A few months back I was in a seminar in Reno, Nevada. Actually I was the speaker at this event, though I do attend a number of real estate investing seminars to stay on the top of this industry. Anyway, during one of the breaks I was approached by a gentleman who was almost in tears over his experiences with out of state investing.
Why was this grown man so shaken up?
He told me that he had recently purchased a bundle of real estate properties in New Jersey at a price that he believed to be.60 cents on the dollar.
However, after closing he had quickly come to the realization that there was a major problem.
He asked me what I thought, and I asked him what was the market trend in the area he'd invested all that money into.
The truth is, he looked at me like I was a crazy man for asking that, as in he had no idea what I was asking- something fundamental when you look to buy real estate out of state.
For his homework that night I told him to research the location that he had invested in more thoroughly using proven techniques that professional real estate investors use, as well as hook up with a local referred real estate agent for some specific data I would need in order to advise him how to clean up the mess he had put himself in.
The next day, sure enough, he showed up with a whole stack of papers from real estate market research from sources I had given him to local comparables and more.
This is what he learned.
First, he had invested in the worst suburbs of New Jersey.
We're talking about the "war zone" areas here, if you get my meaning.
Strike 1: If you're not a local investor who has a team on the ground and specializes in lower income properties and are familiar with their problems... out of state investing there with those properties is NOT a good idea.
Secondly, he also learned through the reports I instructed him to have the real estate agent pull that not only did he NOT get these properties 40% below value as he had believed- in truth, he had paid an average of $10,000 more for EACH property than the Fair Market Value.
He bought 15 individual properties like that, all in one swoop.
Strike 2: If you don't know what you're doing, don't take someone else's word for it that a property you're buying is priced less than what it's really worth. Due diligence is key for successful investing- especially when you buy real estate out of state.
Needless to say, the man was even more upset than the day before, when he knew he had made mistakes- but did not know exactly just how bad his situation really was.
Unfortunately, though... this real estate nightmare gets worse.
With careful review, we investigated the properties and what they needed to even sell for Fair Market Value. The truth was that each property needed 5-10 THOUSAND dollars in fixup work EACH to even sell at fair market value.
That's money he no longer even had.
Strike 3: Don't buy properties that need fixing when you don't have money to fix them. Don't buy properties worth less than what you paid for them. Remember the golden rule of investing: you make your money when you buy.
Now, let's do some math.
Did I tell you that this bundle of properties was FIFTEEN properties?
Can you see how quickly those mistakes added up to a financial real estate nightmare?
I know what you're thinking.
Wow! That's a BAD situation. But, I'm sorry to say... once again, it gets even worse.
Guess where he got his 25% down payment money from for his out of state investing?
A home equity line of credit... from his PERSONAL RESIDENCE.
Yes, that's right.
He took a risky loan against his personal home to buy a bunch of properties in a state he knew nothing about, in a city he had never been to, at a price well above Fair Market Value- all while believing what he had been told that he was "getting a deal".
I know ladies, you would KILL your husband if he did something so foolish... so do your marital status a favor and make sure he reads my articles before he looks to do any investing out of state.
Or, before you do ladies-let's not be a chauvinist here!
Because the truth is that out of state investing can be extremely profitable.
IF you know what you're doing.
If you're not a local investor, though, you just need to know how to do some simple market research and learn how to evaluate the market trends before buy real estate out of state- things we teach people in our network.
And please people, don't come to me after you do something so stupid as that guy.
I know you're itching to see whether this guy's real estate nightmare could be cleaned up and how.
I'll save that crazy story for my next article How You Can Profit Even When You Buy Real Estate Like a Stupid Investor. Be sure to read it!