Why Investing Out-of-State Can Boost Your Portfolio
As I presented our new investment package to potential investors, I noticed that some people are hesitant when investing out-of-state for the first time. I used to also be in that camp and wanted to address how I overcame my uncertainty when parking my money outside my home turf.
In my 13 + years of real estate experience, most of it has been solely in Los Angeles. My first out-of-state investment was in November 2019 in Kansas City. I want to explain what enabled me to take this first step into the unknown. Between 2010-2012 I purchased a few duplexes in the LA area with funds I earned from flips in LA. During these years, it was affordable to still invest in LA, unlike today. During the life of those investments, the equity grew exponentially, and in the last couple years, the return on that equity was about 3-4%. I got to the point where it was time to trade up into something else. I looked in LA for 2-3 years, keeping my eye out for opportunities. What I saw fell into two general categories: either the property wouldn’t give much more of a return/cash flow or require some heavy lifting, such as tenant relocation in rent-controlled areas where the laws favor the tenants. I realized that my past strategy no longer made sense in the present or future. I would have to get creative and start thinking outside the box, or in this case, outside of LA.
I traveled to Kansas City with my wife to visit family a few years ago. One of the days, when we had some time to kill, I started looking at what multi-family options there were local. I quickly recognized that I could buy a turnkey product and achieve better returns as in LA without all the heavy lifting. Of course, it would not have the appreciation we’ve enjoyed in LA. However, we are currently in the stage of the cycle where depreciation could happen in LA. So, I felt the next logical step was to invest out of state in the right markets.
To begin, I started contacting brokers, property managers, and other investors in the Kansas City area. I eventually made my way out there again to meet these contacts and started touring potential options. I liked what I saw in specific neighborhoods; the macro-level fundamentals of the Kansas City metro seemed promising. In my mind, it was an impressive city to hang out in with all its nice restaurants, modern architecture, established greenery, and entertainment. After that trip, I decided I would actively try to acquire a multifamily property in Kansas City. Next, I put one of my duplexes on the market in LA. In selling that duplex, I was looking for target properties in KC. I pursued a building I had walked mid-project from one of my tours. I could get it under contract off-market through one of my broker contacts. This helped me get over the initial hump of investing out of LA: partnering with knowledgeable and trustworthy brokers and property managers on the ground. They used efficient technology to make asset management easier and brought in-depth knowledge about the area. I closed that deal in November 2019, and it has been performing well, further strengthening my strategy of investing out of state.
Then we acquired Norman Creek, a 72-unit value-add opportunity in Oklahoma City. Like KC, we have found established partners on the ground that help answer our questions, present us with properties and advise on key factors about the area. We have now sold all of LA property to invest where the best deals are to be had, notably, outside of California. Investing in real estate anywhere comes with inherent risks. However, if you have done the deep work of due diligence, allied yourself with the right partners, and go with your gut instincts, you can find a lucrative investment in new and surprising places.
Contact us here if you are interested in investing outside of your local area.