Out of State Investing: All Sizzle, no Steak

by Cooksquared

Real Estate Investor

Author website

As I prepare to go down to Greensboro this Thursday to make my first out of state investment, I thought I should talk briefly about what it takes to do out of market investing. Based on my experience too many people jump into a real estate market because it is hot and not because they have in-depth market knowledge or ties to that area. Real estate will always be a relationship business. Going into a market where you have no relationships and minimal knowledge is like playing the lottery. Some times you win, but most times you lose.

Here is a brief example from my past. Living in Detroit, my wife and I bought our first investment property about 15 minutes away from our home. Having developed a few good relationships, we were able to get a lot of work done on the property at a discount and we were able to sell quickly because we had a great agent. Eventually we sold this house to an investor in San Francisco, who was looking for a low risk investment. On the outside, this seemed like a great opportunity for her because the tenants showed consistent on time rent payments and the monthly repairs were minimal.

Here is the catch though. Many of those things happened because we were local and had great relationships. My wife personally drove by the tenants home to collect the rent. Additionally, she built such a great rapport with the tenants they would pay us instead of paying their other bills. Many of the repairs were done by a local contracting crew we had working on other properties, so we were able to get things done fairly cheap and quick. Most importantly, however, were the battles we had with the Detroit Water Company (grrr!). Being local we were able to go down there in person about once a week for two months to get everything straightened out.

While I knew this would be a very tough property to run from out of state, a sale was a sale. Unlike most sellers, we actually disclosed most of this during the sales process. Still, the investor charged on. I don’t know how this story turned out, but I do know that we got a call several months after the sale from the tenants that suggested they were getting behind in the rent and we got yet another notice from the Detroit Water Company.

Many people flock to California, New York, and other hot markets, not realizing what it really takes to run a property from out of state. My advice is to take stock of what you know about that market and who you know in that market. If you can really trust someone or frequently (once a month at a minimum) visit the market, take the risk. If not, don’t do it.

I didn’t even talk about dealing with local contractors while out of state. That is a nightmare if you are local, so I can only assume it would be a small slice of hell if you are out of state. There are too many real estate opportunities out there for small to medium size investors to veer more than a few hours from their permanent homes. Bottom line: Don’t chase success out of state when you could probably find it right in your backyard.