Should I consider investing out-of-state with another investor?

20 Replies

I'm looking at and debating the potential risk/reward of investing in flips out-of-state.

I have a relatively small amount of capital, about 30k. I am aware of a certain investor in AR who has her own rehab team, etc. and says that I can invest 20k-30k (sort of partial financing) and expect a 25% to 30% return. She states that flips there generally make about 20k after expenses.

So, this theoretically means that I could turn that 30k into 60k over the course of a year, if I repeat the process every 3-4 months. To me, this seems like a good way to quickly gain capital for the purpose of acquiring buy and hold units (long-term, passive income being my ultimate goal). Sure, I could try to do flips in my own market, but, I don't have any experience and I know that flips don't generally make that much here.

So is this a good idea? Any reason I should not invest in this kind of a model? To me it sounds like a great, passive way to quickly gain capital, and as I get more, I can fund larger projects for greater return.

However, I have some concerns. Does this person really do what they say they're doing? Does their business actually exist? Etc. So if this is a decent way to invest my limited capital, how might I go about verifying everything, as much as reasonably possible?

If you're in MIssouri, is there a reason you want to do it out-of-state? Missouri isn't really a state that forces investors out-of-state that I know of (like living in LA or NY or a higher-priced area would). 

doubtful you can get 3 turns a year as everything would have to be perfect and everything is not perfect in flipping houses.

I suspect you could do just as well right there in your own market as Ali suggests without having to travel or do remote rehab

Originally posted by @Ali Boone :

If you're in MIssouri, is there a reason you want to do it out-of-state? Missouri isn't really a state that forces investors out-of-state that I know of (like living in LA or NY or a higher-priced area would). 

There's not a specific reason I want to do flips out of state, per se, but if we're talking about rentals; that's another story. I know other cities get much better cash flow on average than Springfield; in fact, I saw a property in my email today from a turnkey company and couldn't hardly believe the purchase price to rent ratio.

But we're talking about flips here, as a means to more quickly amass capital. So no, I don't have anything against my own state or even city, but that may just be because I don't know a lot about the flipping market here. I've heard from other investors that it's not that great.

Secondly, the woman I spoke to impressed me. She seems very knowledgeable and competent and, apparently, has a fairly large team at her disposal. So it sounds like she has refined her processes in all aspects of the flipping workflow and, thus, can probably do flips quickly (relatively speaking) and for less than others (because she has her own rehab team(s), etc.

Also, she's only 4 hours away from me, and, apparently, in a better market (still need to verify this for myself). But, assuming this is true, and If I'm just acting as the private investor, why does it matter if the flip takes place here or Alaska? I'm not responsible for anything other than forking over the cash and collecting the return.

Furthermore, I'm not currently aware of anyone who's doing what she's doing in Springfield, at least on the scale she seems to be operating at. I haven't really been aware of this as an option for investment (passively investing in flips) so I haven't exactly been looking -- I will also start asking around to see who is doing this locally, as well. That said, she's only 4 hours away from me.

@Lucas Mills - It appears to me that you are not buying a house, but participating in a flip, correct? I'd ask why this flipper is willing to let you in on a deal when she could just keep the money herself? Especially if she has a large team in place and doing several properties. Something doesn't add up to me. 

I think that your idea of going to meet and see her operation is a good one and the first thing you should do.

I hear you. If it turns out to be a trusted team, it can certainly be worth it! It's just tough the more intensive the investment the further away you are. But sounds like you have a good head on your shoulders so you can weigh the risk vs reward vs team quality and such plenty fine. :)

Originally posted by @Account Closed :

Chances of  you doubling your money over the course of a year?   Slim and none and slim has just left the building.

Chances of you losing it all   Just about 99.999%.

The flips make $20k.   How much of that is yours?

A woman with a TEAM who needs such small amount of money is a BIG RED FLAG!

Huh? My understanding is that, in addition to doing her own rehabs/flips, she is also a loan broker. So she pairs new(er) flippers with private investors and charges points on the loan. She takes on little to no risk by doing this and makes a little money in the process. The flipper gets their funding and the investor gets a percentage of the profit. For example, if the flippers require 40k, she may take 20k from two separate investors. Each investor may reasonably request up to 25% return; so the flipper gets 50% while the investors split their 50% two ways among each other. That's why she can allow investments using relatively smaller amounts, because she's using multiple investors in these scenarios.

That's my understanding, anyways. Does this seem nefarious for some reason?

Don't see how flipping out of state is a practical business plan. How are you going to put the whole thing together? It's not something you can simply hire out.

Originally posted by @James Wise :

Don't see how flipping out of state is a practical business plan. How are you going to put the whole thing together? It's not something you can simply hire out.

The post directly above yours explains the general premise

Originally posted by @Lucas Mills :
Originally posted by @James Wise:

Don't see how flipping out of state is a practical business plan. How are you going to put the whole thing together? It's not something you can simply hire out.

The post directly above yours explains the general premise

Sounds like a business endeavor that won't pan out. If folks would be able to passively turn their money with an ROI of 25% why are all the hard money lenders out there lending at a rate that is half of that?

Originally posted by @James Wise :
Originally posted by @Lucas Mills:
Originally posted by @James Wise:

Don't see how flipping out of state is a practical business plan. How are you going to put the whole thing together? It's not something you can simply hire out.

The post directly above yours explains the general premise

Sounds like a business endeavor that won't pan out. If folks would be able to passively turn their money with an ROI of 25% why are all the hard money lenders out there lending at a rate that is half of that?

Oh hey, did you add me to the mailing list lol? Just noticed who you work for.

Well, all I know is that as the loan broker she doesn't take any risk. She's not acting as a hard money lender, who does undertake risk and thus, I assume, can charge more. She just puts the deal together and makes a couple points on the loan.

Updated over 3 years ago

Correction: who you own

Lucas, Some great advice here on BP. By the way, there are plenty of flippers here in Springfield making that much and more on flips. As Ali pointed out, Missouri RE doesn't exactly force you into other markets due to the price of entry. I applaud your enthusiasm to double-down on your capital, but walk before you run.

Jay Hinrichs is spot-on when he says everything IS NOT perfect in flipping houses!

Try making the REIA meeting tonight at 5:00pm at the Hilton Garden Inn, you'll meet plenty of investors killing it here in Springfield.

@Lucas Mills "This theoretically means I could turn that 30k into 60k over the course of a year"  Do you know how much that sounds like the intro to every single episode of American Greed?  But, hey, let's assume that you're right and that it all works out the way it's supposed to.  Why on earth would you stop and do anything yourself?  Your money is growing at 100% per year and you could (again, theoretically) just keep adding more capital to enable he team to do more flips:  

Year 1: $60K

Year 2: $120K

Year 3: $240K 

Year 4: $460K

Year 5: $920K

Year 6: $1.8MM

So let's take this extrapolation and create a better marketing pitch:

"INVEST $30K WITH ME AND WE WILL RETURN NEARLY $2 MILLION DOLLARS TO YOU AT THE END OF 6 YEARS!"

Now, that has to come across as somewhere between hyperbolic or an outright lie.  So let's peel this back and reposition this "pitch"  Based on 

Originally posted by @Andrew Johnson :

@Lucas Mills "This theoretically means I could turn that 30k into 60k over the course of a year"  Do you know how much that sounds like the intro to every single episode of American Greed?  But, hey, let's assume that you're right and that it all works out the way it's supposed to.  Why on earth would you stop and do anything yourself?  Your money is growing at 100% per year and you could (again, theoretically) just keep adding more capital to enable he team to do more flips:  

Year 1: $60K

Year 2: $120K

Year 3: $240K 

Year 4: $460K

Year 5: $920K

Year 6: $1.8MM

So let's take this extrapolation and create a better marketing pitch:

"INVEST $30K WITH ME AND WE WILL RETURN NEARLY $2 MILLION DOLLARS TO YOU AT THE END OF 6 YEARS!"

Now, that has to come across as somewhere between hyperbolic or an outright lie.  So let's peel this back and reposition this "pitch"  Based on 

Because there's a point of diminishing returns not far beyond where it starts. In other words, for each time I invest 20k, I might reasonably expect 5k profit (according to this woman). That doesn't mean I can invest more money and get the same return. It only works in a certain price range, or at least that's what it seems to me. They're flipping 50k homes, not 500k homes.

That said, why couldn't I take my money to another market where the numbers are bigger?

@Lucas Mills I think you're missing the point. It's an extrapolation of the expected returns. This woman is telling you that she has some system for giving you a 25% ROI and you can roll this investment over every couple of months. *If* this woman is truly successful at this, has a system, and your posit is correct (there is a point of diminishing returns) then she doesn't need your money. And she certainly wouldn't give an annualized ROI for 100% (your $30K -> $60K example) in exchange for that money. That's what doesn't make sense. You have two lanes:

1.) So, if there a finite supply of these $50K homes and this partner has a team, is successful, etc. then she doesn't need your money.  She would have her own money in the deals and would have local investors lined up to get an annualized 100% return on their money.  

2.) If there isn't a finite supply of homes (and hence can use more capital) then you get into my hyperbolic example of returning nearly $2 million at the end of the 6th year.  Heck, you can cut the return in 1/2 and say that you'll have $900K at the end of 6 years and it still sounds hyperbolically irrational.

Maybe I'm wrong, maybe this is the deal of the century, how the heck would I know.  But just think this through:  If someone out-of-state called you on the phone...tonight...right now...and told you about an out-of-state investment opportunity that was (using as much of your posted data as possible):

a.) A "great, passive way to quickly gain capital"

b.) Could give you a 25% ROI in a couple of months

c.) Would allow you to reinvest your capital to get a 100% compounded ROI in 12 months

What would you do?  Would you...  

i.) Ask to hear more.

ii.) Sign a check and mail it the next day.

iii.) Hang up on them but if it sounds too good to be true...then...you know the rest.

Anyway, I don't know if this particular deal is good or bad.  Go for it if you believe in it.  All I'm saying is that it (on it's face) just sounds like an American Greed plotline... 

Originally posted by @Andrew Johnson :

@Lucas Mills I think you're missing the point. It's an extrapolation of the expected returns. This woman is telling you that she has some system for giving you a 25% ROI and you can roll this investment over every couple of months. *If* this woman is truly successful at this, has a system, and your posit is correct (there is a point of diminishing returns) then she doesn't need your money. And she certainly wouldn't give an annualized ROI for 100% (your $30K -> $60K example) in exchange for that money. That's what doesn't make sense. You have two lanes:

1.) So, if there a finite supply of these $50K homes and this partner has a team, is successful, etc. then she doesn't need your money.  She would have her own money in the deals and would have local investors lined up to get an annualized 100% return on their money.  

2.) If there isn't a finite supply of homes (and hence can use more capital) then you get into my hyperbolic example of returning nearly $2 million at the end of the 6th year.  Heck, you can cut the return in 1/2 and say that you'll have $900K at the end of 6 years and it still sounds hyperbolically irrational.

Maybe I'm wrong, maybe this is the deal of the century, how the heck would I know.  But just think this through:  If someone out-of-state called you on the phone...tonight...right now...and told you about an out-of-state investment opportunity that was (using as much of your posted data as possible):

a.) A "great, passive way to quickly gain capital"

b.) Could give you a 25% ROI in a couple of months

c.) Would allow you to reinvest your capital to get a 100% compounded ROI in 12 months

What would you do?  Would you...  

i.) Ask to hear more.

ii.) Sign a check and mail it the next day.

iii.) Hang up on them but if it sounds too good to be true...then...you know the rest.

Anyway, I don't know if this particular deal is good or bad.  Go for it if you believe in it.  All I'm saying is that it (on it's face) just sounds like an American Greed plotline... 

Good points, and I don't know. That's why I'm here to discuss. Maybe I don't fully understand all details of this and have a false expectation. Maybe she is trying to pull the wool over my eyes, as a new, ignorant investor. Could be.

Ultimately, I don't think I'm going to pursue this avenue. There has been raised enough reason for concern for me to give something like this serious consideration and I think I need more experience before getting involved in this kind of investment.

So, from an objective perspective, this thread seems to have gotten off track.  Maybe we can all take a step back and put some perspective on what Lucas is proposing...

For starters, he isn't "flipping" these properties himself, so he's not actually doing out of state property flips.  He is apparently lending his money in a Gap Financing position to this woman (or her associates) from the sound of it.  So we're assuming she's going to lever up as much as she can with a first position loan and then utilizing Lucas' $30K to gap the down payment and/or repairs.  Does that sound about right @Lucas Mills ?

If that is the case, then okay, she is offering you what appears to be solid 'pref' and a taste of the profits, which is standard for a passive gap lender. It's also not unusual for flippers doing deals in volume to use Gap Lenders and giving those lenders sizable returns for their risky investment. These types of JV structures happen between flippers and lenders all the time...but it's important to know that is exactly what we're talking about here, because if it's anything else, then yes, it would raise many concerns.

And even if this IS what we are talking about, then you're going to want to feel extremely comfortable with her as a flipper, and more specifically, as your partner., because that's really what she is here.  This is a Joint Venture of sorts, which makes you partners, especially since you are participating in the profit.

Strongly suggest you take that four hour drive, meet her in person, meet the entire team, see her previous flips (numbers on those flips) she has completed, and know exactly what you are getting yourself into.  AND make sure you collateralize your money appropriately if you ultimately decide to move forward with her.

Best of luck!

Originally posted by @Aaron Pfeffer :

So, from an objective perspective, this thread seems to have gotten off track.  Maybe we can all take a step back and put some perspective on what Lucas is proposing...

For starters, he isn't "flipping" these properties himself, so he's not actually doing out of state property flips.  He is apparently lending his money in a Gap Financing position to this woman (or her associates) from the sound of it.  So we're assuming she's going to lever up as much as she can with a first position loan and then utilizing Lucas' $30K to gap the down payment and/or repairs.  Does that sound about right @Lucas Mills?

If that is the case, then okay, she is offering you what appears to be solid 'pref' and a taste of the profits, which is standard for a passive gap lender. It's also not unusual for flippers doing deals in volume to use Gap Lenders and giving those lenders sizable returns for their risky investment. These types of JV structures happen between flippers and lenders all the time...but it's important to know that is exactly what we're talking about here, because if it's anything else, then yes, it would raise many concerns.

And even if this IS what we are talking about, then you're going to want to feel extremely comfortable with her as a flipper, and more specifically, as your partner., because that's really what she is here.  This is a Joint Venture of sorts, which makes you partners, especially since you are participating in the profit.

Strongly suggest you take that four hour drive, meet her in person, meet the entire team, see her previous flips (numbers on those flips) she has completed, and know exactly what you are getting yourself into.  AND make sure you collateralize your money appropriately if you ultimately decide to move forward with her.

Best of luck!

You are right. "Gap financing" is a term that she used to describe the model.

The area of concern for me is that I'm not trusting her and/or her team to do the flips -- I'm pretty sure that she is just matching me up with new(er) flippers who need financing and acting as a broker in this situation.

Of course she vets the investors and the deals, but obviously this leaves a lot more up to chance.

And you being so close to the Vacation Rental Capital of Missouri in Branson and Lake of the Ozarks.  There are a lot of folks investing right in springfield, so no need to go out of state unless of course you are going to be a hands off private lender and funding someone experienced somewhere else?

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