between being a landlord and being an investor. That's just my 2 cents.

@Mike D'Arrigo  @Brie Schmidt Mike I am going to disagree with you on the point between being and investor and a landlord.. Owning SFR rentals is just not that passive of investing in my experience which is considerable on the subject. And to represent or market or sell folks on the fact that this TK type of investing is the same as walking into your stock broker and picking a mutual fund is just not reality when it comes to these investments and the amount of time and effort and RISK one has to put into them.

Now again I am talking more on C and D class units... I own quite of few A class SFR's and the management experience in those is not anything like C and D. Its a totally different tenant base.

I have seen your product and your on the upper end for sure in Indy compared to others that are selling TK. So your personal experience's may not be as significant as those buying lower end units. 

My point in this thread is that in the long run if one can find a TRUE EQUITY partner on the ground in the MARKET you want to invest in that you WILL make more money in the long run and have much fewer sleepless nights with a partner than you will buying from companies that are making a profit selling it to you ( not off of MLS) and managers that are in the business to MAKE money and they make it off of your cash flow and repairs)

AS I stated.. If you have no leasing fee's no PM fee's and no mark ups on repairs. IE you have a partner that does this for you plus puts in equity. Not only that the partner on the ground is going to get the deal TRUE wholesale not marked up 3 times between the wholesaler and the contractor and the marketing company, thats the reality of the business.  If you have to set home and let other people source your deals your going to pay far more than a local in the same market and in the same asset class. If you have to hire PM to manage your property you have to pay for that.  So that was my point of the thread and what I liked about the pod cast.

AS for when partnerships end.. You simply need a buy sell in the LLC agreement. And since they will be in the properties wholesale and not marked way up they can probably exit for at least what they paid for them.. Where its very unlikely that anyone who buys through a turn key operator in a C or D class will make a profit trying to sell on their own it just is.

@Mehran K. - Yours was the first podcast I listened to, and thank you!

This may be a dumb question, but how can I listen to podcasts while I'm driving? I have an iPhone....surely there's an app for that! Does it use my data? Thanks for tips!

@Jay Hinrichs  - you always bring such good knowledge and perspective to the table, thank you for starting this conversation.

This has been a GREAT thread to read, with everyone's perspectives. So much good info here.  Thanks, everyone.

If you as an out of state investor have already purchased a property or several properties (C-class), and they all happen to be in bad areas or require a lot of attention, what are the chances that a shady wholesaler, property manager or turn key operator from the subject area will tell you that it is a bad idea especially if you plan on buying more? It is almost like walking into a car lot and strongly insisting on buying the Yugo when the same car salesman will also be the mechanic and parts provider.

I am not saying that all wholesalers, property managers or turn key operators are bad. I am saying that if you are going to invest out of state, you need to do your homework and have local market knowledge or find a good wholesaler, property manager or turn key operator who does and who can tell you what to buy and more importantly what NOT to buy when it comes to C-class.

If you can find a partner who is ready, willing and able to execute the functions of acquisition, rehab and management with aligned interests as has been described in the thread by @Jay Hinrichs it would make things easier and more profitable.

Agreed Jay, Mehran's strategy is solid for long distance. I am surprised more companies don't offer as business model for investors.

thanks,

Matt

Originally posted by @Mehran Kamari:


Since then we've adopted a new structure and she manages those properties with the same care and attention as the ones we own together. 

 Yes, they're like my adopted children.   :)

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