Inman

Should I buy an out-of-state investment property?

viki2win / Shutterstock.com

If you are a real estate investor in California or another high-cost area, you probably are considering an out-of-state investment property. In the costly cities of San Francisco and Los Angeles, many real estate investors are priced out of the market.

This recent graphic of San Francisco housing prices tells the tale:

Investing in a market like that is brutal unless your closets are full of cash. Here in Texas, I have been blessed to build a big portfolio of under market value investment properties that are very low priced.

[Tweet “Investing in a market like San Francisco is brutal unless your closets are full of cash.”]

If you are ever considering an out-of-state investment property purchase, below are some pointers:

How to choose your out-of-state market

The best locales to invest in under market value properties depends on what you want to achieve. Do you want to flip for quick cash or buy and hold long term?

Personally, I favor investing in under market value, buy-and-hold properties — usually with seller financing. Long-term cash flow is, in my opinion, the best vehicle for massive wealth accumulation.

Anyway, note that a good buy-and-hold market might not be so great for flipping. In my home market of San Antonio, flipping is getting harder as prices rise.

Many flippers I know are starved of under market value deals that can turn them a decent profit. On the other hand, buy-and-hold investors like me are doing well; 10 to 12 percent ROI is still routine for my portfolio.

As you mull where to purchase your out-of-state investment property, consider these points:

[Tweet “I advise you to invest only in states that have landlord and owner-friendly laws.”]

This is not an exhaustive list of considerations for buying out-of-state investment properties. However, if those three points look solid, odds are you will produce positive cash flow in that area.

How to locate a good out-of-state investment property

If you have a good idea of your best city to invest in, how do you know which under market value property to buy? Most investors go one of two routes:

Which route do you choose? It depends. Many out-of-state property investors want zero headaches or stress. So they purchase turnkey properties.

Other investors want to save money, so they find their own under market value properties and coordinate their own rehabs and property management.

If you handle your own investment properties out of state, consider:

Upsides

Downsides

If you buy turnkey, consider:

Upsides

Downsides

How much is the difference between buying an under market value property yourself or a turnkey property? In my experience, I can do the rehab on a distressed property for half of what a typical rehab crew will charge.

That can make a difference of 2 to 3 percent in ROI per year. That adds up over time. However, I’m a full-time investor with a construction company. My rehabs cost less because I do 100 per year. You might not be able to do that, so a turnkey might make more sense.

For the beginner, I might lean toward buying solid turnkey company in a low-cost market as a first out-of-state investment property. That will help you dip your feet into the investing waters with some positive cash flow, then you can grow into building your own under market value investment team.

[Tweet “For the beginner, I might lean toward buying solid turnkey company in a low-cost market.”]

John Majalca financially retired in real estate investing in 2006 with more than $35,000 per month in cash flow; he also is a licensed agent. Visit his website, and follow him on LinkedIn.

Email John Majalca.