Out of State or….Out of Your Mind?
Yes, those were the exact words a prospective client said to me about a month ago on a Zoom call. I thought it was pretty funny considering I had just ran through the numbers with her showing her how we can take her from a 1.2% return that she currently was making on her Denver area property, to an approximately 9% return if she were to purchase a turn key property from us in one of our midwest markets. Didn’t matter, it wasn’t for her. And that’s the point, out of state investing isn’t for everyone. So how do you know if out of state investing is for you? Ask yourself the following questions:
Do I need to physically drive by my properties? I actually have investors who tell me this. If that’s you, then stick to investing in your own backyard. But remember, wherever the property is, it will still be there if and when you decide to visit it.
Do you prefer to manage your own properties? This one is tough. If you manage your own properties and enjoy that level of involvement then out of state investing may not work for you. I have had several clients try to manage their out of state properties from their home base and it typically did not end well. Yes, if there is already a good tenant in the property, you will be fine initially. But once that tenant has maintenance issues, or moves out and you need to rent to another tenant, you are at a huge disadvantage to any local property managers in terms of showing the property. I tell people, trust the system and let a local property manager handle property management for you.
Are you buying for appreciation or for cash flow? Typical investors who buy in CO or properties in western US markets are buying for appreciation and hoping to break even on cash flow, which is difficult in the current market. If the market corrects, even a little, your rents may go down and you may be in a negative cash flow position and find yourself writing a check every month to cover the difference on that “slam dunk” CO investment you thought you made. Personally, I cannot afford to write checks every month, especially if I own more than a couple of properties. If you are investing out of state on the other hand, I tell investors to buy for cash flow first because that will always carry you through, regardless of the ups and downs of the market. If you can get appreciation, so much the better. For example, right now in Kansas City, MO, one of our midwest markets, we are seeing appreciation north of 12%. But we tell people not to plan on that, plan on more like a steady 3-4% appreciation per year and if you get more than that, great. Our belief is that you should expect your properties to deliver returns to you both in terms of strong positive net monthly cash flow as well as appreciation potential. We call those the “Twin Pillars of Real Estate Investing”. If a property does not offer both, it's too risky an investment for me.
Are you looking for a quick turn or profit? If this is the case then out of state investing is definitely not for you. I had a guy a couple of years ago who said he wanted to buy 5 properties from us, hold them for 18 months, and then sell them for a quick profit. I told him we weren’t a good fit because we recommend holding for a minimum of 5-7 years to really maximize return on your real estate investments. If you are going to the model he suggested, just call yourself a flipper and go that route. We are talking about long term buy and hold properties. They deliver steady positive cash flow month in and month out. Down the road, if you decide to sell, you should have made some solid appreciation on your property during the holding period.
In the end, the decision is always personal. There is no right or wrong answer. As my kids say, “you do you”, and that really holds true with real estate. Ask yourself the questions I have outlined and think about what kind of an investor you are. If you are still interested in out of state investing or have additional questions, reach out to us; we would be happy to help.