The Brutal Truth About Out-of-State Real Estate: Lessons from a 'Failed' Investor
"I am a failed real estate investor."
These five words mark the end of one investor's journey through the promises and perils of out-of-state property ownership. After selling their second investment property and officially exiting the game, their story serves as both a cautionary tale and a masterclass in what can go wrong when chasing rental income across state lines.
Their journey—from spreadsheet dreams to property management nightmares—reveals uncomfortable truths that rarely make it into investment seminars or YouTube success stories.
The Seductive Math That Starts Every Mistake
Like countless investors before them, this story began with a familiar scenario: high income, high-cost living area, properties too expensive to cash flow locally. The solution seemed obvious—invest in the Midwest where the numbers looked incredible on paper.
"I ran the numbers hundreds of times. The rents were almost double the payments. What could go wrong?"
Everything, as it turned out.
After six months of research and failed attempts, they flew to a Midwest city, met with a property manager and realtor team (red flag number one: they were business partners), and purchased two duplexes. The spreadsheets showed guaranteed success. Reality had other plans.
The Hidden Costs of Distance
The first harsh lesson came quickly: something was always broken. Air conditioners failed. Minor repairs mysteriously cost hundreds of dollars. But the real shock came during tenant turnovers.
"Unit turnover was 10k every time, and that's after I pushed back on most of the stuff the PM insisted on 'fixing' (like replacing a shower head that worked just fine. why?!)."
For context, many experienced investors budget $2,000-3,000 for turnover costs. The property manager was charging five times that amount, padding invoices with unnecessary work like painting after just one year of occupancy or replacing functional appliances.
The distance made pushing back nearly impossible. Without being able to verify claims or get competing quotes, the investor was at the mercy of a property manager who seemed to view them less as a client and more as an ATM.
The Mathematics of Risk
Perhaps the most sobering revelation was how quickly positive cash flow projections turned into financial quicksand. Good months brought in 80% of projected rent. Many months brought in nothing. Two evictions across four units destroyed any semblance of predictable income.
"The properties were supposed to be net positive, instead I never even bothered putting them in the income section of my budget sheet because it was so unreliable."
This transformed what should have been income-producing assets into liabilities requiring constant cash infusions. Each property became not an investment but a ticking time bomb of potential expenses.
The Psychology of Financial Stress
What ultimately drove this investor out wasn't just the money—it was the mental toll. They described having a dream about COVID causing another 2008-style crash, with their properties losing half their value. That nightmare scenario felt real enough to trigger the final sale.
"I just don't have the stomach for that level of risk."
This revealed a truth many investors discover too late: your risk tolerance on paper rarely matches your risk tolerance when real money is bleeding out monthly.
The Property Manager Problem
A clear pattern emerged from the experience: property managers can make or break out-of-state investments. This investor's PM exhibited classic predatory behavior:
Red Flags in Property Management
- Inflated repair costs: $400 to haul away debris from one turnover
- Unnecessary improvements: Painting basement floors, replacing working fixtures
- Conflict of interest: The PM owned their own properties, creating competition for good tenants
- Partnership with realtor: No checks and balances in the system
The property manager relationship revealed a fundamental conflict: managers often profit more from repairs and turnovers than from stable, long-term tenancies. Some even steer the best tenants to their own properties, leaving out-of-state investors with the leftovers.
The Wholesale Vulture Surprise
An unexpected violation of privacy added insult to injury. Despite never telling family about the investments, wholesale real estate vultures found the investor's estranged father through public records, calling him about "his" properties in the Midwest.
"Which was just great when I purposefully didn't tell anyone about the investment to keep my financial situation under wraps."
The lesson: unless you use an LLC, your real estate investments become public record, potentially exposing your financial activities to anyone willing to search.
Hard Truths About Distance Investing
The experience revealed several uncomfortable realities about real estate investing:
The Reality Check
1. The Out-of-State Tax
Remote investing adds a hidden "tax" through inflated costs and management issues. Without the ability to verify work, get competitive bids, or build local relationships, out-of-state investors consistently overpay for everything.
2. The Incentive Misalignment
Property managers make money when investors spend money. This creates a perverse incentive where managers benefit from problems rather than preventing them.
3. The Experience Paradox
You need experience to choose good property managers and avoid bad deals, but you can't get experience without risking capital on potentially bad managers and deals.
4. The True Cost of Turnover
A $10,000 turnover in the Midwest indicates either significant property issues or outright theft. Normal turnover costs should be a fraction of that amount.
The Numbers Tell the Story
Despite property appreciation that allowed them to break even on one property and make approximately $20,000 on the other, the investor considered the venture a failure. When accounting for:
- Multiple cross-country trips
- Transaction fees and closing costs
- Countless hours of stress and management
- Opportunity cost of time and capital
The returns barely justified the effort, let alone the risk and stress endured.
Critical Lessons Learned
Through painful experience, several crucial insights emerged:
The Hard-Won Wisdom
1. Local Connections Are Everything
"Do not invest out of state unless you have multiple, personal connections that have worked with the property manager in the past."
2. Separate Your Team
"Get a separate property manager, realtor, and attorney with no connections to each other. You need checks and balances."
3. Know Your True Risk Tolerance
"Understand how much risk you can stomach. Know yourself. You don't want your investment to keep you up at night."
4. Document Exit Strategies
"Talk to the PM before signing anything on what the process is to end your relationship with them if things go south. Document it."
5. Consider Privacy Protection
Using an LLC for property ownership isn't just about liability—it's about privacy.
The Case Against Out-of-State Investing
This investor's experience illustrates why many successful real estate professionals advise against out-of-state investing, especially for beginners:
Distance Multiplies Every Challenge
- Verification impossibility: You can't drop by to check on claimed repairs
- Relationship handicap: Building trust with contractors and service providers requires presence
- Market ignorance: Local knowledge about neighborhoods, typical costs, and tenant quality is irreplaceable
- Emergency response: When disasters strike, distance multiplies complications
Alternative Strategies
For high-income investors in expensive markets, several alternatives might better balance risk and reward:
Better Options to Consider
- REITs: Professional management, liquidity, and diversification without direct ownership headaches
- Syndications: Passive investment in larger properties with experienced operators
- Local investment: Even expensive markets offer opportunities for those willing to accept lower cash flow for appreciation
- Private lending: Generate returns without property management responsibilities
Redefining Success and Failure
Perhaps the most important lesson is that walking away isn't failure—it's wisdom. This investor recognized their limits, protected their capital, and exited with valuable experience and minimal losses. In a field littered with overleveraged investors who held on too long, that's actually a success story.
"I have no stomach for the degree of risk that comes with increased debt."
Understanding your own psychology and risk tolerance is more valuable than any rental income.
The Path Forward
For those still determined to invest out of state, this story provides a crucial roadmap of what to avoid:
- Vet property managers extensively through multiple independent references
- Start with one property to test systems before scaling
- Build local relationships through multiple visits and networking
- Maintain oversight systems including regular property inspections
- Budget for worst-case scenarios, not spreadsheet dreams
The Uncomfortable Truth
Real estate investing isn't the passive income dream sold by gurus and seminars. It's a business requiring active management, local knowledge, and trusted relationships. When you add distance to the equation, every challenge multiplies.
This investor's story stands as testimony to an uncomfortable truth: sometimes the smartest investment decision is admitting when something isn't working and having the courage to walk away. They entered seeking passive income and financial diversification. They left with hard-won wisdom about their own limits and the true nature of real estate investing.
"Like I said, I never told any of my friends or family about any of this."
By sharing their experience, they've provided something invaluable: an honest account of what can go wrong, why it happens, and how to recognize when it's time to cut your losses. In real estate investing, sometimes the best deal is the one you walk away from—and the wisest investors are those who know when they've reached their limit.
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