The Mistakes I Made Investing in Out-of-State Properties

Starting an investment property business is an exciting journey, often filled with dreams of financial independence and ongoing revenue. While I started by buying properties close to me, I realized that most weren't affordable or able to cash flow. After reading numerous books and blogs, and watching videos and podcasts from renowned real estate investors, the idea to invest out of state became apparent.

So, in 2023, I purchased my first out of state (OOS) property, a quad-plex in Cumberland, Maryland. This seemed like a great idea, and it cash flowed great on paper, but after owning it over a year, I'm listing it for sale. Below, I'm going to go over all the mistakes I made investing OOS, and I hope you can learn from my challenges and steer clear of the pitfalls I encountered.

Lack of Research in The Market

One of the key mistakes I made was jumping into the investment property business without adequate research. Extensive reading on the benefits of "diversifying your investments" by purchasing in different markets drove me to purchase my first OOS property, which turned out to be in a low-income, declining value neighborhood. It wasn't until after the purchase that I learned about the local market dynamics, such as declining home values and poverty rates.

Turns out, I overpaid for my property. What would have been a steal of a price in Delaware was actually way overvalued in Maryland. Therefore, after putting over $60k into the property, I have zero equity and am unable to sell without having to pay. If I had spent a little more time studying the local real estate market, I would have avoided this costly error.

Skimping on Budgeting

Another significant blunder was my underestimation of the overall budget required. Initially, I had a rough idea of the costs, but overlooked essentials like maintenance, property management fees, and surprise repairs. In the first year alone, I encountered thousands of dollars worth of expenses and repairs that were somehow missed during the home inspection.

Outdated electric, old and trashed units, roof leaks, non-working heat, and damaged plumbing quotes were in the thousands. In fact, 2 of my units are not even legal to rent because I must complete these costly repairs first. So, they continue to sit vacant until I can come up with the cash. Always plan a comprehensive budget that accounts for unexpected costs; this added cushion can save your finances from unexpected turmoil.

Overestimating Income

As a new investor, I was far too optimistic about potential rental income. I set rental prices based on my aspirations rather than research. When I listed my property, I received minimal interest from potential tenants. For instance, the average price of a rental in Delaware is $1800. However, rents in the town I purchased my quad in Maryland in rarely exceed $800.

While the rents cash flow on paper, I did not take into account all the extra expenses I would accrue between property management, water, landscaping, licenses, repairs, etc. Having incorrectly estimated the profits this building would make, I am unable to raise rents and I cash flow negatively most of the time. Conducting a competitive market analysis is essential for setting realistic rental rates, ensuring your property stands out in a crowded market.

Neglecting Proper Tenant Screening

Selecting the right tenants is crucial — I learned this the hard way. In my eagerness to fill vacancies, I skimped on typical rental standards. Not requiring a security deposit in exchange for work that was never done, not checking credit prior, and ignoring possible income deficits are all lessons I've had to learn the hard way.

This oversight led to renting to tenants who consistently paid late and caused negligent damage to the property. Implementing a thorough screening process can help ensure that you find quality tenants who contribute positively to your investment.

Overestimating Property Managers

Initially, I believed that a property manager would make my life simple, as they would handle all the property's day-to-day issues and send me a check every month. However, my experience with an out-of-state property manager has been less than ideal. While they do handle the routine operations, I didn't realize how slim the pickings were in the town I chose to invest. With very few property management options and all with bad reviews, I chose to keep the one that was already managing my property.

I've realized that we manage property very differently. This property manager does not use any kind of online tools, which is a detriment to me since I am very into tech. They do not advertise my rentals online, they do not do direct deposit, and there is no "owner portal" or way for me to do anything online regarding the management of my property. Everything is sent via check and paper, which means I don't get paid until a month later and I have no digital copies of anything.

The fees are also excessive, with around $500 being the average monthly expenses taken out, after the PM fee. On top of that, this PM constantly calls me able trivial things and frequently complains about the market they chose to work in. This experience has made me very wary of ever hiring another property management company, and also of investing out of state.

Believing It’s "Easy Money"

I entered the OOS investment property market with an unrealistic belief that it would be an effortless way to earn money. While passive income is possible, I underestimated the amount of time and effort needed.

Collecting rent checks is only the tip of the iceberg. There are countless tasks involved, from coordinating repairs to managing licenses and certifications, even having to manage the manager. Despite my property being 4 hours away, I've had to go out there numerous times to repair things because the quotes I was receiving from local contractors were astronomical. Recognizing the commitment necessary from the outset would have better prepared me for the challenges ahead.

Trusting a Previous Home Inspection

This is a mistake to do with any home anywhere, but its one that I made when purchasing out of state. Since I was putting 20% down on an investment property, I was already coming out of pocket about $60k for this house, so I was looking to save money where I could. Absolutely, do NOT, forgo a home inspection, period. I knew this back then, too, but where I went wrong was trusting the seller. I was planning on getting a home inspection, when I found out that this property had been under contract a few times recently so there had been a home inspection done within the last few months.

Instead of getting a new inspection, I decided to trust the report from a previous buyer. This was a huge mistake, and it may have been a big reason why this property didn't work out for me. The previous inspection noted several things, and there was a follow-up report where the seller states that he made the requested repairs. There was no mentioning, however, of the repairs to come.

The biggest problem with this property that I didn't find out until later on is that the electric is not up to code, and it will cost upwards of $18k to fix it. Had I had my own inspection, this might have been caught, though there's no guarantee. Never trust the seller, get your own home inspection, even on a new construction!

Not Doing My Due Diligence

This can go along with the last point I just made of skipping the home inspection. While doing your due diligence is crucial before buying any property, it is especially important when you are buying a property out of state or in a market you are not familiar with. Some examples of things you need to research are:

• Local rental laws and licenses

• Local inspection requirements

• Age of roof and major systems

• Recent repairs or renovations

• If there's an HOA, their CC&R

• Rental history (rent roll, vacancies)

• Property's profit and loss docs (gives you an idea of monthly expenses)

• Anything not up to code?

Had I done my due diligence, I probably wouldn't have purchased this property in the first place. Its been a valuable lesson that I will put towards my future investing endeavors.

Final Thoughts

Looking back on my early mistakes in the investment property business brings a smile, albeit a cautious one. These experiences shaped my approach to investing and taught me invaluable lessons.

Remember, real estate investment isn't a quick scheme to wealth; it requires careful planning, strategic thought, and consistent effort. By learning from my missteps with research, budgeting, tenant screening, and engaging professionals, you can better position yourself for success.

I am currently in the process of selling this property, so I can invest more in my local Delaware market. Eventually I will move away and once again be an OOS investor, but since I have a deep understanding of the Delaware market and the ability to self-manage, I imagine that experience will be much easier.