Out of State Real Estate Investing

I love the idea of investing in real estate, but the recent price appreciation of the last few years has made Los Angeles, and Southern California in general, both price prohibitive and common sense prohibitive.  Take for example the fourplex that I wrote about a month and a half ago.  It sat there in a prime Los Angeles location with a $1,249,000 asking price, and a gross rent multiplier of 20.2, given the rents of $5,150.  I just checked with Zillow, and it turns out that they sold near the end of January for $1,180,000.  A virtual bargain at that price.  The proud new owner is looking at a GRM of 19.09.  They'll have to put down more than a quarter of the purchase price to break even on monthly cash flow!

So, that being said, I have been thinking about investing in real estate out of California.  The way I see it, there are two benefits.  Of course, there are drawbacks that come with it.

Benefits:

1. Absolute price levels are lower.  Relative prices may still be high in many areas compared to what they were three to five years ago, but they are still cheaper than California.  If the rent is cheaper and the price is lower, doesn't that mean I'm in the same position?  Take the fourplex from above.  If we were talking about a small single family house in Raleigh, NC, for $118,000 and rents of $5,150, aren't the numbers the same?  It is still a GRM of 19.09.  It will still take more than a quarter of the purchase price to break even on monthly cash flow.  The difference is in the absolute numbers.  A quarter of $118,000 is $29,500.  That I have.  $295,000 I don't have.
2. Relative prices are more reasonable.  From what I hear GRMs of 15-17 can be found in many locales around the country.  Maybe even lower.  That is rare or non-existent in Southern California.

Drawbacks:

1. I don't know the markets.  If you told me that you saw a great duplex for sale in Boyle Heights or Montebello, I know what you are talking about.  If you tell me that you found something in a good part of Austin, TX, I'll have to take your word for it.
2. I don't know the people.  I have realtors and contractors in LA whom I know and trust.  Not so elsewhere.  Other than Charles in Portland.
3. I must rely on property management.  I may or may not manage a rental property in Los Angeles myself.  But out of state, I don't have a choice.  From what I understand property management typically takes 8-10% of the gross rent.  This makes it even more critical to find properties with favorable GRMs.

Well, if you're still reading this, I have two questions. 

1. Have you ever invested in real estate outside of your state or region?   If so, how was your experience?
2. What is the market like where you are?  Are you in a part of the country where GRMs are lower than 15?  Can you bring $30-40k to the table and make a small property at least cash flow neutral?

Comments

[dong]

I've thought about investing in out of state real estate for the same reasons. I live on the other coast where real estate while not as expensive as California is still too expensive usually to generate positive cash flow (or a good return on equity). However after much thought, I realized it's just not worth it. If i'm going to invest in RE in a market I don't know, and hire a property manager to do it, I rather get in on a REIT at the right price...

[2 million]

I only have a local real estate investment so I don't have much experience in long distance investments. However, I would be scared to do it knowing what I have had to handle -- ofcourse I haven't had a management company covering me yet.

[Deborah]

My husband worked for many years handling landlord and tenant disputes. He'd never allow us to even think about having property to rent. He certainly had interesting stories at times about how tenants had destroyed property.

I also had a girlfriend that sold out of her extra property after $30,000 of damage to her home from having a grow-op in it.

And then I know another who does rent and he says if you get a good tenant that looks after your place, as long as you are cash positive, never raise the rent.

[bluntmoney]

I've invested in out of state real estate before, for exactly the reasons you mentioned. And I hated it. I wouldn't do it again, unless it was in a place that was also very inexpensive for me to fly to on a regular basis, and I had plenty of time on my hands. Because I'd be flying out there at least every other month. I am just not a hands-off type of person, and I learned the hard way that taking people's word for it is not always the best option.

I don't think I could make a profit here on rental property unless I got a screaming deal on it. Because, for example, a house in my neighborhood would probably rent for between $900-$1200 per month. And you're looking at $250K to buy it, so that's nowhere near even making the mortgage payments.

[Amillionby40]

This post was of interest to me because we too are looking at investing in out of state real estate. We have just started researching this option so we haven't made any determinations.

[One deal at a time...]

Out of state investing has been a great experience for me. I live in Sacramento where the difference between rents and owning are huge.
I have bought properties in Phoenix, Oklahoma City, Austin, and Atlanta all within the past 2 years for anywhere between $140k-$190k. All of these properties with 20% down and a 30 year fixed payment at 6.5% are at least cash flow even after all expenses. The most important thing is to get your team in place: real estate agent, insurance agent, and property mangaement. I have never met any of my team personally or seen the properties personally, but I have gotten many recommendations and contacted many of their current clients to make sure that they were satisifed with the services.
I highly recommend out of state investing as a way to begin your wealth building in real estate.

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