Long Distance Investment Properties
Real Estate Agent · Providence, RI · Member since 2020 · 41 posts · 29 votes
Long Distance Investment Properties
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Zach LemasterBusiness Member
Rental Property Investor · Denver, CO · Member since 2015 · 1k+ posts · 3k+ votesInvesting out of state can be an excellent way to achieve better returns & cash flow especially if you live in a very expensive market. Of course, you need the right boots on the ground team to assist with all aspects of the home including management. So as long as you have the right team in place you can build a very successful portfolio with this strategy. Ultimately I believe it is ideal to have a diversified portfolio across a few different markets depending on your goals. That is how my wife & I have successfully built a large portfolio over many years allowing us to retire from our professional careers in healthcare.
I would highly consider looking at new builds in FL that have excellent cash flow, strong appreciation in a great area on a brand new build that could have $30k+ of immediate equity! That is the best opportunity we've seen for quite some time in this market climate. I'm happy to answer any questions you have at any point in time!
52 Replies
- 5yZach LemasterBusiness MemberRental Property Investor · Denver, CO · Member since 2015 · 1k+ posts · 3k+ votes
This is a master planned community that is partially built out with existing individual lots. Build time is 6-8 months. Most homes start the leasing or marketing for resale process when it's about 90% completed allowing for a tenant to move in shortly after completion, or to have a contract to sell to a residential buyer before the home is even completed. With all the people moving to this location from more expensive parts of the country, and with the affordable housing prices, it's not uncommon to see a home have multiple cash offers before it's completed. So many exit strategies here to resell, or keep as a long term rental. Feel free to message me with more questions.
- 5yZach LemasterBusiness MemberRental Property Investor · Denver, CO · Member since 2015 · 1k+ posts · 3k+ votes
This might be a good resource to learn more as well. You'll have to google this on youtube: FL new builds - cash flow, equity & appreciation!
- Member since 2020 · 983 posts · 1k+ votes5y
Owning real estate is a nightmare compared to keeping it local. There is nothing better than being hands-on and having the ability to check on your property and tenants every few months.
The problem with having long-distance management companies is they don't have the time nor the ability to check on what your tenants are doing to your properties. I live in Los Angeles and recently sold 28 homes in Las Vegas. As each tenant moved out, I personally had to go to every home to clean up the messes. To clean a 1600 sq ft to 2700 sq ft home my cost without labor was $6,000 to $18,000 because almost every home was destroyed inside and out. Almost every home had huge dogs when dogs were not allowed in the leases. This was the result of management companies that don't check to see if tenants are bringing in animals.
While management companies charge 6% to 9% the total cost and losses due to poor management and maintenance costs about 20% to 30% of the profit you would make by keeping properties local. This is because management companies don't get units re-rented as fast as you would. They don't get units cleaned as well nor as fast. This makes tenants move more-frequently and leaves you with tons of deferred maintenance.
I learned several years ago, "DON'T EVERY TRUST SOMEONE ELSE WITH YOUR MONE and ALWAYS HAVE 100% CONTROL OF YOUR MONEY." Otherwise, prepare to write blank checks to your management company.
- Member since 2020 · 983 posts · 1k+ votes5y
Incidentally, I owned a lot of properties in the Springfield, West Springfield and Holyoke Massachusetts areas and Mass. was never a tenant-friendly state since judges are so screwed up several of my tenants got away without paying rent for almost a year . It is super difficult to get a judge to throw a tenant out onto the freezing snow and ice.
You need to constantly research the rental laws in Mass., constantly update your rental agreement and start the eviction process, immediately, when your tenants fail to pay the rent. In California, we give every tenant a 3-Day Notice To Pay Or Quit the day after their rent is late even when they are good tenants and even when we know they will pay the rent the next day because this legal-looking form sends a powerful message. The tenants tell each other about our sending the notice and we get very few late rent payments.
- Bay Area, CA · Member since 2016 · 79 posts · 43 votes5y
@Zach Lemaster Is there separate insurance needed for hurricane risk and if yes, what is typical premium?
- 5yZach LemasterBusiness MemberRental Property Investor · Denver, CO · Member since 2015 · 1k+ posts · 3k+ votes
No, hurricane is covered under your normal owner's insurance policy in the locations we operate in. Typical premiums would be $800 to $1,000 depending on optional coverages. Please see the pro forma breakdown on our site for specific expenses. If you are interested in learning more I recommend you set up an initial call with my team.
- Investor · Charlotte, NC · Member since 2021 · 40 posts · 18 votes5y
@Stacey So which company are you working with?
- 5yRemington LymanBusiness MemberReal Estate Agent · Columbus, OH · Member since 2017 · 6k+ posts · 7k+ votes
Originally posted by @Amanda Bruneau:
I love the idea of buying rental properties in a more landlord-friendly area, but the idea of managing a rental property from afar is terrifying. I would love to hear people's experiences with doing this and how it has worked for them. Thank you!
Some out-of-state investors do well with managing their property manager, and others do not. I think the big thing comes down to expectations. If you want a cheap property manager to be prepared to have higher turnover, longer vacancies, and higher maintenance expenses.
I think out-of-state investors should focus more on self-management by leveraging leasing agents for tenant placement and then systems/virtual assistants for management. This has worked out for a lot of investors in Columbus, Ohio.
- Specialist · NY · Member since 2016 · 82 posts · 60 votes5y
Originally posted by @Zach Lemaster:
Thank you for the question. I'm happy to explain & clarify.
Equity is the difference between what you owe on the property and what the property is worth. That means if you have equity in a property you can potentially either refi the loan on the property to pull capital back out to reinvest, or sell the property to access the equity to reinvest to buy more properties (ideally doing a 1031 to not pay capital gains tax). Both of these are common strategies that we work with our investors on to be more creative to scale their portfolio quicker, and limit the amount of out of pocket costs to acquire more rentals. Since capital to put down is the most limiting factor for everyone to scale, these strategies allow investors to recycle their capital quicker vs just saving up for another down payment. When you hear about the brrr model, this is essentially the same concept of forcing equity by purchasing a property below market value, and then refinancing to pull a lot of your initial capital back out to reinvest. For an inexperienced investor rehabbing a home for the first time has many risks associated with it, and often does not work out as anticipated. There are other ways to pull equity back out. These new builds are one of those ways. All properties will grow equity over time simply from owning RE & letting RE do what it does! Every year you own the property you should have more equity through the principal being paid down on the loan (by the tenant) reducing the amount owed on the property, and the home appreciating over time.
Let me go through a numeric example with you on these builds specifically.
We will use a new build that is priced at $238,000 that has an estimated market value of $285,000 upon completion which is typically the range that we are seeing with the new builds we are working on. If you buy the property at $238k with a 25% down payment your cost to purchase would be roughly $60k. Once the home is completed if it's valued at $285,000 you could either sell the home to a retail buyer to have a ~$40k+ initial gain year one (67% return on your initial capital invested), or you could refinance to pull a lot of your capital back out & still own the property as a long term rental which is what most of our clients are doing. A lender that does a 75% LTV at an appraised value of $285k would be a loan of $214k. Take $238k - $214k = $24k that would be the total out of pocket cost to own the rental, and would be $36k of equity that the bank is giving back to you from your initial $60k investment. Take $24k / $238k = ~10% downpayment that you are essentially into the property for which will skyrocket your ROI anytime you have less money into the property, and allow you to stretch your capital further. If the appraisal comes back above $285k, then you would be into the property for less than 10% down, and be able to pull out more capital. We've seen some of these appraise, or sell to retail buyers upon completion in the $295k to $310k range. All ways to be creative to limit the initial amount of capital required to own a rental property!
I know this may seem a bit complex, so if you find yourself getting lost in the numbers I'm happy to explain this in greater detail to you. Just send me a message.
Hope this helps! As you can see this would be a very creative way to increase your ROI, reduce the amount of capital in an investment to allow you to ultimately scale your portfolio faster! This is another version of the BRRRR model (Build, Rent, Refinance, Repeat, Retire), and you don't have to try to find & rehab a property yourself! ; )
So I have to ask a question. Why wouldn’t you just sell these retail and net the additional $40k profit yourselves? Or you’re saying she can flip it in year one and net a 68% return?
- 5yBrandon SturgillBusiness MemberReal Estate Broker · Columbus, OH · Member since 2013 · 3k+ posts · 1k+ votes
@Account Closed sounds like you had a bad experience with one company...no need to discount or implicate the entire industry. Once you get connected to a top notch PM agency, owning rental properties will be on total cruise control. The only problem I see is not firing your PM sooner.
- 5yZach LemasterBusiness MemberRental Property Investor · Denver, CO · Member since 2015 · 1k+ posts · 3k+ votes
The short answer is we absolutely do sell them retail, but we only have so many we build to sell retail based on our financing capability, and business plan. We have the capacity to build more homes that investors can finance the build directly to achieve the equity I outlined that allows them to either sell to a retail buyer for a gain, or simply hold as a long term rental & possibly refi to pull capital back out.
I get the same question often about our TK rental properties. "If the cash flow is attractive, why not hold them as our own rentals?" The same answer would apply. We hold many properties in our own portfolio, but it does not fit our business plan to simply hold every single rental property we come across. If the property meets our general investment criteria, we can still offer it to one of our clients where it does fit their criteria & strategy to hold as a rental. We have an internal business plan based on our financials & goals of how many new builds & rentals we want to add to our portfolio in each market we work in. Hopefully this makes sense. Feel free to message me directly with any specific questions. If you are interested in learning more about our new build products, or TK rentals I highly recommend setting up an initial call with one of our investment counselors to learn how the process works & answer all of your questions thoroughly.
- Investor · Marin County California · Member since 2018 · 1k+ posts · 2k+ votes5y
@Warren A. You will need a separate wind policy if the property is coastal Florida. The premiums are quite high - around $2,000 if you are right on the beach on a barrier island as we are.
- 5yZach LemasterBusiness MemberRental Property Investor · Denver, CO · Member since 2015 · 1k+ posts · 3k+ votes
Just to clarify, this wind policy is not required for our properties that are not directly on the coast.
- Member since 2019 · 5 posts · 0 votes5y
@Jack Orthman I also live in Los Angeles. Do you see any investment opportunities out here?
- Member since 2020 · 983 posts · 1k+ votes5y
Honestly, I don't know how the posts work, but to say that I may have had one bad experience when using management companies is not correct. As stated in my post, I owned and still own rental properties in California, Nevada, Idaho, Colorado and Massachusetts and use several different management companies.
I never said management companies do a bad job. What I said is; management companies can never due as good a job as the property owner with the exception of property owners who don't have the business savvy to manage their own properties and those property owners should definitely stay from owning long-distance properties.
What I said is when you use a management company to manage long-distance properties you will lose a huge portion of your profits because management companies do not have the time and ability to drive by your properties for inspections as frequently as necessary. Management companies are in a tough situation where property owners expect to see management companies work some sort of magic to show a great profit at the end of each year and this expectation puts management companies in a precarious position where they are forced to keep maintenance costs low and defer maintenance. me.
When you do the math and calculate the management company's 6% to 9% management fee, plus the additional re-rental fees, several other fees, slow re-rental process and deterioration of the property caused by failure to check rental units to see if tenants moved in several times the number of occupants, how many unauthorized dogs are on the property and the destruction throughout the property then the property owner is taking a loss many times greater than locally owner properties.
As mentions several times, very recently I sold most of my Las Vegas properties only because no management company has the ability to manage my properties to turn a profit as well as a hands-on owner with locally-owner properties.
The cost for rental units in Los Angeles county is insane and it took me several years to decide to sell my Las Vegas properties because I can still buy rental units in Las Vegas for less than $100k per unit and the same size units in Los Angeles run an average of about $300k per unit.
Even though units are 3 times the price in Los Angeles it still makes sense to sell in Las Vegas and buy in Los Angeles. Here is an example of what I did for my son. I purchased 5 homes for him in Las Vegas in 2017 for about $220k to $240k. One home closed escrow last week for $300k, and we currently have 3 homes on the market for $300k to $330k. So, his capital gains is about $300k. We are doing a 1031 Exchange so that saves the capital gains taxes.
I advanced my son the money to purchased 6 units in Hawthorne California for $1,750,000 ($291,000 per unit) and the sale of his properties will give us about $1.5 million. During the past 3 years, my son's 5 homes in Las Vegas were managed by a management company and we put every penny of income in a bank account. During the 3 years, the 5 properties netted $150,000 in his bank account minus $25,000 to clean them for re-sale. That means he netted about $41,600 per year from all 5 houses. By selling the properties and buying the 6-unit property in California my son will net $98,000 per year vs. $41,600. In 10 years that is $980,000 vs. $461,000 plus with rent increases we project our total profit with appreciation will be $1.7 million in 10 years. Perhaps, his 5 homes in Las Vegas could appreciate more than the 6-unit in California, but the management company and long-distance problems eat up a huge portion of any profits.
I am not saying property management companies are bad. I am saying that no property management company will do the math like an investor should and no property management company can manage properties as inexpensively as I can (or you).
- Investor · Las Vegas, NV · Member since 2013 · 8k+ posts · 10k+ votes5y
I wouldn’t 1031 exchange into California. Unless your son dies before selling any properties purchased with those proceeds. you are making all those state income tax free gains taxable at California’s insane rate. Even if you 1031 back out of California they will chase you down for the state income taxes if you ever sell, even in another state.
Forget the higher property taxes, the higher insurance, the tenant friendly laws and the income tax on the current rental income hurting your returns. Paying an extra $30k in California state income taxes on that $300k you “earned” in Nevada just seems silly. But I suppose if your son is a California resident he’s already hosed unless he moved to Nevada for a year.
But do watch out for the California 1031 clawback if he ever plans to sell before dying. That being said. Good luck. California better hope they never run out of risk taking go-getters like you and your so. willing to pay their tax.
- Member since 2020 · 983 posts · 1k+ votes5y
Not going to lie and say I know much about the 1031 Exchange or state taxes. I started selling my own Las Vegas properties in 2020, have a few more to sell and it looks like my timing is a little off and prices have been on the rise.
Regardless, of my timing to sell, the only reason I am selling in Las Vegas is because of the 280 miles from Los Angeles to Las Vegas, the property management company costs, the failure for the management company to know that almost every property was being destroyed, every house had huge dogs, one house was literally used for a dog kennel and the cost to clean every house with painting, carpeting and other repairs was $6,000 to $12,000. There is no way I was willing to pay $6,000 to clean a house, lease the house for a year for $1600 to $1900 per month and then have to re-paint and carpet the house one year later for a cost of $6,000.
One huge downside to Las Vegas was almost every house I owned had significant homeowner association fees and some were $135 to $150 per month. For a minute, I though I made a mistake selling in Las Vegas because the property taxes for the 6-unit building we just purchased is about $21,000 per year. That is actually a discount when you divide $21,000 by 6 units and you get $3500 per unit for property taxes. The property taxes in Las Vegas were about $1800 per year for a house, but when you add the HOA fees the total with taxes is about $3600 and then the rents for a 2-bedroom in one of my apartments is $2250 per month vs. $1600 to $1800 for a house in Las Vegas.
The cost to clean an apartment in Los Angeles even with some significant repairs never exceeds $2,000. The apartment can be move-in ready in 3 days and I have several qualified in-house workers who work for $160 to $220 per day vs. having to pay significantly higher costs to find and coordinate with multiple workers and vendors 280 miles away.
Even without a 1031 Exchange, switching to owning properties locally is better than owning long-distance when doing the math over a 10-year period. I am not the shrewdest investor since I sold 10 properties in Las Vegas in 2020 and did not do a 1031 Exchange when I could have. Since I will be 71-years old this June I decided it would be best to pay the capital gains taxes and pay off the mortgages for 4 apartment buildings I own in Los Angeles county. I will recover the money I have to pay for capital gains taxes in about 1 year by not having to pay the 5%+ interest I was paying on the 4 mortgages. Since the mortgages are paid off I am still in good shape to get my cash back if I want to invest in another property by getting a 3.2% loan against my properties.
By paying off my mortgages, I am saving about $22,000 per month by not having to pay interest. I seriously wanted to purchase properties to flip at auctions and I figured it would be very difficult for a flipper to net a solid $22,000 month after month and why would anybody want to work that hard with so many risks.
- Las Vegas, NV · Member since 2018 · 403 posts · 474 votes5y
My clients basically don’t have to lift a finger because I take care of all the day to day stuff. They mostly just watch my statements and direct deposits roll in every month.
Which is also what I do with my out of state rentals - watch the statements and direct deposits roll in from the property manager.
My full time job is managing rentals for others (and my local stuff). I get to spend my spare time looking for more investments because I don’t have to waste my time learning the rules and how to manage in another state.
- Las Vegas, NV · Member since 2018 · 403 posts · 474 votes5y
@Jack Orthman you clearly hired a bad PM. That is not remotely representative of all PMs. Unfortunately some aren’t good. Same as any other industry. In my experience those who are good at selling you on their service, aren’t that great at actually implementing the PM service. Great salespeople typically don’t make good PMs and vice versa. Heh
- Rental Property Investor · Northern Virginia · Member since 2019 · 793 posts · 620 votes5y
We purchase only out-of-state multifamily and use PMs for all of our properties. Property management is not an easy job and not something we want to take on. When everything is working and tenants paying, then it is easy and anyone can do it. But when the pipe bursts and floods the property in the middle of the night or a tenant stops paying and needs to be evicted, then those are the times we are glad to have a PM to handle it.
Not all PMs are created equal, so a great PM will be worth the money you pay for them. The PM can make or break your investment by the way they manage your property.
- Member since 2020 · 983 posts · 1k+ votes5y
This post is very long because the answers for maximizing profits cannot be explained in a few simple sentences. Sorry!
I think a lot of people (investors) miss the important factors and fail to do the math. This thread is about investing in long-distance properties, the pros and the cons. I never said property management companies are bad. And...there are some bad management companies and some huge risks that need to be considered. My management company in Boise Idaho literally disappeared with $18,000 in my account. The costs to go after a company that has no money makes the effort senseless.
My goal in this thread is only to point out the losses (hits) an investors incurs when owning long distance properties vs. locally owned properties where the investor is more hands-on and does not have to pay the costs for a property management company.
I own a fairly large construction company with more than 60 employees. I own real estate in several states. So, the truth is; since I am super busy and have some big fish to fry I don't pay any attention to how much I pay my property management companies. This may sound scary, but I never looked at how much my property management companies charge me. I never looked at a statement from a property management company. I tell my CPA to get the records they need and I trust that my property management companies are honest and keep accurate records.
The downside to long-distance properties is when you use a property management company their fees and costs for re-renting properties and other fees take a huge chunk of your profit and this depletes your investment capital for future real estate purchases, significantly. I will take a wild guess and say that property management companies charge 6% to 9% for monthly fees for management and collecting the rents and additional fees may increase the total costs to 9% to 11% of the gross rental income. Maybe, I am a cheapo, but that is a lot of money for me when I can own real estate locally and save 9% to 11% of my rental income in my pocket. The exception to this rule is; if you can purchase super great long-distance properties and the math is so great it makes the management fees insignificant then do long-distance. I did when I purchased my properties in Las Vegas at auctions between 2008 and 2020 and I made several million dollars.
The next most-critical downside to owning long-distance properties is most property management companies probably do a great job, but due to the many restrictions and controls landlords limit them to and because property management companies don't have the latitude to always make instant decisions on-the-fly like a hand-on owner can then the property owner incurs more losses. Example: An air conditioner goes on the blink and it takes the property management company 3 to 5 days to get price quotes and then has to make several communications with the property owner to get an approval. Meanwhile, the tenant is steaming while writing bad reviews about the management company's poor service when the management company is not at fault. My feeling are always; if I have to communicate with the management company to make decisions I would rather remove some hands from the soup, eliminate the he, said, she said, I said, get the story straight the first time, save time, do a better job because I personally get to speak with the contractors and save property management costs.
I've had many bad experiences with property management companies only because they don't always have the latitude to make quick decisions. I had a property in Las Vegas that had a sewer pipe that was crushed by tree roots. The tenant could not use his plumbing for several weeks because plumbing companies wanted $3600 to about $10,000 to repair the sewer plus several thousand dollars to replace carpets and paint. Luckily, I own a plumbing company, went to Las Vegas and replaced the section of bad sewer pipe in 2 hours and the cost for materials was about $30. The worse part is; one plumbing company put a camera in the sewer pipe, told the management company the pipe was broken inside the house underneath the living room floor and all the other plumbers quoted prices to remove furniture, remove carpets and jackhammer the concrete when the broken pipe was actually outside the house.
I am not saying the property management company did a bad job. I am saying that being able to visit the property myself to investigate saved me several thousand dollars and saved from doing unnecessary damage to the structure and carpets.
I've had several other serious maintenance problems due to using management companies in regards to maintenance and dealing with contractors. One property management company called me on the phone from Boise Idaho at about 8 pm. I was told the furnace fire-box was cracked and the cost to replace the furnace was $6,000. The tone was, "accept the price or have frozen water pipes before the morning". If the property was locally-owned I would have personally delivered electric heaters, but since it was 850 miles from Los Angeles I did not have that choice.
I am a heating contractor and $6,000 to replace a furnace I could purchase for $650 and install in 2 to 3 hours was outrageous. So, I told the tenant to go to a hotel and told the contractor I would drive to Idaho that evening and install a new furnace in the morning. Five minutes later, the contractor called and said he repaired the furnace for $350 and it was working fine. The fire-box was not cracked.
While it should have felt like $350 was a terrific price and a relief, the truth is I still got ripped off because the contractor knew in the beginning that the only thing he needed to do was clean the flame sensor with steel wool and that takes less than 5 minutes. Again, owning properties locally allows the investor to provide tenants with temporary services and it allows investors to deal with contractors on a more-personal level to weed out the crooks.
This thread is about the pros and cons for owning long-distance properties. It should be obvious that I own both locally and own several properties is a few states. I made several million dollars in Las Vegas by purchasing properties at auctions between 2008 and 2010, but the additional costs and losses I took in Las Vegas and other states was huge compared to the lower costs cost and lower losses for my locally-owned properties. That is why I sold almost all my long-distance properties and just purchased multi-unit properties in California for outrageous prices, but the math tells me that even when paying outrageous prices in California I will still make double the profit in California vs. owning out-of-state even if the properties in California do not appreciate.
EXAMPLE: In a recent post, I said my son owned 5 houses we purchased in Las Vegas in 2017. We are selling all 5 house, just closed escrow on a 6-unit property in Hawthorne California, today, for a cost of $292,000 per unit and the 6 -unit will net $98,000 per year vs. the $43,000 per year we netted in Las Vegas, for all 5 houses, and a reason we netted a low $43,000 per year in Las Vegas was the result from not having the ability to be hands-on and having to pay a property management company. The return in California is $980,000 in 10 years vs. $430,000 by owning in Las Vegas and that does not take into consideration the property's appreciation. I think we figured the building profit with appreciation with rental income profit will be $1.7 to $1.9 $million in 10 years and that is from only a stinky little 6-unit property.
If you are a professional giving an investor advice you should not tell an investor which type of investment is better without doing the math and without knowing how to avoid pitfalls that result in poor returns. You will seldom, rarely, or never come close to achieving the best returns when you have too many hands in the soup.
- Real Estate Broker · Redwood City, CA · Member since 2014 · 679 posts · 888 votes5y
@Account Closed
Great analysis and smart investment decision. CA is the best RE investment market anyone can dream of. I invest only in Bay Area, but did go to Las Vegas last thanksgiving to check out their RE market. The rental return is similar to bay Area, but lower rent and lower house prices. That is not a good thing. I prefer high house price and higher rent. The tenant in Las Vegas has very low income level, compared to Bay Area. The only advantage is LV houses are newer and has less maintenance requirements.
in comparison, Bay Area is much better for REI than Las Vegas.
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