Living in New York City, I always thought it would be hard to buy a house because they are so expensive, so instead we purchased a co-op which is much more affordable. I was always interested in real estate investing, but I used to immediately think that it would be IMPOSSIBLE! I couldn’t even afford to buy a house to live in, how was I going to buy one as an investment property? I considered buying a co-op to rent out, but there are often very strict rules about renting so I scratched that idea off. I started reading the Biggerpockets forum which is a great resource for those interested in investing in real estate. When the topic of how to invest in real estate when you live in an expensive area came up, a member of that forum suggested that you look a little farther away from where you live. I work outside of NYC so I looked into that area. While the properties were more affordable, the property taxes were very high and ultimately, the numbers just didn’t make sense. Then I read an option that just might work: invest in an out-of-state turnkey property.
First, what is a turnkey property?
Basically, a turnkey property is a house that has been fully renovated and is ready to be rented out. The company that sells this turnkey property usually also manages the property for the investor. The goal is for the management company to handle the day-to-day operations of the property, it takes a fee, and you, the investor gets to sit back and have the remainder of the rent sent to you.
But aren’t you scared to buy a property out-of-state?
This is the most asked question when I tell them that I bought an out-of-state rental property. As a matter of fact, I bought it sight unseen. You often hear about real estate investment scams and buying a property out-of-state would make most people feel uneasy. Even after learning about such opportunities, I took a lot of time to learn more about it and do my due diligence before jumping in. I read reviews about various turnkey companies and read the BiggerPockets forums to find people who had invested with those companies. I contacted those investors and asked them how their experience was. When I heard positive reviews from other investors, it put me at ease. I used Google maps, Neighborhood Scout and Zillow/Trulia to look at pictures of the property as well as other information. More specifically, I looked at the crime in that area, the school ratings and what Zillow/Trulia estimates the property to be worth. (This is just a starting point. Don’t just rely on information on these sites) I also figure that since there will be an appraisal and an inspection done on the property, there are some safeguards from a company selling you a dump that no one in their right mind would rent.
Where did I end up buying my out-of-state property?
Initially, I wanted to buy in an area where I at least knew someone living there so that they could check on it if I felt the company which was managing the property was doing something shady. I looked into the Buffalo area because it seemed the properties would cash flow and there has been a lot investment by the state to revitalize the city. However, after contacting a few companies, I didn’t feel too comfortable with them as they were not too great with communicating with me. Also, one company offered me a property in a not so great part of town and I wasn’t interested in being a slumlord. Then, I narrowed down the cities that I thought would make sense and came up with Indianapolis, Memphis, and Kansas City, Missouri based on the economy and employment rates as well as other factors. After contacting the companies and asking other investors their honest take about them, I ended up choosing a company in Kansas City.
While the company I chose to work with sold turnkey properties, they also had a hybrid approach. With turnkey properties, the company will usually buy a distressed property at a low price, make renovations to it and sell it to the investor at retail price. Nothing really wrong with that. It is a business and they need to make money too. Just make sure it’s a fair price. The hybrid approach that the company I worked with used was a little different in that the investor would purchase the distressed property, the company would manage the renovation (for a fee), and then rent it out. I decided that since buying the property at a lower price would give me some built in equity in the property from the start, it might be a better investment.
How is it going?
I bought the property about one year ago. It was a foreclosure and my offer of $60,000 was accepted. I took out a mortgage as well as a rehab loan. The rehab cost about $12,000 so the total price of the rehabbed property was $72,000 and the appraisal of the property came to $83,000. After it was renovated, it was rented out in September 2015 for $850 a month and the tenant has paid timely each month. Some maintenance issues have popped up since I purchased the property, however, I am still confident that it will turn out to be a good investment.
I am still very much a novice when it comes to investing in real estate so I didn’t go too in-depth into the more technical aspects of real estate investing. However, I wanted to write about my experience so others who thought they would never be able to invest in real estate because their local housing prices were so high, know that there are opportunities available in other parts of the country and that it’s possible to invest out-of-state. I also understand that there is always risk whenever you invest in real estate, especially when it is out-of-state. So if you are interested in going this route, make very sure that you do your due diligence. Also, check out the resources below. I read a lot of the following blogs and forums from other more experienced real estate investors when I decided to invest.
Resources for those who are interested in investing in out-of-state rental property
I think the first blog I read which talked about investing in out-of-state rentals was Fi Fighter. He laid out a clear and reasoned explanation as to why he chose this route and why he thought it was a good investment. There are a bunch of valuable posts about this topic, but I highly recommend Why I Invest in Turnkey Properties, and How to Quickly Evaluate a Real Estate Deal: The 1% Rule
Paula Pant who blogs at Afford Anything also has a lot of posts relating to real estate investing. She doesn’t focus on turnkey investing but she does write about managing her rental properties from “around the globe.” She has a fantastic post answering the most frequently asked questions about real estate investing, she has monthly income reports, and recently launched a course about this topic.
Another excellent resource is the Biggerpockets website (I mentioned the forum earlier), however they also have a free beginner’s guide to investing, podcasts, blog, calculators and a plethora of other useful tools at your disposal.
For those interested in turnkey properties, you can check out Turnkey reviews, and you can also get a free e-book about that topic there. It’s a good starting point to find companies that seem to do a good job, but I haven’t seen any negative reviews so I try to take the reviews with a grain of salt.
Lastly, I have been following the Cash Flow Diaries blog as the blogger writes about his turnkey real estate investments and is very transparent about the price, expenses, etc, relating to his investments. An excellent post for beginners interesting in investing in turnkey properties is his post A Step by Step Guide: How to Buy a Turnkey Rental Property.
Have you invested in out-of-state rental properties and how has it gone? If not, would you consider this investment option?
You’re not alone. We purchased two out of state rentals back in 2014, and still haven’t seen either. :/
It’s not for everyone, obviously, and the more properties I own, the more I like index funds. But overall, it’s nice to get something income producing that’s fairly passive.
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Yes, I’d love to hear about your experience with those out-of-state rentals.
It’s a mixed bag, and we’re at a particularly un-awesome time. Our renter of two years agreed to re-up her lease for another two years…then didn’t pay in May, right as we left for vacation. I figured there was just some mix up and she said she’d sent payment, and it was returned to her. Ok, no big deal. We were gone so long that I figured we’d just get caught up in June. No June rent and I’m worried…so the property manager goes over and they’ve just left. Vacant house, no idea exactly what happened.
Anyway, overall, we’re doing just fine. We save 20% of all rents collected for vacancy and rent so we’re covering the mortgage no problem while rent isn’t coming in. But still, kind of a weird thing to deal with.
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That’s crazy, especially being that the tenant lived there for 2 years already with no issue so it would seem that she was a good tenant. On the bright side, the tenant vacated and you didn’t have to evict her.
Whoah, very cool. I’ve been reading a lot about turnkey rental properties lately. When you say the investor buys the property in the model you used, I assume that means you. How did did you buy the property without looking at it? Was it recommended by the company?
What’s the long term plan for owning a turnkey rental? Is it to pay down the mortgage and eventually sell it recapturing the equity or is it to buy and hold forever and collect monthly checks once the mortgage is paid off. And is the mortgage a conventional 30-year?
So many questions! Look forward to more posts on this topic for sure.
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Yes, the investor is me. The company had a list of properties which they screened and from that list, I look at the price, estimated rent, the location, the amount repairs it would need, etc, etc and chose the one that I would put an offer on. One of the plans for the rental would be to cash-out refinance and use that money to purchase an additional property. I haven’t really looked into whether that will work but it would be great if it does. Otherwise, yes…it is buy and hold. And yes, it is a conventional 30-year mortgage. Feel free to ask me more. And check out the resources as they have had more experience with it.
Perhaps it’s the conservative lawyer in me, but I guess I’d be concerned that it’s too good to be true.
You purchase a property for $83,000 (assuming 20% down of $16,600 that means a mortgage of $66,400). The mortgage payments would be about $336 a month. The rent is $850. Assuming the management company gets 10% that leaves $429 a month in cash flow for insurance, vacancy, repairs, taxes, etc. Seems pretty reasonable for those expenses.
Is your hope that in 30 years you will use the income for living expenses? Or have you approached it as strict investment where you are hoping to just get a greater return on capital than could be achieved in a low-cost index fund?
If you’re comfortable detailing your calculations, that would be very interesting to see indeed!
Actually, the purchase price was $60,000 plus renovation loan of $12,000. (It was appraised for $83,000) My mortgage, insurance and property tax total is $485. The management company charges 9%. Might have been able to charge slightly more for rent, but the prospective tenant at the time asked for a lower rent and I accepted it since it was a 2 year lease and their income was good. I could have waited I guess to see if he or someone would pay the higher rent. Another factor other than the cash flow is the possibility of appreciation. Kansas City, MO is considered the Silicon Valley of the Midwest and Google Fiber chose it as the first city where it set up its fiber optics network.
This would scare the crap out of me but I know people in our FIRE community have had success with it. You have to pick investments that fit your emotional profile and risk tolerance. This just wouldn’t be one for me. Best of luck!
Yea, I think I felt that way in the beginning but when I started looking into it more, it didn’t seem that risky. Which part do you think is risky, the part of it being that it is out-of-state or just real estate in general? Now that you’re out in the Midwest, maybe there will be opportunities to invest in real estate?
Wow this is awesome! And the price sounds really affordable! I would be fine with an out-of-state property, but would want it under similar conditions. I would want it rehabbed so less chance of something going wrong, and I’d want to outsource the day-to-day management.
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I think some turnkey companies will have a guarantee that there will be no repairs the first year or something like that. And definitely need to outsource if it’s long distance.
This is something I have been considering since I live near DC, not as high as NYC but pretty high home prices. I asked a few local investors and they told me turnkey is certainly an option but there are deals to be found locally if I look in the right areas. I’m going to try that for a while and if I don’t have much luck, I might give turnkey a try.
I love BiggerPockets as well. So much good info on that website and their podcasts are great.
Yes, the DC area is pretty expensive too. Are there areas in Virginia that might work? I would probably try local first and if it doesn’t make sense, then I’d go the long distance turnkey route.
This definitely sounds like something I would be interested in further exploring once I have a completed emergency fund. I’ve always wanted to try my hand at investment properties, but have never heard of turnkey investments. Thanks for the enlightenment!
Latoya @ Femme Frugality recently posted…Two Easy Ways Beginners Can Get Started Investing
The area you live might have some reasonable priced houses so you might not need to go out-of-state. Although it might be nice to have a property manager if you don’t want to deal with tenant issues.
This is so awesome, Andrew!! So excited for you guys! We are lucky that we live in a reasonably cost area as far as real estate goes. We plan on buying some stuff as soon as the debt is gone and we can build up sufficient savings.
That’s great. Would love to hear about that when you guys get there. I would have preferred to buy closer to home but it is too expensive.
This is awesome. I’m happy for you. I want to get into real estate investing once I graduate from college. I’d love to buy a property in NYC. It’s an exciting but expensive city though. =)
Housing is expensive in NYC!
Seems like you did it the smart way. What matters is that you researched the company and area carefully and got company recommendations from other turnkey investors.
We live here in Phoenix, so there aren’t all that many places cheaper than here, but rates are rising. So I’ll have to keep this in mind once we have our own mortgage dealt with.
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Yes, I think doing your due diligence, getting recommendations, and trust in the company is very important. It’s great that you live in an area where it’s possible to buy affordable real estate…both to live and to invest.
Wow! It seems like it is working. It’s really a great way to earn easy money or have passive income. I’d consider this kind of out of state investment. What do you think is the risk of this kind of investment? Thanks for sharing.
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I think the risk is of repairs, vacancy and tenants not paying. I think having a great property manager is very important. It’s also important to do your research about the location and neighborhood so you know there is demand for that rental.
I’m personally not a huge fan of turn-key investment property…but I’d recommend it over not investing in real estate at all.
The value of this property will go up and probably match inflation (good), and your rents will also go up (awesome) while your mortgage payments will stay exactly the same. For a long term investment, it makes great sense.
It doesn’t seem like this was “turn-key” though because you had to spend money on repairs. I could be wrong, but isn’t turn-key by definition mean it’s 100% read to go?
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I can understand not being a big fan of turnkey but for those who live in areas where the numbers don’t make sense I think it’s the second best option. I was originally looking at turnkey but the company I was working with offered a hybrid approach as well as turnkey. I opted for the hybrid approach because I felt as if I could have some more equity in the property from the beginning.
This is a cool way to diversify the total portfolio, I think real estate should be in everybody’s passive income plans. That’s great you go a good deal and tenant. How does it feel from a cash flow perspective now that you have another income source coming in? If you compare this to a REIT you could have experienced similar annual profits, if the REIT paid out 5% or more. But going the REIT route is still not diversifying from the markets in general.
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Yea, it’s tougher for us folks in areas where housing is expensive but this strategy makes it possible.
dude it is costly you certainly have brought house full renovated and everything seems to be perfect and even it is outside the city the way you want but it is much expensive than to buy home in city.
Huge congrats on the buy Andrew, I hope it works out well and gets the rental income you want.
Tristan
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Thanks Tristan!
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Really interesting read. My brother and I have been kicking around the idea of purchasing a few rentals, but have not taken the plunge. I’m pretty undecided at the moment.
I think real estate has the potential for much higher returns than the stock market moving forward, but I continually hear horror stories about bad tenants.
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Yea, I’ve read many articles about stock market vs real estate. I like them both and try not to predict which ones will have higher returns in the future. As for bad tenants, I guess it does happen but it’s less likely if you buy in certain areas. Not that you can always avoid them though… I still think it is worth looking into.
Congrats on the investment and for jumping into out of state rental investing. I’m also investing out in KC as well and have a feeling we may be working with the same provider. I’ve been a big fan of picking up value-add properties so that I have built in equity from day one. Also, the route we’re going…being involved in the rehab process, let’s me stay involved more and hands-on, which I tend to learn more that way. I’d love to connect with you further to talk more real estate shop 🙂
Good to see another out of state investor who chose the KCMO area. The built in equity was definitely one factor that made it more appealing that a pure turnkey investment. Also, the provider was highly recommended by those on BP.
Hey! I cant believe im just reading this!! You should have told me you bought a turnkey. 😉
You did awesome and got appreciation from the start. Great job!! Thanks for dropping my blog too!! 🙂
I have bought 4 turnkeys so far and they are all still working out great for me and im on year 2 now on some of them. Im really happy about it.
The only problem really now is that its tough to find good deals which is why I think its a good idea to do a hybrid approach like you did.
You going to buy anymore?
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Yes, that was the biggest factor in choosing that company…having appreciation from the start. It does seem like it is harder to find good deals…that is exactly what the company I worked with said…there just isn’t that many good deals out there right now. I’m hoping to buy more…need to work on getting funding! It’s tough when you live in a high cost area, plus there’s this pull to buy a primary residence too which would take a big bite out of my cash. Maybe it’s better to rent, but the appreciation in NYC is a bit tempting.
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Hey,
Thanks for sharing your experience with us. Buying a property is not an easy task, or if your are buying a property for renting it then it is more important to buy a great property so you can make more money not loss which you invest on that property. So we should be careful during buying any house, commercial, retail or mix property.
Hi there! We are similar. I live in Queens, NY (under contract for a fixer-upper co-op) but am originally from KCMO. Just got back from spending two weeks out there visiting my family. I’m just curious, which part of town exactly in this home? My dad is unloading his 50+ SFH and multifamilies – says the market is pushing prices way up. I’m interested in a turnkey approach and think my edge is going back there and being from there, etc. Would be curious to know where in town the house is : )
Congrats on the co-op! The house I bought in KCMO is in Gladstone. Your dad is definitely right about the market pushing upwards because I was looking to buy another property and the person I worked with said it is ultracompetitive! You definitely have an edge since you know the area and you have family dad, plus he is an experienced landlord! Do you really need the turnkey approach in your situation? Maybe your dad can sell you some of his properties for a better price. Also, does your dad self-manage or he has a property management company (50+ is a lot to self manage I would assume) Turnkey is pretty much the only option for people out-of-state even though it does cut into profits. I think you can do better since you have more connections in the KCMO area.
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