So you want to invest in real estate, but your local area is too expensive? Choosing where to invest can be one of the hardest decisions to make. I have gone back and forth trying to decide where to buy my next investment property. I live in northern California where prices can be extremely high and cash flow can be non-existent. I believe cash flow can be found/ made anywhere in the country, but I don’t want to spend months scraping the bottom of the barrel trying to find something to make me $100 positive per month. I’d like to invest passively, as in, not put a million hours into a deal. I’d like to live where I want and invest where it makes sense. In this blog I’m going to weigh out both options for you, explain to you why I made the decision I did, and how it has affected me thus far.
The hardest thing to get over when investing out of state is obviously not being near the property in case something goes wrong. Let’s look at what could go wrong. The roof could leak, the toilets could clog, the tenant could stop paying rent, the power could go out. This is a fair list of headaches that could potentially happen while owning a rental property. Let’s dive into each one real quick.
+ The toilet clogs: Your property manager calls a plumber.
+ Tenants stop paying rent: Property manager sends out a late notice and if this doesn’t entice them to become current, your property manager evicts them and may have to go to court to get them out.
+ The power goes out: Your property manager calls either the city or an electrician.
Noticing a theme here? When investing in out of state rentals your team is vital. You will rely on your property manager heavily, if they aren’t on point, lose them. There is no room for error in this business, if you have a chink in the chain, get rid of it. There are plenty of other people who would love to take 10% to run your property the way it should be run. Your agent, contractor and property manager are your dream team in this business so choose wisely.
What if you don’t like this? You don’t want to pay your property manager 10% AND the cost to fix the issue, after all, tradesmen can charge a high rate. A plumber unclogging a toilet at 9pm on a Friday could cost you $300 where if you lived close to the property, you could bust over to the property and solve the problem for “free”. If you’re one of these types that’s great, you will probably save a lot of money. This works best for the half investor (investor who has a couple properties and doesn’t plan to go big). This is not scaleable. After you have a few properties you won’t be able to sustain this. You’ll be running around like a chicken with your head cut off fixing toilets all the time. Sounds kind of like you want to be a plumber more than a real estate investor to me. I wish you well in your handyman endeavors. For the rest of us, HIRE IT OUT. HIRE EVERYTHING OUT. If you need to fix a toilet yourself to stay cash flow positive, you bought a bad deal. Work property managers numbers into yours. A PM will usually charge a max of 10% . That’s 10% of the monthly income, if your property rents for $1,000 your PM takes $100 per month. This may seem like a lot, but if your boss asked you to take a 10% pay decrease to never have to come into the office again, just answer a question or two every once in a while, would you do it? If you wouldn’t, I hope you’re an astronaut or a Vin Diesel stunt double because the most of us would take a 90% pay cut to never pull ourselves into the office again and keep collecting.
Living by this rule to hire everything out so you can spend your time doing meaningful things like playing with your kids, spending time with your significant other, or finding a significant other, you’ll find the same amount of work whether you’re investing next door or 8 states away. Instead of focusing on the mindless tasks, focus on what matters. Finding more deals and having fun.
Where I am, a 3 bedroom 2 bathroom 1,300 square foot house averages $280,000 and will rent for $1,550. In Memphis, TN a 3 bedroom 2 bathroom 1,300 square foot house averages $110,000 and will rent for $1,000. What would you do? Memphis looks pretty sweet right now. I could buy a house where I am with 20% ($56,000) down and maybe make $100 per month cash flow. Or I could buy one in Memphis with 20% ($22,000) and cash flow $100 per month. There is a clear winner here. For many of you, out of state investing is a slam dunk. Now that I have lined out exactly why you should invest out of state, let me explain exactly why I don’t. I don’t invest out of state because I like to fix problems if they come up (just kidding), I don’t invest out of state for the same reason why many people do, price.
Let’s say I buy a $110,000 home in Memphis. I have to put 20% down because of rules and regulations set by Fannie Mae and Freddie Mac. That’s $22,000 dollars out of my pocket. Now let’s say I buy one locally for $280,000. I’m going to make $100 cash flow on both so why spend $56,000 on a down payment? I’m not. I’m going to live in the home for a year. With the conventional 5% down program, if you move into the home and intend to live in it for at least 1 full year you can save a lot of money. With a 5% down payment you’re only spending $14,000. If you’re in the position to live in this home for a year it can be worthwhile. Spend this time living in the property to tenant proof the house. Swap out breakable finishes with hardier ones. Swap fluorescents for LED’s to minimized calls for your property manager.
Having a low down payment resource is not the only reason to invest where it is more expensive. Like I mentioned earlier, many people invest where the prices are low, I invest where the prices are high for one reason, equity. If I buy a $110,000 house on a 30 year loan and the value over 30 years increases by 35% when the loan is paid off I now have an asset worth $148,500. Not too bad! Although in that same amount of time, if I bought a $280,000 home and it appreciated 35% I would now have a $378,000 asset. I’ve waited the same amount of time and have a property worth 2.5X the value. This is the reason why I invest locally, another factor is that I believe in investing in what you know and I know my market better than any other. Not to say I couldn’t learn another market, but in my case, I don’t have to.
If you don’t want to make the numbers fly with a low down payment, you can use the B.R.R.R.R method (explained in my blog found here). Which in my opinion is the single best way to create a huge net worth with little starting capital. With just a few thousand dollars you can recycle your money into deal after deal. If you haven’t read that blog, you need to.
Everyone is different. There are no right or wrong answers in life, just different ones. Pick an asset class and location, learn the hell out of it and execute. Weigh your options out and decide what investing style works for you. If you still aren’t sure, please email me and I would love to help you make your decision.
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