Hey REI,
I was curious if you have insights. My concerns of buying a property I can’t physically see without flying out personally, plus being able to manage renters. Anyone here have success buying cashflow property out-of-state where you live?
We have our small multi-unit building that’s about 600 miles from where we live, but it’s close to where I grew up and still have family there. I’ve been there several times to work on things and still manage it. This property has been good, but I don’t know if I’d be looking at other out of state rentals since we have plenty of deals in our local area.
I would be especially cautious by not even being able to see the property or have someone you know personally to view the property. I’ve seen plenty of pictures online of houses for sale in my town that looked much worse when I toured the property. Some people can take shots at one angle of a room which will make it look better than it actually is.
DON’T!
The residential rental business is, for the most part, a sweat equity business. If you can’t do the repairs yourself and you’re not there to stomp out a tenant rebellion or you don’t have relatives who can do those repairs living in that city, you’re going to get screwed 90% of the time and lose money on it. More often than not, sellers are selling you a property that has some costly issues with it they’re not telling you about. If it made a ton of cash after expenses, why would they be selling it for a really great price that would make you want to buy it out of state? You’ve always got to go in being prepared to do a lot more work than they claim, which can bankrupt you if you’re not prepared to do that work yourself.
In some market areas, buying cash flow properties for less than $150k is just out of the question so looking at properties out of area is a viable option.
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Get your own real estate agent. Do not put offers through the listing agent as they are working for the seller. It will not cost you one dime extra. Your agent should take photos of every carpet stain, paint chip, crawl space etc.
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Pay for a home inspection and make it a contingency to your offer. If there are problems with the property, a home inspection will find them. It is $300 well spent.
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Hire a reputable and highly recommended property management firm. It is going to cost you between 8 - 10% of your earnings but it will save you the headaches of the day to day management which just is not practical if you are out of town/state.
Out of state investments carry a higher degree of risk for sure but they can be good investment opportunities if you have a good network in place. Look to buy in areas where you intend to retire or plan to seek employment down the road.
I have experience with out-of-state single family investing. Do NOT do it.
I don’t have enough fingers, thumbs, and toes to count the people who’ve lost their shirts as out of state landlords.
That said, I’m talking about low-end rentals.
Dave mentioned that single family investing is more sweat equity type of investing. It is. Rarely can 3rd party, professional property management be applied, because of the cost. And management intensive properties are even more expensive.
When you consider management, maintenance, reserves, replacements, taxes, insurance, stolen a/c’s, broken fish tanks, and professional deadbeats, you can easily and conservatively figure 50% of the rent going to these expenses over time.
Maybe not the first year, but you will, over time, spend 50% of your gross (before taxes) on overhead.
If you don’t figure in this overhead, and don’t negotiate/buy accordingly, you’ll end up donating your time, treasures, and talents to the cause in the end.
The problem is, finding deals that are this profitable, when you’re not in the farm itself, seeking out such deals. The locals will beat you out of these deals, until you embed yourself as well as they are in the farm, and dig up the gems that make sense in any market. This is NOT easy.
That said, you can be patient, make friends with some local wholesalers (this is not that hard) and explain what you want to buy, where you want to buy it (or ask them where other investors are buying and prepare to compete).
If you’re possibly a repeat buyer, everyone will be ‘real’ interested in helping you, and likely give you first bite at the apples in many cases.
How you become/attain ‘repeat buyer’ status is too complicated to explain here, suffice to say, you need a team put together that includes sources for hard/soft money, a competent agent, CPA, RE attorney, title company, appraiser, a realquest account, and a property manager, and perhaps a skilled maintenance/rehab man/crew.
There may be an investor here that has successfully supervised a rehab from long distance.
My experience is spotty.
Sometimes I got what I wanted, other times I got slammed like a rented mule.
One time I paid a guy time and materials (he had done several jobs for me successfully) in advance to fix the gutters and down spout.
What I didn’t know was that he took my money, and didn’t do the work, but told me he had completed it, adding convincing detail about how he fixed the leaks. Of course, when I saw the house six months later, I discovered that he had done nothing whatsoever to the house, and was long gone with my money.
Another time, my maintenance guy was hard up for some spending money, and actually broke down a door on one of my vacant rentals, and then phoned me to tell me there had been a break-in.
And he so generously suggested that he could fix it cheap.
So, naturally I had him fix the door …for cheap.
Then there was a break in on the garage door. So, guess what I had fixed ‘cheap?’
Other times, the work was done exactly as promised and paid for on time, and there were no problems. But trying to cover your bases, long distance, is tiring, if not dysfunctional, even with professional management.
Oh, and never mind one of my PM’s telling me that the bathroom tub surround was leaking, and the garage door was bent up, and needed replacing to ‘keep the tenant’ happy (and not move out).
Only $650 bucks. No problem.
A year later, I visited the house, and discovered the old garage door was in place (and not bent up), and the old shower enclosure was still there, ugly, but not leaking).
So, when your maintenance guy will lie; your professional management will lie; and you’re 1200 miles away from the liars; it’s probably better to invest where you can overcome the liars. Just saying.
As kdhastedt used to say move closer to the food.
LOL…nice to know SOMEBODY listened to me!
Keith
A lot of these things can now be resolved with technology. A skype conversation with video of the work that needs to be done. or even request a ‘video invoice’.
When you are calculating cash flow, the 50% rule does not include property management fees. If you are going to hire a local company to manage the property (which would have solved @javipa’s problem), you need to add their fees in addition to the average 50% you take out for vacancy, taxes, insurance, repairs, capital reserve, owner utilities.
If after this, you cannot get $150 per month/per unit cash flow - I would back away. Yes the typical figure is $100 per month/unit but you will need to require a larger return to offset the greater risk.
No it won’t. Javipa’s right. If the PM breaks down a door and says there’s a break in, it’s broken. He takes a picture for you. You still have to pay to fix it as you’re 1200 miles away. It’s not going to get magically fixed on its own. And bylaw officers are more than happy to write up tickets for unsecured properties and then call in the fire marshal to inspect the property and write up a work order a bunch of retrofits if you get upset with them.
As for the garage door and leaky tub surround. I don’t know what kind of garage door and tub surround you expect to get for $650 with photos as new ones cost a lot more (just materials alone). It could be as simple as all the PM did was take two pipe wrenches and straighten out the garage door railing so it would roll out smoothly, hammer out the dent on the door, and spray paint a section of it and then recaulk the tub surround, which is probably under ten bucks for a tube of caulking and a can of spray paint if you did it yourself. But, $650 from 1200 miles away sounds like your typical PM invoice/scam.
All the PMs I’ve dealt with want damage retrainers and the money upfront before they do the work and take on the management contract. At least all of them in my area. I’ve seen the ugliest railings put in for over a grand (conformed to building code to satisfy the building dept., but that’s it–I had a relative get screwed over a long distance PM work like that and he worked full-time at Ford’s a few hundred miles away so it was such an impractical situation to do the repairs himself). I’ve yet to meet someone personally who wasn’t seriously burned by a long distance PM.
This is your typical PM phone call from afar: "Hello Mr. Savvy Investor from afar, the tenant called that he’s not paying rent and plans to take you to landlord and tenant court over maintenance issues because the tub surround is leaking and he’s worried about it turning into a mold problem and the garage was broken into and the garage door is damaged and won’t open. It looks like a few thousand dollars worth of work and can take a few weeks to do, but I can have my handyman take care of it personally for you for $650 and it’ll be done right away and you can have it done before your tenant reports it to the city building dept.
Or worse yet, he might say the building dept. gave you a two week work order to fix it or you’ll be fined.
WTF are you going to do 1200 miles away??? And try talking to his angry handyman to explain his estimate to you who sounds like he has a crack problem.
You’re going to have to take that invoice up the ass because it’s so far away and the PM knows that. Just try taking that scumbag handyman to small claims court from 1200 miles away to find he’s pretty much judgment proof. The PM is just acting as the handyman’s agent taking his 50% commission for the handyman so you can’t go after him. These long distance issues can’t be taken care of by technology. You’re going to get screwed 90% of the time if you don’t live in the same city.