by Bill Bronchick
Real estate investors, hungry for break-even or positive cash flow rental properties, purchased income property out of state the mid 2000’s. California investors bought houses in Florida, Texas, and Oklahoma. Florida investors purchased houses in Louisiana. Texas investors purchased in Las Vegas. Some these investors made millions of dollars because of the appreciation in those hot markets.
On the other hand, many beginning investors lost their hard-earned investment capital or only made a meager profit because they failed to do their homework on the out of state area’s real estate market and customs. If you’re thinking about buying investment properties in a different state than you’re accustomed to, beware of these five surprises.
Pitfalls of Investing in “Emerging Markets Out of State
Surprise #1 – “This house will only rent for $750 per month, not $1200!” This was one of the top mistakes made by investors. Large real estate investing groups, selling out of state properties to local investors, inflated the rental income. Because so many houses were purchased in a limited area by investors, a rental glut lowered expected income. This created hardships for investors who suddenly had to pay out hundreds of dollars a month instead of reaping promised profits.
Surprise #2 – “You can’t sell this house, now!” Some investors who couldn’t rent the out of state property decided to sell because the values did rise significantly while the house was built or during the purchase time. However, many investors were stunned when they were told they couldn’t sell the property within the first year after purchase. Restrictions prohibiting real estate investors from quick-turning their properties is a trend that is growing increasingly popular with some developers.
Surprise #3 – “You Can’t Lease This Property!” New home developers and many Homeowners’ Associations (HOA)s prohibit property owners from leasing their properties. Some of these restrictions got passed, without the investor being notified, during the property purchase phase. You must read the fine print to see if any clauses prevent the rental of the property. Home builders, to keep the value of the neighborhood up, added restrictions requiring the purchaser to occupy the home as a primary or secondary residence.
Surprise #4 – “These (extra) costs are the norm in this state!” Besides extra closing costs like pricey surveys, common in Florida but rare in California, other surprise costs included higher transfer fees and taxes. Property taxes in Florida cost much more for investors in Florida than in California. On the other side of the country, out of state investors were shocked by California’s state tax held in escrow: 3.8% of the property’s SALE’S price, no matter the actual profit made. In other words, an investor who made a quick profit of $20,000 on a fast flip could have more than the profit held until the next year’s income tax filing.
Surprise #5 – “Houses don’t appreciate 30% per year here!” Perhaps you’ve attended or been invited to a high-power investment seminar that promotes out of state real estate investing. Some of these ‘investor clubs’ really are promoters who receive kick-backs in real estate commissions, property management fees, mortgage loan fees, and even fire insurance premiums. They tell stories of huge appreciation gains, which are probably true. However, not all areas enjoy significant appreciation-year after year.
Emerging Markets Investing Due Diligence Don’t make the costly mistake of not fully researching the complete market customs and restrictions in the area where you’re thinking about investing. If you can’t afford to go to check out the area in person, choose another area that you can visit.
William Bronchick, CEO of Legalwiz Publications, is a Nationally-known attorney, author, entrepreneur and speaker. Mr. Bronchick has been practicing law and real estate since 1990, having been involved in over 600 transactions. He has appeared as a guest on numerous radio and television talk shows including CNBC Power Lunch. He has been featured in Who’s Who in American Business, Money Magazine, the Los Angeles Times and the Denver Business Journal. William Bronchick has served as President of the Colorado Association of Real Estate Investors since 1996.
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