What I Learned About Investing Out of State

Dave here, with a sad, true story that might make you think twice before investing out of state.

Back in 2004 I decided that ten years was probably about it for our California real estate boom. (Turns out it should have been. Unfortunately, I was about two years early with that call–see “How we got into this mess.”) (For our current market forecast, see “A Change in Our Predictions?”

Barb & I are buy & hold investors, but it seemed it might be time to liquidate at least one or two of our local rentals. To avoid capital gain taxes, we decided to use a 1031 Starker delayed exchange to purchase in an area where prices might be nearing a bottom. The ultimate in market timing–something I’d wished I’d done back in 1991, the last time our local market peaked.

After researching markets from Las Vegas to Florida I found a complex with upside potential in a small town with a fairly strong economy. As an added plus, we have family living fairly nearby.

So we sold a rental house in Lakewood, and bought 90 some units in 12 brick buildings in McMinnville, Tennessee. The 90+ units only cost two and a half times the house’s selling price. Sure looked like going from the top of the California market to the bottom of the rural Tennessee market to me. (Perhaps this whole experience has influenced my thoughts on market timing.)

Well, Barb & I have been spending time & losing money in Tennessee ever since. I knew it was a major turnaround project, but we’ve had great success with turnarounds before. But those were nearby in Southern California, not two time zones away.

I recently discussed my Tennessee challenges with David Haas, the best property manager I know in So Cal (or anywhere). He’s been following my saga for several years, offering helpful pointers along the way. This time he nailed it.

“You know, Dave, a number of my owners exchanged out of state over the last few years. It’s gone badly for every one of them.”

He went on to detail the particularly sad saga of one landlord who eventually lost his equity and his Texas apartments and then took a huge tax hit from the capital gains he’d deferred when he exchanged into it.

There are several reasons for this common woe, most of them obvious. Most experts agree your property should be close enough you can drive by it occasionally. What I didn’t realize is that letting locals know you live out of state is like walking around with a “Kick Me!” sign taped to your back. Or a bullseye on your wallet. And once a Californian opens his in rural Tennessee, they know you “ain’t from aroun’ heah.”

I also had no idea how much looser disclosure and construction standards are in rural Tennessee. Our seller disclosure laws aren’t perfect here, but to me California looks like consumer heaven compared to Tennessee. And building codes in unincorporated areas? Non existent, as far as I can tell!

Eventually, I had to hire my Tennessee son-in-law to supervise the units. He’s not David Haas yet, but he’s learning, and he’s honest. He’s now got his own management firm, Sasser and Thrasher (I’m not making this up). They’re now also managing units for other out-of-state owners, most of whom were ripped off by their former managers. Like another Californian, who flew out to inspect the six new roofs he’d paid for, only to find they didn’t exist.

As for us, I hope we’re finally starting to turn a corner. The day may come when Barb & I are glad we own The Meadows Apartments. But the price to get there was way more than we expected. We did much better during the ’91 – ’95 recession, when we stayed close to home and exchanged from single family rentals to multi family units.

So, before you jump on something out of state think twice. And pray thrice. At least. If it’s an area you know, maybe one you intend to retire to or have family in, it might be worth considering. But I’d start by checking out foreclosures and motivated sellers throughout Southrn Califonra before going out of state.

The Inland Empire and desert regions are about as far from home as I’d recommend going. We do think eventually things will turn around here (see “What’s Next For Southern California Housing?“) We think some parts of the I.E. may eventually bounce back like South Orange County did from the last biggie back in the 90’s.

Southern California still has lots to offer that few, if any, other places on earth can match!

When it comes to going out of state, I now think of what my mom used to tell me: “The grass is always greener in the other fellow’s lawn!” Or so you think–until you own it!

April 25th update: For the latest on my adventures in out of state investing, check out today’s “Post from Tennessee.”

What to Do When Nobody Knows What’s Next

In our last post we explained why we agree with Freddie Mac’s chief economist, Frank Northaft that “We just don’t know [when the market will hit bottom or how low prices will drop] because we’re in totally uncharted territory.”

As if to illustrate our point, since we wrote that we’ve seen huge swings in stocks as Federal Reserve leaders twice surprised the markets with supposedly clear indications they intend to further reduce rates.

Now, as promised, we tackle the logical next question of what buyers and sellers should do in such an uncertain situation.

The key is to base your decision making primarily on what you know, not on speculation about market trends. Market timing is nice, but it’s highly speculative and subject to surprises from the Feds, politicians, consumers, other nations, and even terrorist attacks. Instead of trying to precisely time the market, figure out what you really want or need and brainstorm options, work, & wait until you find an acceptable solution.

As my mortgage broker once told me when I was trying to time the interest rate market in locking a loan, “if the loan works at the current rate, go ahead & take it. ” In other words, don’t gamble on something that works. As my mother used to say, “A bird in the hand is worth 2 in the bush.”

This approach usually works with buying, if 3 conditions are met:

1. You’re planning to live in the home for a long time, 5 – 10 years.

2. You’re buying with a loan that’s fixed for at least 10 – 15 years.

3. You’ve got fairly stable income.

If it works, do it. The better it works, the more you should do it. Especially if you like the location and the floorplan. After all, location is the one thing you can’t change, condition is the easiest thing to change.

The same goes for selling. If you can sell & move up to your dream home at today’s prices, don’t roll the dice on prices going up. Especially any time soon. A year from now you may wish you’d sold today. What your neighbor got two years ago is irrelevent–the question is, will today’s price work for you?

For those of us who are people of faith, we’d add in prayer. God is the only one who does know what the future holds, but he’s also a lot more concerned about our character than our money. (Actually God’s the only one with a perfect perspective on money, too.)

King Solomon was the wisest and richest monarch of his day and he said it well: “Trust in the Lord with all your heart, and don’t rely on your own understanding. In all your ways acknowledge Him, and He will direct your paths.” (Proverbs 3:5,6) That worked almost 3,000 years ago, & it still works today.