3 Reasons Never Seeing Your Rental Property Is Actually Superior

MichaelAutomation, Education, Making Money, Misc, Real Estate21 Comments

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(Today I’m headed back to Mammoth for some family vacation time, so I leave you in great hands with this guest post from Brian, my fellow blogger, real estate investor, and friend, over at RentalMindset.com.)

I’ve never seen my rental properties.

I bought each one without physically setting eyes on it and haven’t yet after 6 years.

They are thousands of miles away.

These facts are mind-blowing to most people. They immediately assume I’m some risk-loving adrenaline junky. The type of person who goes skydiving to get my fix, soon followed by BASE jumping with a wingsuit, and crazier and crazier stunts.

Nope. I actually think it is an advantage to buying rental properties from thousands of miles away without seeing them.

Isn’t that counter-intuitive?

Here are 3 reasons it is actually superior.

1. Better Numbers

I live in California. Definitely an expensive state. What’s the most expensive part of the expensive state? Probably San Francisco’s 7 miles by 7 miles. That’s where you’ll find me.

Once I understood rental properties are the best way for an average person to build wealth over the long-run, I started looking for ways to get started.

Note: Why it is the best is out of scope for this article, but learn the power of cheap leverage, multiple components of return, and thinking in decades.

I could look locally, but that is actually riskier. It comes down to the numbers.

An hour drive away, I can buy something tenant ready that looks like this.

suisun city house

Purchase for $316k, rents for $1750 a month (Zillow link).

The mortgage is only $1320 a month with 20% down and a typical investor mortgage rate of 4.75%. Plus taxes and insurance of $280 a month. That leaves you $100 a month.

That is good right? Cash flow!

I like to think of cash flow as a margin of safety. You need some cushion for expenses. This cushion is tiny. Like your jeans providing a cushion on metal bleachers.

lonely girl 14?

Let’s assume you get a new tenant every year or two – it costs $1-2k to clean the place up and takes a month to get the new tenant in. There goes all that cash and then some.

Add in regular repairs and saving for big items like a roof… doesn’t look so good now. You better be able to keep putting money into the property. Suddenly it doesn’t sound like an investment, it sounds like an expense!

Within a 1 hour drive, the monthly rent is 0.55% of the purchase price.

Let’s see what we can get in a city like Memphis, where I am likely to buy later this year.

memphis rental house

Purchase for $104k, rents for $1050 a month (Zillow link).

Including mortgage, taxes, and insurance the cash flow is $425 a month.

That is a cushion! You can expect the cash flow to cover all expenses that come up.

When the monthly rent gets to 1% of the purchase price (like this property), you are in good shape. Your rental is an investment, not an on-going expense.

But what about appreciation? Isn’t it better in California?

Doubt it.

First, timing is tough. No one exactly knows. If you did, you would be sitting on a beach somewhere, already with so much money, you don’t know what to do with it. I want something steady and repeatable.

Second, not all markets behave the same during a downturn. Some have bigger swings, but over a couple decades, it is likely to even out to roughly the rate of inflation (which you can still make an incredible return from considering you are leveraged with fixed rate debt for 30 years). See How to Visualize the Real Estate Cycle.

Third, there are some areas where supply and demand make home values absolutely nutty. Those rent ratios are way worse and “investing” starts to look more like “gambling”. In a lower cost area of California like this, there is more room for new homes. What would it cost to build a new property? Let’s estimate that the California property around $250k and the Memphis property $100k. So you are predicting huge appreciation from there? When the market is hot, new homes are built – new supply keeps the price down.

Ok, the numbers are way better out-of-state. What else?

2. More Passive

I have a job. I don’t want my investments to be a huge time suck.

Then why don’t I just invest in index funds and call it a day?

With a couple of hours a month of effort, I believe I can take a significant portion of my portfolio from 8% expected returns to over 20%. That is well worth my time!

To channel my inner Tim Ferriss – what is the minimal effective dose? How can I put in 20% of the effort for 80% of the benefit?

One end of the spectrum are REITs and crowdsourced sites like RealtyShares. You don’t get the power of leverage, the tax savings, or the control. Basically handing back most the benefits. So no thanks.

At the other end of the spectrum is doing everything myself. Finding a foreclosed or distressed property, managing the repair, placing a tenant, and being the property manager. Most of this would be possible and bring greater returns but is too much effort.

What is the sweet spot?

Investing from thousand of miles away. We just looked at the numbers – there is plenty of cushion to pay experts to do most of the work for you. You give up a bit in order to make your life easier.

When buying, you can purchase from a flipper who already found a great deal and fixed up the property. There are even flippers in those markets that specialize in working with investors, called turnkey providers.

Looking forward, there is enough of a cash flow cushion to pay a property manager to do most of the work.

It isn’t completely passive because you still are responsible for due diligence and managing your property manager. But it is well worth this small amount of effort.

If my properties were local, I know I’d try to save some money by doing more of the work myself. New water heater? Sure, I’ll just drive out there on Saturday to install it to save a couple hundred bucks.

Water Heater "After"
Caption: not my Saturday

Pretty soon I would resent investing in rentals. I would not keep adding to my portfolio as it would take even more of my time. I might even sell to relieve myself of the burden.

Think long-term. What is it going to take to keep you in the game for fifteen or twenty years?

For me, it is avoiding being a hands-on investor. Passive, out-of-state for me!

3. You Can Start Now

It is a huge jump from 0 rental properties to 1. How can you start as early as possible to begin building wealth and accelerate your learning?

An important step is saving up enough money to invest – investment property loans today require 20% down.

With the examples earlier, the California property at $316k would require a $63.2k down payment. The Memphis property at $104k would require just $20.8k down.

It takes about 3 times less money to get into the rental on the other side of the country. This allowed me to get started years earlier!

When you are a beginner at something that could be deemed risky, think about how to limit your downside.

How can you limit your downside with rental property investing?

Diversifying helps. Even if you wanted to invest $75k and could afford that California property right away, you could get 3 of the out-of-state properties.

If a tenant moves out of one property, you’ll still have two others that are providing cash flow. Things average out. You have fewer eggs in one basket.

Another important way to limit downside is to pay experts.

The first time you go rock climbing, you aren’t just going to pick up some gear at Wal-Mart and head for the mountain. You are going to hire someone with experience to take you out.

Scaling Walls & Overcoming Boundaries

With rental properties thousands of miles away, you will be forced to hire people to do most of the work. We already saw there is plenty of cushion in the numbers to pay for this.

Think of it as a gentle introduction to the world of real estate investing. You can observe and ask questions. Get as involved as you feel comfortable, learn from those with more experience.

Later on, you can always take on more responsibility. Start simple, start soon.

Do You Think You Can Do It?

I was pumped once I learned I wouldn’t have to be a hands-on, in-person investor. Sign me up!

6 years in, things are going well. With some lucky market timing, I’m up 31% a year right now.

The long-term outlook is very exciting too. One of my properties is cloning itself this year! (That’s what I call a cash out refinance and using the proceeds to buy a new rental.)

If I can do it from thousands of miles away, you can too.

What do you think?

Did you know it was possible to own rental properties with so little money and experience required?

Do you think it can actually be an advantage to never see your properties in person?

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Michael

Hi, I have been blessed to take an early retirement in my mid-30's so I can focus on becoming a better father, blogger, and investor.

My goal is to help you find your personal path to financial freedom, and to enjoy the entire journey.

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21 Comments on “3 Reasons Never Seeing Your Rental Property Is Actually Superior”

  1. This is really interesting… Mr. Adventure Rich and I have been toying with Real Estate, but assumed that investing out of town or out of state would require at least a trip (or several!) to check out the area we wanted to invest in and the houses in that market. It is good to hear a new perspective!

    ~Mrs. Adventure Rich

    1. A lot of people do end up traveling out there, but it is optional. You can get a better feel for neighborhoods driving around and build a rapport / trust the the turnkey provider (at a cost of time and money). Considering things like this (or landlording yourself) a requirement is what hold many people back from getting started!

      1. I’ve never felt comfortable with turnkey providers. I’ve heard many horror stories about them being a rip-off. However – turnkeys are priced higher because they are generally ready to go, duh? So, if you find a good one where the numbers work and you don’t have to do the leg work of the remodel? Sign me up!

        1. The horror stories are very loud, while the successes are quiet. Hard to tell the percentage of failures, or how much the investor is to blame. When you have TV shows like “Flip That House”, it is no surprise that amateurs try to do it and suck. I think about how can I work with only the best professionals with a track record of success?

          I think turnkey is a rip off if you are looking to sell within a couple years. But long-term you can make a killing, paying $5k more isn’t a big deal.

  2. Oooh, this is a tough one! I think it would be hard for me to relinquish control over being able to visit my rental properties whenever I wanted. But hey, it’s all about diversifying, and what’s more diversified than a handful of properties across the country?

    1. The nice thing about real estate investing is it is highly customizable. There is a way to do it for almost everyone.

      If I lived in a city where the numbers made sense, I would like to buy local properties too! Diversifying is good, but I would also want to be careful that the hours spent wouldn’t hold me back from growing the portfolio. In other words, the hands off stuff is an optional part-time job I choose to do to save money, but I can always make it more passive by outsourcing it to professionals.

  3. This is such a great post! I have been having an internal conflict about investing in rental property locally v. from a distance. It’s amazing you have ever seen your properties, but I know for a fact that it works really well for a lot of people.

    I personally want to see and touch my rental property. I live in DC, so the houses here are not perfect for the 1% rule and whatnot. I’ve been thinking about investing in properties about 1-2 hours a way when Mr. FAF and I have the cash. But I’ve been having a hard time putting the control of the rental into someone else’s hands. I know they won’t care about my property as much as I do. Tough call!

    1. It is a tough call and there isn’t always a right answer. Many different ways to make it work.

      I’d like to see and touch my properties too, but it would cost me dearly to do so. It would have delayed me getting into investing in REI 5-10 years. Risk would be up with less cash flow. My projected returns would be way smaller. So it was pretty easy for me to give up that preference. 2 hours out of DC opens up a lot of options though.

  4. My wife and I are very interested in this concept. We’re also in an area that is not good for purchasing investment properties, so we were looking at the turnkey solutions as well. How has your approach to the purchase changed from the first house to the next ones? I wonder if a turnkey provider would be a good entry point into the business and then maybe the subsequent ones I might feel more confident taking on additional aspects.

    1. Great question! Yes, some things have changed. I feel like I understand the investment better – how all the various components of return work (appreciation, cash flow, tax benefits, debt pay down, inflation). A better understand of the real estate cycles. Those just really change what I’m looking for though.

      There are a ton of ways to purchase, I reserve the right to make it more complicated down the line. With the market so hot and my still fairly small amount of money to invest, I am still purchasing turnkey for now.

      In a down market with more cash, I think it is really cool to buy a distressed property cash, fix it up (contractors aren’t as busy and are likely to give better rates), then do a delayed financing. If it appraises well, you can hopefully get 100% of your money back and be “in” the property 0%. It is trading work for equity, but also protects your capital to do it again!

  5. Great post and something I had never thought of. I lived in Memphis for 4 years. It is an interesting city for sure and one I like to visit (but not live in). My brother had a rental there for years and it did okay until he had some tenant problems. That has always been my main concern with real estate investing- tenants!

    Otherwise this post brings up some great points such as being way more passive if you can’t lay hands on your property and the power of a cheaper market…nice work. I am going to stick with index funds for now. Less hassle but possibly less return.

    1. Glad to hear you liked it and it was a new idea. My goal is to expose more people to it and show it doesn’t have to be that hard.

      The hassle isn’t for everyone, but I encourage people to run the numbers before deciding. If you could find a fairly passive was to do it that you believe you can make 15% a year over 20 years, would it be worth the hassle? That is what allows me to put up with it.

  6. You’re probably right that it’s best NOT to see your rental properties if you want to hold for the long term. I had a bad moment w/ my rental home, which has led me to selling the thing, even though I should probably hold for the next 20 years!

    Emotions create bad decisions. But really, I’ve been wanting to sell a rental since 2013 if I look back at my archives. Hence, giving 4 more years with leverage in this up market is good enough. I’m content.

    Congrats on your gain! Buy and hold, forever, if you can! I couldn’t.

    Sam

    1. Emotions and investing don’t mix. But in your case selling isn’t so bad. Considering the changes in your personal life (including other sources of income) and the fact that you can realize paper gains, I would sell too!

      On your site I voted for doing a 1031 exchange though to avoid some of the taxes.

  7. Thanks Michael for letting me share my excitement for rental property investing with your audience. Hopefully a few more people learn about the benefits!

  8. So where is the best place to find out of state rental properties without actually going tp visit the properties?

    1. Each person is likely to have a different answer. For someone new to it, I recommend checking out Jason Hartman or Norada. They are national marketers of turnkey properties and provide an investment counselor at no cost to you (they make a referral fee when you purchase a property). They have a lot of knowledge they are willing to share.

      But of course there are other ways! Roofstock is the biggest online marketplace, but I don’t have any firsthand experience with it and wouldn’t expect the properties to be vetted as thoroughly.

  9. This is so interesting- I never would have thought to purchase a rental property that wasn’t within driving distance of me. However, with the crazy Boston real estate prices, we could get SO MUCH more for our money by purchasing in another state. I can’t to read an update on your next rental property acquisition!

    1. Great! I’m hoping to expose more people to the idea and show it doesn’t have to be that hard!

      Updates on the new rental property should start coming out this week and continue for the next month or so.

  10. I am absolutely intrigued by this idea, but afraid to jump in without “enough” knowledge. The idea that my tenants don’t know me and can’t knock on my door with their problems is a lovely thought.

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