018: Why I Buy Out-of-State Properties

SHOW NOTES FOR EPISODE #018 – WHY I BUY OUT-OF-STATE PROPERTIES

For those of you who listen to this podcast regularly, you know I live in Southern California and invest in other states.  For many investors, especially those just starting out, the thought of investing out-of-state seems crazy.  Why would anyone want to buy such an important and expensive investment and not be able to easily access it, regularly see it and be there in a moment’s notice? Well. I had and still have the same questions running through my mind.  I would love to buy in California IF the numbers worked for me.  But they don’t.

Believe me, I looked – all over the State – and, although I found some cheap properties here and there — the numbers just didn’t work.  CAP rates, cash-on-cash ratios and price-to-rent ratios are so ridiculously low it really reduces the chance of generating what I can in other states.  I suppose if I had a VERY LARGE cash reserve, it might be a different story in California.  People do make good money here in real estate.  However, as a beginning investor it just doesn’t make sense.

For me, I really felt that if I was going to start investing, the ONLY way I could do it was by buying outside of California.  There’s a lot more properties that meet my criteria (and budget) in other states.

For example, if I have only $100,000 to invest, I could buy 4 $100,000 properties in places like Ohio, North Carolina, Tennessee, Georgia and even Florida at $20,000 down on each property – and they could be duplexes through fourplexes   Conversely, in Southern California, I would have to spend the entire $100,000 to purchase a $500,000 duplex (if I could find one), and that does not include closing costs.  And, on top of that – even if I could find a decent duplex at that price – what would the return-on-my-investment be?  Let alone the cash flow.

So, for me, it makes a lot more sense to go out of state to find good properties, with good numbers, that will cash flow AND appreciate.

The first three properties I purchased were in Georgia and Tennessee (two in Memphis – one in Atlanta).  These were markets that I had researched and that had all the RIGHT STUFF I was looking for.

But keep in mind — Choosing your markets FIRST IS KEY!  Don’t go out and just buy some where without knowing what your goals  and your criteria are FIRST.  One you have your goals and criteria in place, then you can find the markets that meets those goals and criteria!

What market to invest in is not the same for everyone – it really depends on your goals. For example, do you want to fix ‘n flip properties or buy rental properties? A good market for rental properties may not be good for flipping and vice versa.  I personally don’t flip properties, so I won’t focus on fix ‘n flip markets.  I can however, because I’m a buy and hold guy, know what to look for in a good market for rental properties.

So, here are my primary reasons for investing out-of-state:

1. YOU GET MORE FOR YOUR MONEY – In my earlier example, I showed how I can buy 4 or 5 properties out-of-state for $100,000, whereas, in California, I’d be lucky to find one. When you have multiple properties in multiple states, you have a better chance of surviving a local market economic down-turn, slump or dip.  If one market goes down, you still have your other markets that will hopefully make up the difference.
2. I WANT A TRULY PASSIVE INVESTMENT – I mentioned earlier how I would prefer to be near my properties but, I have found out something ELSE that I did not anticipate. By being geographically set apart from my properties, I may not get to practice my PROPERTY MANAGEMENT SKILLS but I definitely have learned how to sharpen my ASSET MANAGER skills.  In other words, because I’m away, I HAVE to rely on my “boots on the ground” property management team that much more. If I were nearby, it would be so much easier to just jump in my car, drive to the property and take care of the problem.  However, being away from the property forces me to better manage MY TEAM.  To make sure THEY are motivated, committed and responsive to our tenants needs and the asset – to do THEIR very best job possible.  That helps make me become a better asset manager – not a landlord – so that I can truly enjoy my “passive investment.”
3. THE RETURNS IN OTHER STATES ARE BETTER!
   1. Better ROI – 25% return on investment is not uncommon
   2. Better CAP rates – 10 plus
   3. Better cash-on-cash returns – I set a minimum of 12% but more commonly get 20 plus percent
   4. Better cash flow – When I first set out, I said I wanted a minimum net cash flow of $100 per door. I’m averaging close to $300 per door.
   5. Better Price-to-Rent Ratios – 2% is common. 4 to 5% is certainly possible
   6. It’s hard to beat the numbers of investments in other states
4. BETTER STATE LAWS – When you buy out-of-state, you can chose to select states that are much friendlier to landlords and owners. You can avoid things like rent control and anti-landlord laws.  For example, in California, it can take months, and I have even heard, in some cases, a year or longer, to evict a non-rent-paying tenant.  Whereas, in places like Tennessee, evictions can be completed in as short as two weeks.
5. YOU CAN PICK PROPERTIES IN A STRONG MARKET – Since I don’t live in what I would define as a truly emerging market (although California has a few cities – not near where I live — that are considered emerging), I can still buy a property in an up and coming market with all the benefits (short term appreciation, etc.).  I can search out markets where unemployment is low, where jobs are plentiful, where businesses are growing and new industry is moving into the area, where there is much redevelopment, where rents are in high demand and where property values are just starting to go up.  Then, besides just the great ratios/returns my property would get I can also see significant appreciation, increasing rents and a better overall return-on-my investment.

There you have it — just a few of the reasons why I prefer out-of-state investments.  I’m sure some of you out-of-state investors listening can add even more.

On next week’s “Fun Fact Friday” I’m going to outline how you can develop a great out-of-state team.  So, make sure you tune in!

Just remember, real estate investing is not that difficult to learn. Once you get the key concepts in place, you’re on your way.   Just keep educating yourself. Write out your goals.  Get a mentor.  And take action!

Well, that’s it for now.  Until next time… God bless.

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