What Do You Wish You Knew Before Your First Out-of-State BRRRR?

Question

Hi BP community,

I’m new to real estate investing and currently exploring out-of-state opportunities in the $80K–$125K range, with a focus on BRRRR and small multi-family properties.

I’ve been doing my research, but I know there’s only so much I can learn from books and podcasts — the real lessons come from actually doing deals. Before I jump in, I’d love to hear from those of you who’ve already gone through the process:

• What’s the biggest lesson you learned from your first BRRRR out of state?
• Were there any surprises (good or bad) you didn’t see coming?
• If you could go back, what would you do differently before buying your first property?
• Any tips for building a reliable local team before pulling the trigger?

I know mistakes are part of the journey, but I’d like to learn as much as I can from others’ experiences so I can start strong and avoid the common pitfalls.

Thanks in advance for sharing your insight — I really appreciate it!

Christopher

Michael Smythe · Answer

@Christopher Rubio

Your challenge won't be finding properties to meet your BRRRR goal, but will be understanding what Class of properties those will be!

Seems every new investor fails to understand the difference between Class A, B, C & D Neighborhoods/Properties/Tenants:(

They all assume anything they buy will be Class A - and then are shocked when their performance expectations aren't met.

So, yes you can easily find properties to BRRRR in the Midwest - but most of them will be Class C or D with tenants having credit scores under 600 => which have a 20% chance of nonperforming on their lease!

You can find Class B properties in the Midwest to BRRRR, but it will take more digging and YOU will need to understand how to analyze & identify them - because a lot of agents, wholesalers, PMCs, etc. will try to sell you Class C or D represented as Class B:(
- Many of them don't know/care what Class the properties are, so they're incompetent.
- Others know exactly what they are doing, so should be labeled as crooks!
EITHER WAY YOU LOSE!

Here's some copy & paste advice you might find useful:

------------------------------------------------------------

How much do you know about Property Classes?

Recommend you spend some time learning about them, so you don’t mistakenly buy a property that will NEVER meet your expectations!

Why is Property Class so important for investors to understand and apply in their investing strategies?

Because the Property Class dictates the Class of the tenant pool that the property will attract.

The Tenant Class greatly impacts rental income stability and property maintenance/damage by tenants.

Both Property Class and Tenant Class will affect what type of contractors, handymen and property management companies you should target and be willing to deal with a property.

The Property Class will also impact the maintenance & renovations you do to, “Maintain to the Neighborhood”.

Why is that important?

Well, if you buy & renovate a property in Class D area to Class A standards, what Tenant Class will actually rent it?

Or, if you put several Class D tenants in a Class A four-plex, what do you think will happen to the property?

So, if you fail to apply the correct assumptions to a property, your expectations won’t be met, and it may even be a financial disaster.

We use the following to rank Property Classes, in order of importance:

• Property Tenant      Pool: closely linked to location, but not always.
• Property      Location: closely linked to tenant pool, but not always.
• Property      Condition & Amenities: it’s important to, “Maintain to the      Neighborhood.”

Key metrics for each Property Class:

Class A Properties:
Tenant Pool: Majority of FICO scores 680+, no convictions/evictions in last 7 years.
Tenant Default: 0-5% probability of eviction or early lease termination.
Section 8: Class A rents are too high and won’t be approved.
Vacancies: 5-10%, depending on market conditions.
Cashflow vs Appreciation: Typically, 3-5 years for positive cashflow, but you get highest relative rent & value appreciation.

Class B Properties:
Tenant Pool: Majority of FICO scores 620-680, some blemishes, no convictions/evictions in last 5 years.
Tenant Default: 5-10% probability of eviction or early lease termination.
Vacancies: 10-15%, depending on market conditions.
Cashflow vs Appreciation: Typically, 1-3 years for positive cashflow, balanced amounts of relative rent & value appreciation.
Section 8: Class B rents are usually too high for the Section 8 program.

Class C Properties:
Tenant Pool: Majority of FICO scores 560-620, many blemishes, but should have no convictions/evictions in last 3 years. Verifying recent 2-years of rental history very important! Same for 2-years of job/income stability.
Tenant Default: 10-20% probability of eviction or early lease termination.
Section 8: Class C rents usually meet program requirements, proper screening still recommended.
Vacancies: 10-20%, depending on market conditions and tenant screening.
Cashflow vs Appreciation: Should cashflow immediately, at the lower end of relative rent & value appreciation.

Class D Properties:
Tenant Pool: Majority of FICO scores under 560, little to no good tradelines, lots of collections & chargeoffs, but should have no convictions/evictions in last 12 months. Verifying last 2-years of rental history and income/employment extremely important to find the “best of the worst”.
Tenant Default: 20-30% probability of eviction or early lease termination.
Section 8: Class D rents meet program requirements, often challenges to pass Section 8 inspection.
Vacancies: 20%+, depending on market conditions and tenant screening.
Cashflow vs Appreciation: Typically, all cashflow with little, maybe even negative, relative rent & value appreciation.

Where did we get our FICO credit score information from?

Check out this chart:

FICO Score

Pct of Population

Default Probability

800 or more

13.00%

1.00%

750-799

27.00%

1.00%

700-749

18.00%

4.40%

650-699

15.00%

8.90%

600-649

12.00%

15.80%

550-599

8.00%

22.50%

500-549

5.00%

28.40%

Less than 499

2.00%

41.00%

Source: Fair Isaac Company

Make sure you understand the Class of properties you are looking at and the corresponding results to expect.

Metro Detroit has 132 cities, the City of Detroit 183 Neighborhoods, which we’re analyzing and classifying.

Horror Stories:

https://www.biggerpockets.com/forums/48/topics/1137397-baltimore-a-path-to-never-ending-pain

https://www.biggerpockets.com/forums/432/topics/1231840-sell-at-a-loss-or-rent-at-a-loss

https://www.biggerpockets.com/forums/311/topics/840134-memphis-turnkey-tenant-turnover-costs

https://www.biggerpockets.com/forums/963/topics/1195280-experience-of-oos-investing-in-cleveland-after-15-years

Travis Timmons · Answer

Pick a different strategy. The only people that will tell you that out of state BRRRR is a good idea is an agent or other service provider with a profit motive. It is a very high risk strategy with a ridiculously low success rate for a first time investor.

Kerlous Tadres · Answer

Hey Chris, I would do a different strategy compared to BRRRR if you're doing out-of-state investing. Starting off with a long-term rental for your first rental would work better for you compared to a rehab project, can be difficult to manage that.

Scott Chilton · Answer

Hi Christopher,Jumping into out-of-state investing can be rewarding if you take time to build the right foundation. The biggest lesson for most first timers is that the deal only works if you have a trustworthy local team. A property manager, contractor and realtor who know the area will save you money, stress and mistakes you cannot see from far away. Before buying, try visiting the market in person, walk some neighborhoods and meet your team face to face if possible. It may feel slow at first, but putting this in place now will give you smoother BRRRR projects later and protect your investment when surprises come up.

Caleb Brown · Answer

Bad GCs and bad areas are the 2 themes people miss the most. On the GC get 2-3 bids that are itemized. Don't go by a GC giving you a guestimate, you need numbers with the work to verify. Also don't give large sums upfront. Rehab needs to be done in stages where you verify the work is done. On the area you need to look at all the details associated with the area(school, crime rates, where is it by, neighbors, etc). Many deals look "good" on paper but will not work with vacancy, evictions, turnover and anything else bad tenants bring. Along with that they won't appreciate and you will have a hard time selling

Ethan Haigler · Answer

Interview/build a team you are very confident in!

Caleb Brown · Answer

All about doing your due diligence and being careful. Investing is all about the details

Christopher Rubio · Answer

@Ethan Haigler my biggest issue

Henry Lazerow · Answer

As mentioned above an out of state brrr is really hard and unlikely to work when new. Just buy and hold, do some updates over time and then cash out refi in a few years as it’s appreciated.

To brrr need get rehab done below what your competition can do it at. This takes contacts you get over time and test on small things first.

FICO Score	Pct of Population	Default Probability
800 or more	13.00%	1.00%
750-799	27.00%	1.00%
700-749	18.00%	4.40%
650-699	15.00%	8.90%
600-649	12.00%	15.80%
550-599	8.00%	22.50%
500-549	5.00%	28.40%
Less than 499	2.00%	41.00%

What Do You Wish You Knew Before Your First Out-of-State BRRRR?

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