083: Out of State, Not Out of Your Mind
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Is owning out-of-state real estate easy or hard? 🤔🤔
Truthfully, it all depends. Our journey started over 4 years ago, back in 2018 in Memphis. Since then, many people have asked us about our experiences, both good and bad, so we figured we would share our journey – from the early days to now.
When we first started four years ago, that was prior to our apartment days. We really had no clue that we can be part owners of bigger and better things. 🤷♀️ But hindsight is always 20/20.
Like so many of you, our fellow apartment investors, we started out with single-family home rentals. Many of us in real estate were happy investing in houses here and there. The early days of our real estate journey were kind of like a side hustle. Our thought process was that we should buy a rental house, stick with that house for 3-4 years, and eventually establish equity.
We quickly realized that’s only going to get us so far. At some point, we were going to use up all our credit, down payment options, and loan qualifications. 👀
In case you didn’t know, you can only have 10 conventional mortgages as a single person, and 20 mortgages if you’re a married couple. There’s a number of rules and regulations outlining the qualifications for these if you want to learn more about Federal National Mortgage Association guidelines.
Don’t get us wrong, out-of-state real estate can be a beautiful thing. There are fewer barriers to entry, and better deals, and it offers an opportunity to build a more diverse portfolio.
Plus, you can choose the specific type of return that you want, and then choose a market that is most likely to deliver your desired results. You need to evaluate if you are you looking for cash flow, tax saving, if you prefer a higher projected appreciation, etc. 😉😉
But what is the problem with out-of-state real estate investing? It can be anything from skipping due diligence and buying property sight unseen, to struggling to find quality tenants, to too much reliance on others, and challenges in getting the rent paid on time, without having an expert team to vet out everything on your behalf.
However, out-of-state real estate investing doesn’t have to be that way. We started small; our first property was in Memphis, TN, then a few months later we purchased a couple of other properties in Jacksonville, FL. 😊😊
Ultimately we ended up buying a few single-family home rentals. We really thought that was where we were heading… being out-of-state single-family rental landlords!
Because you know us and our journey, you know that’s not the end of our story. Let’s get into our personal out of state real estate investing experiences and also discover how you can get involved without having to deal with rowdy tenants!
So did we love it? Or did we hate it?
Maybe a little bit of both. Innovator Charles Kettering said it best – “99 percent of success is built on failure.”
The Pros
Before we get too far ahead of ourselves, let’s dive into some of the pros and cons here. Let’s start with the pros. 🤩
Investor-friendly laws
First, remember that you have the advantage of choice. You can choose to invest in investor, landlord, and business-friendly states. If you live in a state or city with laws unfriendly to real estate investors, it often pays to invest elsewhere.
Take Los Angeles for example. Under a recent tenant protection resolution that was passed in LA county, low-income households are protected from eviction for nonpayment if they have been financially impacted by COVID-19. 😲
Diversification
The first rule of mitigating risk in investing is diversification. Remember, if you only invest in the home market, and that market crashes (think back to Vegas in 2008 where median resale prices fell 59 percent) – you’re in a lot of trouble.
Higher ROI
You might not expect this one, but not everything is sunnier at the beach. Your overpriced coastal cities tend to offer poor returns to real estate investors. At the end of the day, we care a lot about ROI.
Greater room for appreciation
The last pro that we want to talk about is the opportunity for appreciation. When the ratio between local income and home prices becomes too high, there’s little room for home prices to rise further without significant income growth.
This ratio usually sits between 2.5-4 in a healthy real estate market. But it’s important to understand the geography and economic climate of the area you are looking at.
Some cities have median home prices over ten times higher than median incomes, so it’s simply not affordable or sustainable for these cities to see much more appreciation without higher incomes. Make sure to do your research.
You already know that this experience was mixed for us, so we have to take some time to talk about the cons.
Cons
Memphis
Spoiler alert: our first experience back in Memphis was truly HORRIBLE. 😨 That sounds dramatic, but we closed on a house that was not what we initially looked at. In fact, the sales guy from the recommended turnkey provider “accidentally” sold the house to another investor.
Ultimately we were left with a surprise in a not great area, and 2-3 months into ownership we were forced to pay for our own mortgage. That can and does happen when you only have a single tenant, but given that it was our first out-of-state experience, it left us pretty scarred!
Honestly, once we got through that rough patch Memphis wasn’t all that bad. We did have a couple of times where the tenant moved out and we had to pay for the monthly mortgage.
That’s everyone’s worst fear, right? When you’re investing, you want to increase your cash flow, not decrease it!
Jacksonville
Jacksonville is such a great area, but in 2019 the city had to prepare for Hurricane Dorian. Luckily for us, it ended up only being a category 2, which meant tropical storm-force winds in some areas only, but we were totally prepared to have to pay for a new roof, if not more. 😝😝
Now What?
You might be thinking, is it possible to own out-of-state real estate and enjoy the upside without all the stress, uncertainty, and unknowns?
You bet it is! Around here, we like to call it apartment syndication.
If you’re new to our show, apartment syndication – our fav mode of investment – is also what we believe is the #1 best strategy there is for reaching true financial freedom and boosting your passive income streams to live the life you want to live.
The Differences Between Single Family Home Rental vs. Apartment Syndication
The biggest differentiator here is that you’re not signing up to be a landlord or a property manager with apartment syndication, and you also don’t need to worry about broken dishwashers or rowdy tenants. That kind of work is left up to your apartment syndication sponsors, also called the general partners or syndicators. 😉😉
👉 The best part is that we don’t need to do it all ourselves! Yes, we might make less profit, but thank you general partners, please DO ALL THE WORK, get that 20%/30% split while we, the passive investors, get 80%/70% and we sit back and just LIVE our life! No trial and error, no guesswork involvement here!
On top of that, unlike our experience in Memphis, we don’t need to cough up monthly mortgages if one tenant doesn’t pay. That’s the beauty of multifamily apartments – if one unit leaves, there are still 200+ units to cover the mortgage!
The value of a single-family home is based on comparable pricing of similar properties in the general vicinity, while multifamily apartment properties are valued based on the NOI.
Here’s a crash course on NOl; it’s calculated by subtracting operating expenses from gross income. And here’s the thing, once you have the NOI you divide it by CAP Rate to get the investment’s purchasing price or current market value. That’s a lot of jargon, but it’s important to understand NOI and how it affects you
👉 Scalability is also a big difference. If you’re someone who wants to enjoy the economy of scale, be part of a bigger and potentially more profitable deal while working with professional management and surpass the limitations that come with size, the amount of credit, and the amount of capital you need – then you need to be a passive investor in apartment syndication deals. 🤓🤓
Once you’ve done the work and vetted the sponsor team you don’t need to repeat this process unless you decide to work with another team!
👉 Another and probably more commonly known benefit is your tax benefits. Paying less in taxes LEGALLY is always good, right? There are some tax benefits associated with a single family home, like deducting property taxes and loan interest, which we definitely utilized, but you pay even less in multifamily apartments due to the dollar amount and thanks to a little term called “bonus depreciation”.
Your investment income is taxed at a much lower rate than other investments through multifamily apartment investing. Plus, you might be able to show off a taxable loss that can be used to offset the rest. It’s truly remarkable. 🙏✨
The list goes on and on, but another key point here is you’re investing passively (for real). Real estate is confusing. Sometimes just the learning curve in itself can be steep, and joining an apartment syndication lets you have access to truly expert knowledge.
Remember that the passive investors themselves really just have one job: to invest their money. Plus, you can then leverage them to help you make more money. While some forms of apartment investing are super time-consuming, apartment syndication allows you to create a stream of passive income.
The exciting part is that you actually get to take the backseat, reap the benefits, and get rich in the meantime. 🤓🤓 By investing with an experienced sponsor and choosing your investment amount, you can trust in your investment and then roll in the returns.
The type of apartment syndication we do is still out-of-state real estate investing; however, our experience has been quite the opposite. The profit, the cash flow, and the tax benefits were not driven by us, but there is an actual team of experts who deal with all of that.
We’ve endured a lot with single-family home 🏡 rentals from unpaid tenants, not getting paid on time, high maintenance costs 🛠️ like grounds maintenance and facing the defeat of not purchasing the home that we wanted.
We can tell you this much; owning out-of-state real estate can still be a beautiful thing, however, you need to choose the right asset class in the right market with the right team.
So at the end of the day, our out-of-state single-family rental experiences and gains led us to jump right into apartment syndication without any hesitation. We were like please take the J.O.B. from us, we no longer want to deal with all the headaches and the fear that our single tenants will stop paying us.
That’s it for us today; thanks for tuning all the way to the end, and remember to check out our other episodes from us for more tips, tricks, and secrets to owning your own time. Cashflow Multipliers, we love sharing our knowledge and learning and growing with you! 👋👋
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