Converting Investors’ Rentals to Owner Finance Was the Best Decision Ever

Before the market crash, two of our biggest investors owned more than 100 rental properties. Like many investors, they once thought that owning rental properties was the only way to make money in real estate investing.

What they found was that they were often dealing with repair problems.  It didn’t matter that they had property managers. When you own 100 houses, you always have to deal with a repair, a late bill, a vacancy, paperwork and so on.

They also found it was hard to know what their cash flow on each house was each month. Writing checks for new water heaters and fridges gets old fast!

It was around 2009 that one of our investors’ mentors talked to them about switching to owner finance so they could retire with millions in real estate. That mentor only did owner finance homes.

Rather than being a landlord responsible for property upkeep and repairs, there are more efficient ways to generate monthly cash flow.

Be the Bank!

Think about your own house. Each month you send an electronic payment (or check) to your mortgage company or bank. Your bank doesn’t have to maintain the property – you do. Since you are buying the property from the bank on terms, it is natural to your benefit to maintain the property. The bank knows that statistically, homeowners are much more likely to keep their houses in good repair than renters. That’s what makes holding mortgage notes so attractive.

Our mentor taught our investors they could be the bank for people who do not have the credit history to qualify for a regular mortgage loan. The investor carries the loan on the distressed property for 30 years just like the bank, and the new owner of the house simply pays a mortgage payment each month that includes taxes and insurance.

The mentor said to our investors –  why should you spend $10s of thousands on rehabbing a property when you can have the end buyer do most of it? Owner finance investment property is smart.

The end buyer usually has a vested interest in maintaining their property, as they own it.

How a Typical Owner Finance Property Deal Looks:

$62,000 cash purchase, $10,000 rehab, 50 DOM, sold for $89,900 owner finance, $937 per month, 12.3% ROI.

This 3 BR 1.5 bath property investment with positive cash flow north of downtown San Antonio TX is in a heavily revitalizing area. It was bought by the investor for $62,000.

The under-market value property only needed approximately $10,000 of rehab, including new flooring, paint in and out, and minor foundation work.

The total project cost to the investor for this under-market value property was $72,000.

Within 50 days of the completion of rehab, it was sold with owner financing with the following terms:

  • $5000 down
  • $89,900 final price
  • 10% interest
  • 30 year note
  • $937/month PITI positive cash flow
  • Cap rate 12.3%

After our investors converted most of their under-market value properties to owner finance, most of of their worries about properties disappeared. The owner maintains it and the investors simply enjoy the monthly cash flow from each property into their bank accounts.

Most people don’t seem to ever consider owner financing their property investment, probably because they don’t know about it.

The keys to success in owner finance property are simple:

  • Carefully documenting the income of the potential buyer and verifying their work history
  • Follow the Dodd Frank law, which mandates that you must collect proof of their income and document their work history.
  • You can have a Texas licensed loan originator do this for you for a $750 or so fee (we have one on staff).

The bottom line on owner finance investment property is you enjoy cash flow without maintenance and the buyer enjoys buying their own home at last – a true win-win for everyone.

How Our Investors Buy Investment Properties in Texas Below Market Value

The most important factor in our big investors’ success in buying the best San Antonio investment property is every house they buy is under market value. That is, they buy under market investment properties that need rehab.

How To Determine Market Value

One of the biggest reasons many investors we have become real estate agents is so they can determine market value of the best below market value San Antonio investment property on their own. It is never a good idea to use Zillow to determine market value of a property. Zillow is notoriously off base, especially when you are dealing with off market properties or an out of state investment property that are not in the MLS.

Also, bear carefully in mind that the value that you come up with will largely depend upon the repairs your under market value properties need. Our investors like buy properties that are at least 20% under market value. So if the house is worth $90,000 and needs $25,000 in rehab, buying the house at $115,000 is a waste of time and money. They want to buy that house for at least 20% under $90,000, or about $72,000, so they can make a good profit.

How Investors Buy Under Market Value Properties

There are several ways that our investors use to buy under market value properties in San Antonio TX, one of the best cities to invest in real estate:

  • Buying fair market sale houses: These are houses that are owned by a private person who has equity in the house and there is no bank involved. Most of these sellers are in no rush to sell, so this can be tough. But our investors have bought many under-market value properties in estate sales; that is where they find most of their deals. In many cases,  there are several children involved and they just want to be rid of the house that needs repair.
  • Buy off market properties: Given our investors’ level of success in real estate investing, they tend to find many good deals that are not in the MLS. Agents and investors in the business send our site and top investors below-market deals. Of course, you need to get experience in the business to work this way, but know that if you do become successful, good deals often find you. We currently are analyzing several below market value properties that we will post on this site soon.
  • Buy REOs under market value: These are Real Estate Owned properties, and these are houses that the banks have foreclosed on. REOs are usually in the MLS, and some of them will be repaired and some will not. Of course, REOs are tougher to find now and many of them need a lot of work. To make your offer more attractive, you may want to tell the seller you don’t need to do an inspection. Pay all cash if you can – cash is king!
  • However you buy your under-market value investment property or out-of-state investment property, do not spend too much money on the rehab. Rehabs are where many investors lose their rears. Spend too much on your rehab and you will never make any money. Our top investors own a construction company and are able to do rehabs for 50% less than most contractors on the best San Antonio investment properties.

That in short is how our investors buy below-market value properties in Texas. The big thing to remember is to stick to your guns on your numbers – if you need to buy that house 20% under market value to make money, don’t go over it. Move on to the next under-market value property deal if you have to – there are lots of them out there!

Thinking of Buying Investment Property? New Tax Law Makes It Time To Buy

The Tax Cuts and Jobs Act was passed through Congress very quickly at the end of last year. The law, which affects the tax returns we file for 2018 through 2025, has several parts that may make it more profitable to be a real estate investor in San Antonio and in many areaas.

The tax law offers benefits especially for landlords who are working as LLCs. It allows these landlords to pay less tax on their income, which will lower the rate. To take full advantage of this, you must file as an LLC when you buy investment properties and start to rent them. Here is more information about this tax benefit:

  • LLCs will be able to deduct 20% of their qualified business income. This means if you are a real estate investor as an LLC, you could be able to pay taxes on only 80% of what you are earning from rents.
  • LLCs are what are known as pass through entities. This means the income that you get from the LLC will flow directly to your personal tax return. If you are in the 37% federal tax bracket and have rental property income, you will now pay 29.6% because of this new 20% rule. The tax rate was not dropped for LLCs, but the end result is lower taxes for landlords who run their business this way.

Next, you could enjoy more demand for your rental investment properties. This is because some financial experts think fewer people will buy their own homes. People who are not sure about buying may rent longer. Here are three tax changes that could increase demand for your rental properties:

  • Standard deduction was hiked: The new law doubles the standard deduction to $24,000 for married couples filing jointly and $12,000 for an individual. This means fewer people will save money through itemizing. One of the big reasons people buy homes is gone for many folks.
  • New limit on local and state property tax deductions: A homeowner can deduct their state and real estate taxes on their federal income tax return. The new tax law states the deduction is limited to $10,000. So one major cost of ownership of a home went up for some peopole.
  • Limit on mortgage interest deductions: The tax law lets homeowners write off interest on mortgages up to $750,000. This is a decrease of $250,000 from the old law. People who wanted to upgrade to homes worth more than $750,000 might now think twice. So the supply of cheaper homes could be smaller. This may cause some people to rent homes longer.

Lower demand could cause lower home prices, which can be a boon for real estate investors. If you have thought about buying market value or under market value investment property, 2018 could be a great time!

How to Turn $10,000 Into $30,000+ in a Year

Most of the time, I only work with under market value property investors with at least $50,000 cash, and preferably $250,000 cash or more.

However, I once started out in San Antonio investment properties without any capital, so I wanted to sketch out quickly how you can make $30,000+ out of $10,000 in a year.

It is possible with my guidance to buy an under market value property with a hard money lender, do $1000-$5000 in clean up and rehab, and flip it to another investor/cash buyer.

On each of these hard money deals, you will need to have $8000 to $10,000 invested. Then, when the deal sells, you will make $8000 to $10000, after your hard money expenses and closing costs.

Hold On!

This is the point where many typical below market value property investors will smirk and say, why bother? Who cares about making a piddly $8000?

Ah :), that is why I financially retired at 28 and you most likely did not. I NEVER turn up my nose at making $5000 or $7000 or $8000 on a deal! Never!

You know what I do? I do 50 of those deals per year, in addition to my large buy and hold investment portfolio, and make another $300,000!

I strongly believe in doing a lot of small San Antonio investment property deals. When you do just four of those deals per year, you can triple your money….transform $10,000 into $30,000 or more. Then you can afford to do more than 1 flip at a time, and do eight per year and make $64,000…..see where this is going?

Of course, in the end, I am a buy and hold investor, and I would advise you after you have at least $100,000 to invest in long term buy and hold, owner financed properties in San Antonio. Then do 2-3 of these quick flips per year to increase your cash as you need it to do more buy and holds.

Here is a fantastic San Antonio investment property for the out of state investor that will make you a quick $8000 to $10,000.

ONE LAST THING!

Before I show you this San Antonio investment property, if you want to turn $10,000 into $30,000, you need to do the following:

  • Listen to what I tell you to do and do not question it.
  • Do not doubt my ARVs or rehab costs.
  • Do not call me every day asking when your house will resell.

I know exactly what I am doing, and it is important for you to trust me.

Out of state investment property investors, this San Antonio investment property has two houses on one lot and offers you a quick $10,000 on a clean and resell flip, or 13-14% ROI on a buy and hold.

front man

    • Address: 3230 La Violeta St., San Antonio, TX 78211-3728
    • Year Built: 1950
    • Description: 2 homes for the price of one;  Home #1, 3 beds 2 bath, 928 sqft, built: 1950, lot size: .15 acres, home needs minor plumbing, carpentry, paint, cleaning, estimated rehab cost 10K, Home #2, 2 beds, 1 bath, 600 sqft, has been remodeled no repairs needed
    • Cash Price: $58,000.
    • Exit Strategy: Owner Finance with 10K repairs: 5-10k down, $900.00 monthly P/I, 30 year amortization, 10% interest, Price: 89K, ROI will be 13-14% per year. ; or do $1500 in quick clean up and flip to another investor at $69,900. This is a 2 for 1 deal and will resell quickly.
    • Contact us for more information or to make offer.
    • Rental Comps 3230 La Violeta St Sold Comps 3230 La Violeta

More Pictures:

Living Kitchen Kitchen 2 Bedroom Bath

Investors, you will never see a San Francisco investment property, Los Angeles or a Seattle investment property at this price point and rate of return! This under market value property is a good option to invest in real estate with IRA, or invest in real estate with 401k.

SOLD – 820 South San Manuel St., San Antonio TX 78237

IMG_0022

    • Address: 820 South San Manuel St., San Antonio TX
    • Year Built: 1950
    • Description: Under market value investment property, three bedroom, one bath that has 928 square feet. Beautiful home with TWO exterior storage units – this is a MAJOR selling point for the end buyer; most buyers are blue collar contractors, and they need their tools to be completely secure.
    • Max After Repair Value: $99,000.
    • Cash Price: $65,000.
    • Exit Strategy: Owner finance this out of state investment property with positive cash flow with only $10,000 in repairs completed in 30 days – $99,000, $900 per month, $5000 down, 30 year note, 10% interest. This San Antonio investment property offers passive cash flow with no maintenance.
    • Alternative Exit Strategy: Buy at $65,000, remodel $15,000, rent $995 per month.
    • Contact us for more information or to make offer.
    • Sold and Rental Comps: Sold Comps 820 S San Manuel Rental Comps 820 S San Manuel

More Images (more photos to be added soon):

IMG_0024

Please contact us to make offer or ask questions.

Investors, you will never see a San Francisco investment property, Los Angeles investment property or a Seattle investment property at this price point and rate of return!

Why It Is So Hard to Find Affordable San Francisco Investment Property?

Many of my out of state property investors come to San Antonio TX from San Francisco. They find it is very difficult to find affordable San Francisco investment property that will produce passive cash flow.

According to Forbes, 2016 is an excellent time to pick up under market value properties for cash flow in many undervalued markets. One of the most undervalued investor markets is San Antonio, which comes in at #6 on their list with a median price of only $189,000. It also is rated as their #4 boom town.

sa2
San Antonio is a much more affordable place than San Francisco to buy under market value properties.

San Antonio is where I have bought hundreds of under market value properties since 2000. I have made millions of dollars off of below market value, $50,000 houses that many investors would laugh at.

It’s much easier to make real estate cash flow on investment properties in the undervalued market of San Antonio. It is IMHO one of the best cities to invest in real estate given its growing population, affordable real estate, low taxes, and strong economy.

San Francisco Investment Property Hugely Overvalued = No Cash Flow

Meanwhile, San Francisco houses and San Francisco investment property is among the most overvalued in the US, according to Forbes. That magazine states that five of the most overvalued investment property markets are in California: San Francisco, San Diego, San Jose, and Los Angeles.

What is driving the lack of affordable investment property in San Francisco? There simply is not enough supply of market value properties for home buyers, which means that California investment property is just too expensive to produce real estate cash flow.

One of the reasons for that, Forbes says, is that many Chinese buyers have come into San Francisco and bought up San Francisco investment properties, paying full cash offers.

Another source says that San Francisco price to rent and price to income ratios have gone up by 25% from 2012 until 2015. The median price for a San Francisco house is $548,000 and is up 24% from a year ago.

In fact, San Francisco investment property houses are getting near to levels that were during the bubble years of 2006 and 2007. That was when prices in San Francisco were near $665,000.

I do not know how San Francisco investment property buyers can survive in that market, or California investment property generally. If you buy for appreciation, maybe you can do well, but that is far too risky for me.

I am an under market value, buy and hold, real estate cash flow investor.

A Good Example of Under Market Value, Cash Flow Property

Like I said earlier, I buy and sell under market value properties that many wealthy investors laugh at.

For example, this below market value San Antonio investment property was sold to my investor for only $25,000:

k

No one wanted this ‘junk house.’ I did! I saw the $100,000 houses next door lived in by the owners, and all of the revitalization going on in this area of San Antonio on the near west side.

Many out of state investment property buyers looking for real estate cash flow would never buy this house. My investor did for $25k, and then I did $27k in rehab:

  • Electrical update
  • New flooring (float new floor over that minor foundation issue after it’s repaired)
  • Clean out
  • Update bath and kitchen with tile and granite
  • New light fixtures
  • Paint in and out
  • Finish second bedroom

1a

The ARV on this below market value property is $79,900. We just finished the rehab in the middle of January 2016. And guess what? By early February, we already had an owner finance buyer for it: $5000 down, $850 per month, $79,000 final price, 10% interest, 30 year note.

That is what you can do with investment properties in an under valued market here with San Antonio investment property. Anyone who buys San Francisco investment property or Los Angeles investment property or Seattle investment property will never see these types of returns or prices.

 

Which Are the Best Texas Cities to Invest in Real Estate?

If you are considering to purchase under market value, out of state investment property, you probably will be considering the state of Texas as a possibility. Texas generally offers some great benefits for out of state property investors and has some of the best cities to invest in real estate.

Forbes recently recognized Texas as a great place to buy under market value investment properties. In fact, FOUR of its Top 10 Best Buy Cities in 2015 for real estate were in Texas. Forbes analyzed more than 300 housing markets and Texas turned out to be a great place to invest in real estate. Let’s take a look at each one:

#1 Austin

Forbes rated Austin #1 in its Top 10 Best Cities to Invest in for 2015 with its impressive population growth of 8.9% and job growth of 3.6%, which is far better than the national average of 2%.

Milken Institute’s Growth Comparison for Austin, 2nd Best-Performing City in US in 2014

austin

More figures about Austin to consider for out of state property investors:

  • MSA is Austin/Round Rock TX
  • Population is 1.8 million
  • Average home price is $261,000
  • Population growth from 2010-13 was 8.9%
  • Job growth annually is 3.6%
  • Unemployment is 4.2%
  • Home price to rent ratio is 19

Of course all this growth is driving housing prices higher. Austin house prices are 8% over the typical income for the region. But under market value investors  should take heart because the higher house prices in this area are due the demand, not a housing bubble and over inflation.

Austin is not reliant upon energy for most of its economy so the oil crash should not be a major factor here.

#3 Houston

MSA is Houston-Bayton-Sugarland TX. As is the case in Texas generally, Houston has a business friendly environment, no state income tax for people or corporations and a very educated population.

Houston investors made gross returns of 18% in 2015.

Houston also has strong growth in jobs, a booming population and low housing prices. The average price here currently is $214,000. Some experts say the housing market in Houston is still undervalued, so if you are looking for under market value property to invest in, you could do well in Houston.

Remember, in every real estate investment market, there is a strong correlation between the price of homes and the median income. When prices go high above that level, the market is overpriced and you will have a hard time finding under market value property that will produce passive income. If houses are under valued, you should feel confident that you will make a solid rate of return with investment property. Houston is a solid out of state property investment option.

Also note that the median age of inventory in 2015 for Houston was only 54 days.

I would watch to see what is going to happen to the Houston market in 2016 as oil prices continue to drop. Houston’s economy has a lot to do with energy exploration. The rental market is driven largely by transient oil and gas workers, so we’ll see how the Houston market responds to lower oil prices this year.

#5 Dallas

MSA is Dallas-Plano-Irving TX. The population of Dallas is growing at at least 6% per year and will continue for the next few years at least. It also has a job growth rate of 3%, and this is being driven by a boom in high tech companies. One of these is One Technologies LP, which is an online credit monitoring service that was ranked in 2014 as the quickest growing private firm in Dallas.

Investors made almost a 20% return here before expenses in 2015, which is due to strong appreciation in prices and high rents.

Under market value property investors should note that 13 privately held corporations worth $1 billion or more are in the Dallas metro area, such as Dean Foods, Exxon Mobil, Kimberly Clark, Neiman Marcus, Southwest Airlines and Texas Instruments.

In 2015, new home closings rose 20% in Dallas from a year earlier.

#6 San Antonio

MSA is San Antonio TX. San Antonio is where I have invested for most of my below market value investment career since 2001. I continue to invest in under market value properties here, rehab them and resell with owner financing. Here’s why I continue to believe that San Antonio is one of the best cities to invest in real estate:

  • Prices are still low, even with the economic boom. The average home price here is $189,000. Even with higher prices, I still buy below market value properties for $50,000, do $25,000 in rehab and sell with owner financing for $99,000. That still makes me an 11% return, which is excellent passive income.
  • Booming economy, with the biggest growth in construction employment from 2014 to 15. Even though oil prices have effectively crashed in the last year, I have no shortage of buyers for my under market value properties. Only 2-3% of our economy depends upon oil and gas. My workers may get laid off from oil work, but they find other blue collar employment.
  • Strong job outlook, with a 3.5% job growth rate in 2015.
  • Growing population – San Antonio is the #9 fastest growing city, according to Forbes. This means strong demand for owner finance and rental properties, and is a great option for out of state property investment.

If you want a good example of how good under market value investment properties can be in San Antonio, here is one:

l20b61845-m0xd-w640_h480_q80
$62,000 cash purchase, $10,000 rehab, 50 DOM, sold for $89,900 owner finance, $937 per month, 12.3% ROI.

This 3 BR 1.5 bath property investment with positive cash flow north of downtown San Antonio TX is in a heavily revitalizing area. It was bought by the investor for $62,000.

It only needed approximately $10,000 of rehab, including new flooring, paint in and out, and minor foundation work.

The total project cost to the investor was $72,000.

Within 50 days of the completion of rehab, it was sold with owner financing with the following terms:

  • $5000 down
  • $89,900 final price
  • 10% interest
  • 30 year note
  • $937/month PITI
  • Cap rate 12.3%

I have invested in hundreds of these under market value properties in San Antonio and that is what retired me at the age of 28. 🙂

 

 

 

 

What Are Some Considerations When Buying Under Market Value Property?

As an experienced under market value property investor in San Antonio, I love to get a great bargain. Of course, just because the house is being sold below market value does not mean it is a great buy.

When I find a potential under market value property that I may buy, I keep in mind why people usually sell houses for less than they are worth:

  • The under market value property needs a lot of rehab. This is usually one of the reasons the property is being sold so inexpensively. Most of the houses that I buy under market value need at least $20,000 in repairs. Buying below market value property that needs rehab is fine, as long as you are able to do the work cost effectively. I own a construction company, so I can usually do the $40,000 rehab for a fraction of that amount.
  • Divorce – people split up and will sell a house for less than it is worth.
  • Foreclosure – Mortgage companies may repossess a property and will often sell the properties at auctions. I always advise new under market value property investors to be wary of auctions. Many of the buyers at these events are retail buyers, and they will drive up the price on that below market value property. If you pay too much, you will never make any positive cash flow.
  • Estate sales – I get most of my below market value properties through estate sales. Usually there are several heirs and they are willing to accept a low price to just get the house sold. Of course, my offer on the below market value property takes into consideration the repairs that must be performed.
Front
An under market value property before my rehab.
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After rehab – being sold for $119,900.

When you are considering buying an under market value, out of state investment property, be certain that you do very careful due diligence. Newer investors routinely pay too much and under estimate expenses. So long, cash flow!

Remember:

  • Do a careful personal inspection of the under market value property, and look around the neighborhood as well. Check the condition of most of the other houses around it. Is it the ugliest house in the neighborhood? It could be expensive to rehab to get it up to par.
  • Check comps for houses that have sold in the area in the last six months. The best way to do this is to have a real estate agent investor who can help you compare house values. I’m a real estate agent myself so checking comps is easy.
  • Check the rental and mortgage prices in the area of the below market value property. Your real estate agent can run rental comps in the MLS. Personally, I do owner finance on my under market value properties, and I try to keep the monthly payment around the rents in that area.
  • Get a really good idea of what the rehab expenses will be. I have seen so many investors lose money because the costs of rehabbing the property doubled.
  • If you are concerned about the expenses of owning rental property, consider owner financing your under market value investment properties like I do. This is an especially good move for an under market value investor who wants an out of state investment property.  You have no worries about expenses as your buyer take care of the asset.

Also be certain to research which city you are going to invest in. Some of the best cities to invest in real estate include Kansas City, Indianapolis, San Antonio, and Charlotte.

Cash Is King in Under Market Value Real Estate Investments!

Many investors wax poetic about the magic of leverage in real estate investing. That is, they say that by taking out a mortgage on an investment property and using a 10-20% down payment, you can buy more under market value properties and generate more cash flow.

I respect their position, but I disagree. And so does my dog and mascot, Teddy:

cash is king

I financially retired at the young age of 28 by buying all cash investment property in San Antonio TX, one of the best cities to invest in real estate. I also came from a poor family and had $40,000 in college debt. Nonetheless, every one of my under market value investment properties has been paid for all cash. These are some of the best San Antonio real estate investments. Buying here in Texas is often better than say, California investment property, because you can buy so many houses with not much cash.

Why Do I Buy All Cash Investment Property?

I prefer incurring the lower risk that comes with buying properties all cash. My under market value investment property portfolio is:

  • Stable
  • Flexible
  • Can be sold quickly when and if I need to

By investing in all cash real estate properties, I have invested my money into a tangible asset that will usually produce cash flow, and may appreciate somewhat over time (this is not my priority – cash flow is).

buy-house-all-cash
All cash real estate sales have dropped but still are 30% of the market.

I also buy cash real estate San Antonio because I always owner finance my under market value investment properties. Many real estate investors take out mortgages and rent their properties. That isn’t my model. I buy all cash real estate and then owner finance at 10%. I get superior cash flow over 10% per year and also have no landlording costs with San Antonio investment property.

When I Buy All Cash San Antonio Investment Properties

I typically pay $40,000 for the under market value property, and about $25,000 for the rehab. So I am in the deal for $65,000 and then owner finance it for fair market value – approximately $90,000. That property owned all in cash generates $800+ per month of positive cash flow.

If I had a mortgage on the house and rented it, I would have only $300 to $400 per month in cash flow, and also would have repairs.

For me, I buy only for long term, maximum cash flow when I buy property all cash in the best San Antonio real estate investments, one of the best cities to invest in real estate, IMHO. It’s a good city to own an out of state investment property because houses are cheap, there are lots of qualified buyers, and cash flow is excellent especially with owner financing.

More Considerations When You Do All Cash Investment Property

  • I don’t worry about a bank giving me a mortgage for investment properties. I can close fast – in 10 days. That gets me some great under market value properties.
  • My real estate investment portfolio is safe and stable. I never worry about having a mortgage to pay when a renter skips town.
  • I incur less risk as I do not worry about appraisals on my properties. If your lender sees lower appraisals in your neighborhood, they may loan you less money.
  • In the real estate crash, I sold several of my all cash investment properties quickly when I needed money from my San Antonio investment property.
  • Buying all cash investment properties usually means you buy in affordable cities. Make sure you do research to figure out where to buy your all cash investment property. As of right now, prices are up in some markets, but if you save your cash, you may be able to pick up houses for a substantial discount in the next downturn.

In short, I recommend that people looking for an out of state investment property buy property all cash, as that is the best way to enjoy maximum cash flow with low risk.

 

Why Buy Out of State Investment Property?

If you are an investor or possible investor in California, you probably know the answer to that question! Many of my out of state investors in California cannot believe the sky high cost of investment properties in many of the high population areas of California, such as San Francisco, Los Angeles and San Diego. Great places to live, but for positive cash flow investing? Not so much! California investment property is very expensive.

san fran
I feel for San Francisco real estate investors.

I’ve been fortunate enough to build my large portfolio of under market value properties here in Texas, where property values are a lot lower than some places. San Antonio investment property produces excellent real estate cash flow and is quite inexpensive. I also only owner finance my houses, so I have no maintenance costs.

If you are thinking about buying an out of state investment property for passive income, here is a good simple guide that can help:

How to Select Your Out of State Investing Market for Passive Income

Where you are going to invest in under market value properties depends on your real estate investing goals. Are you a flipper or a buy and hold investor? If you hang around my site long, you’ll learn I retired early with buy and hold investment properties that are owner financed. I’m a big believer in buy and hold long term cash flow – that is how I financially retired at just 28 in San Antonio – one of the best cities to invest in real estate, in my humble opinion.

Anyway, a good buy and hold market for passive income might not be the best flipping market. Here in San Antonio TX, flipping has gotten tough as the economy is booming as of January 2016; it’s hard for flippers to get properties cheap enough to make a good profit. For buy and hold investing though, I still make 10-12% per year, or $500-$700 per month in positive cash flow.

tx
I’m biased, but TX is a great place for out of state investors – the population is soaring due to job growth.

As you think about where to buy out of state investment property and under market value properties, consider:

  • State law: Is the state friendly to property owners? You want to invest in a state that makes it easy to evict tenants or to foreclose. State that are tenant friendly, such as CA, make it so hard to evict or foreclose, you could lose your shirt.
  • Trends: What’s going on in the state as far as population? Here in Texas, we are seeing MEGA population growth.   My market of San Antonio is #5 on the list above as far as hottest housing markets go. Jobs are the biggest reason that people are coming to Texas, as well as housing affordability. This makes Texas a great place for out of state investors.
  • Price to rent: What does rent cost compared to the price to buy? In my town, it’s 16.90, while in San Francisco it’s 30.05. Whoa! No wonder so many CA investors are investing in out of state investment properties.

These are not all the factors to consider when you are buying an out of state investment property instead of California investment property, but if those three areas look favorable, you probably could do well in that market and financially retire early as I did, in one of the best cities to invest in real estate. San Antonio investment property is excellent for cash flow.

Ok…..so let’s take a quick break from the investing talk. Time for a picture of our TexasCashFlow.com mascot – Teddy!

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Ok, back to the program!

How To Find Out Of State Investment Properties and Under Market Value Properties

Now that you know which market to buy your below market value investment properties, how are you going to locate that house? Most investors I know do it two ways:

  • They find a good real estate agent investor who is hooked up with excellent contractors, property inspectors, title company, real estate attorneys.
  • They find a good turnkey property provider. The house has been totally rehabbed and usually has tenants or buyers in place.

Which of these routes you go with will depend upon your investing goals again. Some out of state property investors want to have absolutely no headaches or management worries, so they just buy turnkey properties. Other out of state investors think that method is too expensive, so they manage their own rehabs and property management.

If you decide to find your own below market value properties in your chosen market, here’s what you’re looking at:

Buying Below Market Property Yourself

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Advantages

  • You’ll get the house at a low price
  • High cap rate or ROI

Disadvantages

  • The house will not be producing income during the rehab and the time it takes to find a renter or an owner finance buyer
  • Rehab costs could shoot up if you don’t have reliable partners
  • Harder to manage the rehab and management from a distance
  • Difficulty in controlling material costs

Buying Turnkey Property

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Advantages

  • Totally rehabbed
  • Tenant or buyer may already be in place
  • No work for you
  • Cost of material more predictable and stable
  • You know the quality of work you will get
  • Whole investment team is in place

Disadvantages

  • Higher initial cost
  • Lower ROI or cap rate

How big a difference are we looking at between buying a run down under market value house and buying a turnkey? Let’s take a look:

  • Run down property: Estate sale, $30k purchase, $30k in rehab – will produce 13% ROI with owner financing or renting.
  • Turnkey property: $80k purchase price, no repairs, will produce 9-10% ROI with owner financing or renting.

So which will it be? Most people would say you obviously go for the better ROI with the under market value property you do yourself. But remember, you are going to have to do a heck of a lot more work – at a distance – with the fixer upper property. A turnkey property will earn lower ROI, but it a lot less stress. At the very least, you might consider a good turnkey property if you are a beginner in real estate investing. That way, you can make some good positive cash flow as you develop your own investment property team.

It all boils down to how you look at investing in real estate. Investing by definition means using something to get some type of return. You just have to decide if you want to use just your money to get a return, or use your time AND money to get a potentially higher return.

Choose wisely based upon your personal investing goals, and you will hopefully be able to be financially retired on your time table.

Personally, if I were a usual buyer of California investment property, San Francisco investment property, Los Angeles investment property or San Diego investment property, I would strongly consider buying out of state investment property. Investment property is all about real estate cash flow…..it’s something you can rely on year in and year out, unlike hoping for appreciation.