Hundreds, if not thousands of people are investing every week. However, some real estate investors have this fear or reluctance to invest out of state or what some people call long distance real estate investing. Marco is joined by Oliver, one of his investment counselors, to talk about why people invest out of state, but more importantly, why there’s a fear or reluctance and why that’s crippling you from achieving far more with your investment capital than you could otherwise.
Download your FREE copy of: The Ultimate Guide to Passive Real Estate Investing.
—
If you missed our last episode, be sure to listen to Tracking Your Income And Expenses On Autopilot with Heath Silverman.
Enjoy the show!
– – – – – – – – – – – – – –
Download your FREE copy of: The Ultimate Guide to Passive Real Estate Investing.
Get your FREE coffee mug by leaving us a Rating and Review on iTunes. Here’s how.
See our available Turnkey Cash-Flow Rental Properties.
Please give us a RATING & REVIEW (Thank you!)
SUBSCRIBE on iTunes | Stitcher | Podcast Feed
[spp-player]
How to Overcome the Fear of Out-of-State Real Estate Investing
I have one of my investment counselors here with me, Oliver. We were talking about how some real estate investors have this fear or reluctance to invest out-of-state or what some people call long distance real estate investing. The fact is that hundreds, if not thousands of people, are investing every week and probably every day in markets that are not local to them. They’re long distance real estate investors. I wanted to talk about why people do this but more importantly, why there’s a fear or reluctance. Why that’s crippling you in a way or holding you back from achieving far more with your investment capital than you could otherwise. The question becomes how do you overcome that reluctance or that fear? There are a lot of reasons and that’s what we’re going to talk with Oliver about now. Oliver, welcome to the show.
Thanks, Marco. It’s great to be on the show here with you. It’s my first time on the show. I look forward to diving in on this topic together.
It’s great to have you on. I know you’re a super smart guy, a successful real estate investor and valuable addition to our team. When you brought up the subject of the fear of investing out-of-state or the fear of investing outside of your local market, it begs the question of why are people reluctant. Why do they have this fear? Why don’t we start there and we’ll end this episode with suggestions and recommendations for people to overcome what might be false evidence appearing real.
Many investors when they’re initially starting and they’re interested in investing in real estate, they start looking locally. That appears to be the trend most people do. Sometimes investing locally doesn’t make a whole lot of sense, but that may be what all of your friends and family have done as well so maybe that’s all you know. When someone talks to you about going out-of-state, that brings up a lot of fear because it brings up a lot of insecurities you may have about who is doing what to your property? Who’s living there? Who’s overseeing it? To get an idea from what is going on at the property at any point in time and trying to get that security and that safety blanket to ensure it’s being taken care of at almost all points in time.
One of the factors that a lot of investors tend to be fearful of is going out-of-state and not having that “drivability factor” to the property. This means that at any point in time you can drive by the property. See what it looks like, see what the tenants are up to and making sure they’re keeping the property in good standing and that it’s looking good. That’s one factor that I find a lot of people tend to have as an issue, not being able to do that. Let’s say that you do end up buying locally down the street in your neighborhood. One rule I remember hearing about several years ago when I first got started in investment real estate was never buy more than 60 miles or one hour away from where you live. I’m sure you’ve probably heard that as well, Marco.
I’ve heard that many times and it comes from the so-called “gurus.” That’s misguided advice. People who are typically saying that I’ve found are those that are promoting and/or selling programs and workshops related to wholesaling and/or buying, fixing and flipping or buying, fixing and holding. The operative word in there is you are essentially an active real estate investor doing the groundwork and the grunt work. In order to be able to do that at least reasonably well, you need to be local. You need to be boots on the ground and have your hands on everything or at least be able to manage the contractors and subcontractors you’re dealing with. That becomes harder to, but not impossible, from a long distance. This is probably why the whole “invest” around your local market came up. That’s a form of investing. If you want to be an active real estate investor and be involved in that entire life cycle of that property, do it. Many of us are not in markets that allow us to find good deals and create good returns, we have to look out-of-state. Now, that means you have to rely on a reputable and reliable team. That’s one of the secrets to overcoming that objection or that fear is having the right people to work with in the right markets with the right properties. That is part of that formula for success.
The individual I heard this from was a family member. He was a successful dentist. He owned very good listing. He had multiple practices. He probably owned about 40 or 50 different houses. I still remember when I first got started, that’s what he told me. He said, “This is my advice I have for you, Oliver. Never buy more than an hour away or 60 miles away from where you currently live.” I remember that sticking in my mind. I did not listen to that at all, but I remember seeing him often after work going to the different properties, assessing what was going on in terms of repairs or maintenance that was needed. He would get telephone calls from the tenants telling them about what needed repairing or any issue or him trying to collect rents at the time because they were late or trying to evict them. He was doing a ton of this stuff himself. He didn’t have a property management company, but he liked doing it.
When I looked at the amount of time he spent doing these tasks that many management companies take on for a nominal fee. When you look at the overall return on time based on the amount that he typically collected daily, on an hourly basis, there was zero correlation that made sense there. To clarify, his dollar per hour that he made by owning a couple of practices compared to the amount of time he was spending overseeing tenants, trying to arrange for contractors to go to the property, plumbers to make repairs or trying to collect rents himself, didn’t make sense at all. It didn’t correlate. What I saw with that is your returns diminished because that is your return on life, your return on time. That’s when you can have spent that time with your kids, with your family and doing things that you love. That’s where I saw it firsthand.
I told myself, “I don’t want to go down that same path. I want to do something a little bit different. Do I mind paying a management company 8% management fee or even 10% of the gross rents that are coming in to oversee the property?” I don’t mind that. I don’t mind paying someone a nominal fee to be able to take that time out of my day to go and drive by the property, to take the telephone calls from the tenants that are coming in at random times of the day. To arrange for having one or two contractors go to the property, get quotes and then oversee the work to ensure that it’s done. When I take all those different factors into one, my ROI on the properties and on life itself go up dramatically. For me, it’s worth it. For certain individuals, if you live locally in a market that makes sense numbers-wise, you’re lucky. If you can do it, fantastic. If you like doing it, even better.
For the vast majority of individuals, they don’t oftentimes invest in markets where the numbers make as much sense as the Midwest for example. Especially if you live on the coastal cities such as California or if you have been to Seattle area or New York or any one of these different areas where you’re seeing huge prices in terms of rentals. The rent to value ratios makes zero sense. Whereas in Orange County, the average rental is about 0.4 rent to value ratio. To clarify that for our audience, essentially that million-dollar property will rent out for about $4,000 a month. That’s typical for what we see here. When we invest in the Midwest, what you’ll often see is 1% or as close to a 1% rent to value ratio as possible. That $100,000 property will rent out for at least $1,000 a month, which ultimately means there’s a lot more spread in that overall gross rent that’s coming in to be able to give you more cashflow per month. In addition to that, take care of all the expenses that are coming in for that property.
There are many benefits of investing in other markets where the numbers do make more sense, such as affordability. You’re comparing, in your case, the Midwest to expensive coastal markets like California. You have almost in all cases better cashflow. Everything else being equal, you have better cashflow. More importantly, you have better returns on your investment in terms of your cap rate and cash-on-cash return. The numbers are more attractive. It could be argued you have less downside risk due to the fact you’re diversifying into markets that have lower land costs. Last but not least, you’re going to be managing these properties with professional property management that more often than not will probably do a better job than you investing and managing in your properties locally. They know the laws. They know how to screen and qualify and place tenants, handle tenant calls and deal with repairs. That’s why you’re paying them.
You’ve got a question, “How much is my time worth?” We all have the same amount of time during the day. If you’re investing a lot of that time over the course of the month in things that could easily be done by an outside property management company, you got to ask the question is it worth paying the $60, $70, $80, $100 a month in management versus you spending several or multiple hours dealing with a similar problem? What is your time worth? I would hope that you would think that your time’s worth in the hundreds of dollars per hour, rather than what you might be making or what you could be paying a property management company. It’s a decision. Do you want to do it yourself? Do you want to try to do it yourself? Do you want to outsource it and have a professional management company do it for you?
This leads to a sense of security. Sometimes I have the investor that they don’t feel secure with the providers that we have in our different markets. Oftentimes, for people that is uncertain about whether or not this is the right fit for them and it may not be the right fit for everyone. We believe in IP, for a lot of people this may not be the right vehicle for you either. What I recommend for investors that are on the fence about that thing is to book a quick flight over to the market you’re interested in. We have providers in fifteen different markets across the nation in markets that make sense. We’ll help with this as well in terms of facilitating a property tour with one of our providers in that market. They will be more than happy to pick you up at the airport or if not at your hotel and they’ll tour you around their market. They’ll show you why they believe it’s a good place to invest. They’ll show you the rehabs they have ongoing, whether it’s the initial stages when they acquire it or if not mid rehab stage. They’ll show you their final product as well. That way you can assess the whole thing, the whole scope on your own.
On top of that, you’ll be able to meet with the management teams. They’re the ones you’ll be communicating with post-closing. These are the people you’re going to be developing these long-standing relationships with because they’re the ones you’ll call if ever you have any questions about your property. For anyone that has concerns, that’s a huge thing I highly recommend you do to help overcome that fear. I’ve spoken to investors at times where they’ve sometimes gone years without moving on their capital because they didn’t want to take that next step. Sometimes they’ll come around and they’ll say, “I’m ready to book a flight and I’m going to go out there and meet the people. I want to see if this is the right fit for me.” What I will warn investors is once they fly out to the market, often they start seeing the rehabs, they get excited and they ended up putting a property under contract on the spot. It doesn’t happen all the time, but the vast majority of the time once they’re at that stage. They are able to touch and feel and see that it’s real, then they move forward fairly quickly after that.
It makes the decision easier. I also find that some investors who go out and visit with our teams and kick the dirt often end up purchasing or investing in more than the number of properties they originally set out and thought about investing in from the beginning. One becomes two, two becomes three or four. That’s because their confidence level goes up so much because they’re out there and it’s almost like they’re touching it all. They get to understand the market. They get toured around some of the neighborhoods. They better understand the people that live there and the properties that are there and the schools that are there. They gain confidence in the people that are renovating or building these properties. They meet with the property managers and they gain confidence in their ability to properly manage and protect and watch those assets. When your confidence level goes up, the decision process becomes easier. That may be one of the suggestions or recommendations in overcoming that reluctance or fear is get on a plane or get in a car and drive out there and meet with our teams.
Go into a bunch of properties and see them for yourself. It surprises me how small of a percentage of number of people that we work with do this. The last time I checked, it was only 5%, which means only one out of twenty clients fly out and meet with our team and do what I said. It should be a lot more, but people are busy. They have a career. They have a life. They have a family. They have all these things and it prevents them from doing that. The tools are out there. The technology, the internet, video, photographs, inspectors and everything you need to do your due diligence is there with us and through us. I can understand why you don’t need to go out there, but it adds another layer of due diligence and confidence when you do take the trip and make it happen.
It is small in terms of the investors that see their properties physically. It’s about that 5%. To help investors further increase that level of confidence, always bear in mind that you have your investment counselor, whomever that is to help you along the entire process. If you have any questions, just touch base with us. We’re happy to help. A lot of us have done hundreds if not thousands of transactions and we’ve been doing this for quite some time. I started investing several years ago. We’ve gone through a lot of different scenarios. As a team, we’re able to tackle any scenario that comes up. Especially with Marco’s experience and history in this field, we can help with just about anything and we’ve got a great team to help you do so.
I would think and I don’t mean to minimize this, but the reluctance or fear is almost entirely psychological. I use this example quite often. I was sitting with Grant Cardone when we were talking about this and I like to use the analogy of investing in Coca-Cola. Not that I’m advocating investing in stock. If you believe through all your research that Coca-Cola is the best company to invest in and you should be buying Coke stock, as Warren Buffet did, then are you going to make the argument that you need to live within one hour of Coca-Cola’s headquarters in Atlanta, Georgia? I’m living in Southern California and I can easily invest in Coke or any other company from any place in the world. It doesn’t matter where you live. The fact is you don’t need to be there. The thing is it doesn’t change anything. If you have rental properties in Indianapolis or in Jacksonville, Florida or wherever it may be, you don’t have to live in that market because it’s not going to change anything materially. It’s going to be one of those feel good comfort things that is all psychological. Just because you can drive by your property every morning and get out of your car and walk up to it and touch it with your hand, is not going to make it a better investment or make it more secure or perform any better. It doesn’t change anything at all. What do you have to say about that, Oliver?
One thing that I ask a lot of investors when they’re getting started and they’re doing a ton of due diligence and especially if they’re stuck in that analysis-paralysis mode. I give them this scenario and I ask them, “Have you ever invested in stocks or mutual funds?” Often they say yes. Whether it be Coke or some other large company, blue chip company or even venture capital, mining stocks, etc., how much due diligence do you spend on these different companies? Are you taking the advice of your broker to invest a couple of hundred thousand dollars or even $5,000 into said stock? How much do you know about where it is that they’re spending their money?
Part of the reason I’m bringing this up is in a previous life, I’m actually a geologist. I used to work as a product geologist. I used to explore for precious metals around the world. I used to manage exploration programs for different companies. At times, we would be spending about $100,000 a day on exploration. We used to go out there with drills and everything else and try and find gold, copper, silver and all these precious metals. The investors we had were knowledgeable, but when it comes down to it, most of the people have no idea how much is being spent on a daily basis. What they’re most interested in is seeing what the overall return is going to give at the end of the day potentially. When I have the investor that spends hours and hours researching a particular property, I ask them how much time they spent doing the same thing when they clicked a few buttons online to transfer over X amount of money because they heard from their friend that it’s a good time to buy whatever stock is being promoted at that time.
I sometimes get into conversations with people and I don’t tell people this all the time. It’s uncommon but I will tell them that I own single-family homes in different markets that to this day I still receive income. I can’t say it’s a check because it’s all auto deposit, but I still receive rent from these properties every month and I have never stepped foot in them. I’ve never seen them with my own eyes. I’ve seen photos and video and some of them I’ve driven by, but there are those that I’ve never seen before, but I know they perform. They’re well managed and I am not worried about it in the least because I know that over time these things are going to be a great addition to my overall net worth and my cashflow and my income. Sometimes it’s the first one or the second one that’s the hardest. Once you realize, “That’s not that complicated. It’s not that big of a deal. I can do my third and my fourth,” and all of a sudden you don’t even think about it. It’s like, “Why didn’t I do this sooner?”
That’s something I hear from every single investor, “I wish I would have been doing this a lot sooner in my 20s, in my 30s, in my 40s.” That’s something I hear over and over again.
I’m going to take some of the fault on that in the sense that maybe we’re not communicating and marketing the message enough and to enough people. It’s interesting to know that there are people that still to this day come to us saying, “I wish I knew about your services years ago.” There’s a lot of value there. Not to toot my own horn, but we do provide a lot of value in service to a lot of the investors that we work with. We need to keep doing that and keep doing it better and helping more people because the mission is to help as many people as we possibly can, create wealth and passive income for as long as we’re in business.
To our audience and investors out there, once you do your first deal and we’re here to help you with it, your learning curve will go up exponentially, especially for that first deal. Everyone always remembers their first. You’re second, third, fourth, etc., is going to go a lot smoother. You won’t have nearly as many questions but as you do, we’re here to help you grow. Once you hit your ten conventional finance loans, we’re here to help thereafter as well because we have other options for you to be able to expand your portfolio further as well.
I like to think of real estate investing as a journey. Everybody starts at the beginning with no income property and then goes through phases of growth. We’re able to help throughout that entire life cycle, that entire journey with a real estate investor, every client. Regardless of your level of experience or the size of your portfolio or your level of knowledge, we’re here to help you in any way we can. Give your investment counselor a call or contact our office and we’ll assign you to somebody. Oliver, anything else you want to add?
We’re here to help. If you have any questions, feel free to ask us. Don’t let the fear drive you. Explore, get out there. Educate yourself. Build up the confidence. When you’re ready to move forward, we’ll be here with you.
Help us spread the word. Visit us on iTunes and leave us a rating and review. Thanks for reading. We’ll see you all on our next episode.
– – – – – – – – – – – – – –
Download your FREE copy of: The Ultimate Guide to Passive Real Estate Investing.
Get your FREE coffee mug by leaving us a Rating and Review on iTunes. Here’s how.
See our available Turnkey Cash-Flow Rental Properties.
Please give us a RATING & REVIEW (Thank you!)