Investor · Boston MA · Member since 2015 · 50 posts · 18 votes
Hi everyone :)
I have been doing some research on investing in out of state properties. However, after reading and factoring all the hassles and risks of investing long distances and knowing that there are investments out there that are completely passive and yield a standard 7 to 10% returns, now I am wondering if it's worth it to invest in out of state at all.
For newbies, I think a lot of people on this forum recommend to start with turnkey properties. When I looked at some of the TK websites, the properties they featured are generating around 8 to 9% on average. If that's the case, are there any upsides of investing out of state instead of just doing passive investments like Multiple Equity, Crowd Street etc? Or am I missing something?
I know that you can probably get a higher returns if you assembly your own out of state teams and get some off market deals. But what is the ROI for doing that vs. investing in TK? Is the return significantly enough comparing to the risk and work you take.
Would appreciate your thoughts and want to hear your stories about investing in out of state vs. passive investing in funds and notes. Thank you all in advance!
@Sara W.: asking if investing OOS is "worth it" is like asking a room full of hungry first graders what snack they want - you'll get unlimited and diverse responses, and each response will be genuine, well-intentioned, and vehement. Same with OOS investors; based upon each investor's location, experience, capital and risk tolerance, you'll get a smorgasbord of feedback.
Unsure if it helps, but instead of asking if the best play is OOS, TK or whatever, ask yourself how much of your life you want to dedicate to managing your assets and what amount of money is worth it to you to delegate that management - then reverse engineer that play.
@Sara W. I invest near Boise Idaho and big bear CA which is a lake town and the closest ski resorts to LA, San Diego and Las Vegas. Idaho units are managed by a management company that was recommended by family that use them so it wasn’t much work just buying and setting up auto pay and getting paid. The properties I have in Big Bear are brrrr’s that I Use as short term rentals so not passive at all but the people we manage for it is passive for them they just buy and set up auto pay and get paid. We even offer furnishings services for the properties so that they are staged nicely as well as Search engine optimization for the listings so the are top performers in the algorithms so we can get the properties to perform optimally.
Thank you for the detail. I was looking at Boise ID not long ago because I knew a family friend who lived around there. But I don't see the high return you are talking about. I was looking at Bench and Winstead Park areas, maybe I need to look a little further? And what kind of neighborhood are you investing in (B- or C+ areas?) And does your 20% IRR includes appreciation? Thank you!
@Sara W. With OOS investing, depending on strategy, your returns can be greater than 8-9% if you factor in a long term hold and appreciation on top of your cash flow.
Turnkey rentals usually have tight margins, and I don't recommend those to newbie investors. Sure it is easier, but it's not necessarily the best ROI. It's entirely dependent on the comfort level for the investor, and like others have said, it depends on what makes sense for you personally.
I have investors who have no interest in doing rehabs or even owning properties. They would much rather invest in notes for what they consider a "safer" investment. It's very customized to the person and the goals.
Thank you! Yeah I don't usually want to factor in the appreciation as that is not guaranteed. But you are right TK seems to have very tight margins. If something goes wrong with the property it can wipe out the entire year of profit and I need to purchase in volume for it to accumulate to a sizeable monthly profit. I was just curious why some people still want to do TK knowing that there are many other investments out there that are "safer" and require less hassles.
Out of state investing can be very profitable, but you need to have a strong local team wherever you invest which is comprised of an agent, property manager, lender, and contractor.
Turnkey providers can be good but sometimes they’ll sell you overpriced assets that are not fully turnkey and then drop the ball on management. Versus the route of using multiple separate entities to manage your asset buying process (agent, property manager, lender, contractor).
Invest where you are comfortable and have “ working” knowledge. Most out of state investors end up becoming absentee owners who want out of their situation. Because what sounds great on a forum, become nightmares to many.
I recall when these type forums were touting Michigan (Detroit) as a great place to invest. And I know a number of people—from Arizona and California—-that acted on that information. Most did well. But they were the ones with either working knowledge of that area or friends/family from that area. Those that were following the crowd got burnt.
The issues they faced from bursting water lines, heating units failing, extreme wear/tear on roofs etc. issues they had never experienced in their locales. Caused them more headaches than the property was worth (cashflow, appreciation).
All of these investors loss more money than they could have made by being patient and investing where they lived.
Thank you for sharing this. This is one of the reasons why I am a little hesitant and why I don't understand how TK solution can be better off than investing in some real estate funds and RE notes. Because the profit margin is so slim in TK, any major repair will wipe out the entire year's profit. And even if one property cash flow, I will need to get a lot of those properties in order to accumulate to a sizeable monthly profit because one property sometimes only generate a couple of hundred dollars in profit.
I would say the benefit is year 5 versus year one. Absolutely through syndications and other means you can hit 8-12% a year in returns and when you are looking at buying properties it seems as if you are doing a lot more work for the same return, so why do it? Because you are not buying a property for its year 1 return. You are buying it for its year 5, 10, 15, even 20 year return. Don't get me wrong you don't want to buy a bad deal, and you don't want to buy and just bank on appreciation, but often that okay deal year 1 will be a great deal in 5 years.
Easy example is the house I bought 2 years ago, 2 years ago it was a fine deal not bad, not good, just a base it. Now it has appreciated about 33%. If anyone could buy my house for what I bought it for 2 years ago they would in a heart beat. So the reason you go through the trouble is because of the long term benefits. Hope that helps.
Thank you for sharing this! It's true that appreciation will make all the headaches worth it. I think I am just not comfortable banking on the fact that the property will appreciate or appreciate enough that it will cover all the repair and capital that I put in. So would you say your strategy is to look into areas where it has the potential to appreciate but not necessarily giving you a high cash flow month to month?
Hi @Sara W. You got some great advice from several folks here. I would recommend you check out this insightful recent forum post to help with this decision. Though it doesn't hit your question head-on, I think it could be helpful: https://www.biggerpockets.com/...
I think the big question worth asking is how involved do you want to be in your real estate portfolio. You can invest in syndications and be completely passive and make good returns. Or you can be hands on and build your own portfolio and make similar returns. If you do plan on taking the passive route I'd suggest investing with a proven syndicator and not in one of the massive funds like Crowd Street. Happy to answer any questions you may have regarding investing in syndications.
@Sara W with my Idaho units when we bought we where about about 20% IRR without appreciation. It was around 12% CoC plus some loan pay down and tax benefits. with appreciation it has been much higher. I will also say that I haven't gotten any there in about 3 years and there has been very high appreciation so the type of deal we got is probably gone. It was at 1% rule when we got it but now they are selling closer to .7%. Even with about 15% rent increases. With appreciation it is much high as we have had over 60% appreciation in the 3 years and we did a high level of leverage. I wouldn't invest in LTR's if there is no appreciation play the yield is just to low for what I can get. I very low 2% yearly appreciation increases the return by 8-10% and if you are willing to-hold 20+ years then it would be unwise to not include it in your calculations. I would suggest only putting calculating the worst 30 year period for your market in the last 100 years as what you calculate for a prediction.
@David A. I just answered Sarah about the idaho units so check that out for the big bear ones we manage depending on the financing there are currently deals for over 20% IRR without appreciation. If Covid prices keep up even over 20% CoC passively after management. Think over 10+cap rate with 3% loans at 80% LTV that's a return of 38% with no appreciation. And over 20% CoC. I will say getting property is hard right now there are ten times the buyers and properties for sale and weekends are renting for well over a thousand per night. And week days are sold out also. Part of that is that are properties are top performers including 1 in big bear city for 2019 for 6. We revenue about 2-3 times what the other management companies and the 50% percentile do. I will say that LTR's being bought this year I agree with your statement in most good areas it's hard to get 6% CoC with management passively.
Hi @Sara W. You got some great advice from several folks here. I would recommend you check out this insightful recent forum post to help with this decision. Though it doesn't hit your question head-on, I think it could be helpful: https://www.biggerpockets.com/...
I think the big question worth asking is how involved do you want to be in your real estate portfolio. You can invest in syndications and be completely passive and make good returns. Or you can be hands on and build your own portfolio and make similar returns. If you do plan on taking the passive route I'd suggest investing with a proven syndicator and not in one of the massive funds like Crowd Street. Happy to answer any questions you may have regarding investing in syndications.
Thank you, Brock! This is an interesting angle. Why do you recommend to work with a syndicator vs. one of the massive funds? And what are some of the syndicator you have worked with or would recommend? If syndication which is completely passive yields the same returns as actively managing my portfolio, why would anyone choose to do the latter?
@Sara W with my Idaho units when we bought we where about about 20% IRR without appreciation. It was around 12% CoC plus some loan pay down and tax benefits. with appreciation it has been much higher. I will also say that I haven't gotten any there in about 3 years and there has been very high appreciation so the type of deal we got is probably gone. It was at 1% rule when we got it but now they are selling closer to .7%. Even with about 15% rent increases. With appreciation it is much high as we have had over 60% appreciation in the 3 years and we did a high level of leverage. I wouldn't invest in LTR's if there is no appreciation play the yield is just to low for what I can get. I very low 2% yearly appreciation increases the return by 8-10% and if you are willing to-hold 20+ years then it would be unwise to not include it in your calculations. I would suggest only putting calculating the worst 30 year period for your market in the last 100 years as what you calculate for a prediction.
I agree completely with some of your concerns. I am currently in a situation where I can't do a regular OOS investing due to where I am living at the moment and have recently teamed up with a TK company and am working on closing on a property.
I was a big advocate of just investing in stocks and satisfied with owning one property but have just switched gears into wanting to own more rentals in order to create cashflow. I understand that your concern about only generating 8-9% ROI on a property is not attractive at all and usually if you just stick with blue chip stocks you will outperform that. but take into account the equity you're building on the house every month. i kind of look at it as getting paid dividends each month. even though you aren't generating cashflow, you're technically not losing money on the property.
@Sara W. there are 50 states and you only live in one, so that tells you that there are a lot of potential opportunities out there they 'may' well be better than your own state/city. Maybe you're lucky and live in a state where all the conditions are ripe for good investment, but maybe/probably not... I don't know a lot about Boston/MA markets but they don't generally top the list of best places to invest.
I'm sorry - I disagree - this amount of housing inflation is unsustainable. And when contractors are trying to charge me a premium vs what I know builders pay to build a house they are out for a payday and I wont succumb to that. ***I'll clarify - I designed my own house - cleared the land where I wanted the house built - picked out all furnishings - was going to buy all supplies, have my own accounts, have done other construction projects - I'm not the typical green horn - yes I'm getting screwed if someone wants to charge a premium on their work and treat me as some yuppy typical needing client - all they have to do is show up and do the work - we've got it all figured out - so no I wont pay a premium for someone to do even less work and put in even less time that is usual. In Topeka with our business we struggle to get peopel to show up to do anything - we live in a very weird part of the state - people do not like to work here in general -- I do not know why.
The day will come soon that they wont be having people banging on their door for work. We cant have the largest economy shut down for this many months, a president on a hell bent mission to raise the price of energy via taxation and outlawing the production of certain vehicles and create a whole BS climate industry built around smoke and mirrors. The flood gates will open - it's a matter of when -- this many people can't have been out of work and barely surviving without any sort of adjustment. Not to mention one of the biggest cash infusions set to hit the economy ever soon if they pass the handout bill.
How many posts do you see on this very RE board of everyone wanting to invest in rentals, do flips etc as they see people making money on tv -- I dunno - there are things about this cycle that are different as you pointed out - but there's a point where affordability gets out of reach and doesnt make sense.
All you coasters and big city folks can keep your money there - you ran up your markets to unsustainable levels - dont bring your crash to the midwest - I dont want to see that here. The same type of crap happened in S Florida when I lived there during the bubble/crash - literally everyone was attempting to flip homes, make money in RE -- as the old wisdom goes when your hair stylist, taxi driver or whatever is starting to talk about some sort of investment that's when you should approach w caution or get out.
I just put 3 more under contract so I'm not heeding my own advice of getting out but they fit my affordability factor and the rents are there too.
Don't be sorry Shane, I'll tell you why I think it will be different. Look at the numbers!
You raise a good argument, when you say what goes up must come down. So let's examine that, because the wave of new investors that email me every day feels a little bit like the hair stylist getting into RE.
Real Estate is driven by suppy and demand, which makes it different to the stock market. We could all sell every last stocj and go to bed at night. But we all need a place to sleep.
Where is demand comming from? Unlike 2007, where demand was created artifically and speculative in nature, todays demand is real. It is driven by a demographic shift: Millennials are finally buying houses! The oldest of them are now 38 years old and we have about 65 million in the US.
Supply: google "new housing starts FRED" you'll get a chart that goes back into the 1950's. You can see that we have underproduced homes for the last ten years on a massive scale. And new these two factors are clashing -
Millennials as the largest demogaphic group have "suddenly changed their mind" and caught the building industry with their pants down. Increased demand meets very restricted supply.
Here in Milwaukee new construction is not even a factor, we only have a few hundred new builds every year and they are priced well over half a million. So no relief for a housing market that is about 200k on average. So we only have what we have and there is no quick way to solve that dilemma. When you look, you'll see almost 60% of new construction happens in the south, only 14% in the midwest. Homes are too cheap here, builders can't compete. Cost to build is a lot less in the south, look at Texas.
At the same time housing is historically very afforable. It is now more affordable than at most of the last 40 years, whith the only exception of 2010, 2011 and 2012.
In other words, as much as a wreck my brain, I don't see how any of this can change in the next years. My most optimistic scenario is that we see home prices in Milwaukee go up at least another 50% from there they are today, maybe even more - that would be 300 to 350k for a median SF. At that point the gap between existing home prices and new construction is becomming close enough, that new construction can scale to a signifcant volume and is able to bring balnace to supply and demand.
I have made a career out of out of state investing and supporting out of state investors. Def worth it. Need the right team and support but again... worth it.
One of my favorite metrics that is never talked about is Return on Stress (RoS). Yes, an investor can put together an out-of-state team and try to DIY but it can get very busy and some investors just don't have the temperament.
At the end of the day, it all falls on what a particular investor is looking for on the Passive to Active spectrum. Returns will inevitably vary.
I have been doing some research on investing in out of state properties. However, after reading and factoring all the hassles and risks of investing long distances and knowing that there are investments out there that are completely passive and yield a standard 7 to 10% returns, now I am wondering if it's worth it to invest in out of state at all.
For newbies, I think a lot of people on this forum recommend to start with turnkey properties. When I looked at some of the TK websites, the properties they featured are generating around 8 to 9% on average. If that's the case, are there any upsides of investing out of state instead of just doing passive investments like Multiple Equity, Crowd Street etc? Or am I missing something?
I know that you can probably get a higher returns if you assembly your own out of state teams and get some off market deals. But what is the ROI for doing that vs. investing in TK? Is the return significantly enough comparing to the risk and work you take.
Would appreciate your thoughts and want to hear your stories about investing in out of state vs. passive investing in funds and notes. Thank you all in advance!
Is out-of-state investing worth it? For us- Yes. First, let me say that we are not turnkey investors. We started out that way but did not like the returns & did not have much equity. Why out of state investing was worth it to us - the local markets we were in (Not Chicago where we currently are) were small & not diverse. It was the equivalent of having all your money in one company stock. We invested out of state for higher returns but it was also about diversity.
Regarding passive investing- We put a portion of our $ into REITS & just monitor the REIT performance.
@Sara W. It depends on the structure of the syndication but there will generally be less fees and a more favorable equity split. It also allows you to have a more "1 on 1" relationship compared to a fund. I know many syndicators but I also syndicate my own deals (have done 6 so far). Investing in syndications isn't for everyone. Many investors like to be involved in the decisions and operations..which doing your own deals allows for.
I agree completely with some of your concerns. I am currently in a situation where I can't do a regular OOS investing due to where I am living at the moment and have recently teamed up with a TK company and am working on closing on a property.
I was a big advocate of just investing in stocks and satisfied with owning one property but have just switched gears into wanting to own more rentals in order to create cashflow. I understand that your concern about only generating 8-9% ROI on a property is not attractive at all and usually if you just stick with blue chip stocks you will outperform that. but take into account the equity you're building on the house every month. i kind of look at it as getting paid dividends each month. even though you aren't generating cashflow, you're technically not losing money on the property.
Thank you John! I totally understand your point on appreciation. However, I am very conservative on my ROI calculation and don't usually want to factor in the appreciation in my deal as the market can change and if the property is not generating enough cash flow to sustain itself I might not be able to hold it long enough to see those appreciations.
I have made a career out of out of state investing and supporting out of state investors. Def worth it. Need the right team and support but again... worth it.
Thank you James! Can you provide some examples of how involved you are vs how much returns you are seeing? I do think that with economic of scale your cost and time spent will be less as you scale.