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How to Invest in Real Estate When Everything Is Too Expensive

by Brandon Turner on September 23, 2012 · 41 comments

  
Finding inexpensive real estate deals

The most inexpensive property I’ve ever bought was for $16,000.00. It wasn’t in terrible shape, but it did need a good deal of work to get it up to a rent-able standards (about $30,000.00). The most expensive property was over a half-million for an apartment complex which I still own and love dearly.

However, in some areas of the country, those prices are simply not realistic.  In fact, in some areas you can barely buy the lowest-end home for what I purchased my apartment complex for. I am often asked by visitors to my blog who have read my book, “but what if I can’t find properties as cheap as you do?”

It’s a perfectly valid question.  I am located in a very low priced area, but I know that there are some areas where the prices are astronomically high. Many major metropolitan areas such as New York, LA, or Washington DC have prices well above the national average. If you live in an area such as this, this article is for you. I want to just share a few thoughts I have concerning high-priced locations and how you can still invest while living in such a place.

Are You Looking for Homes On Sale?

How much do you pay for a gallon of milk?

$3.00? $4.00? $5.00?  These are all prices I see whenever I shop for milk. However, I never spend more than $2.50.  How is it possible that I can get milk for $2.50 a gallon and others are paying up to double that? It’s because I’m actively looking for a deal. $2.50 a gallon for milk is not normal. It’s a sale.

In the same way, the prices I talk about are not normal.  No one lists a home for $16,000 like the one I mentioned earlier, even in my area. Often times seasoned investors like myself talk about the cheap prices we are getting to make a point (like I’m doing in this very post) – but remember that those prices are not retail prices.  That home was actually listed at over $30,000 (still a low price, I know) but I knew the seller was desperate and I could solve her problem quickly. I was actively searching for a deal.

Are you actively seeking a deal?

When you pull up your list of nearby homes for sale are your simply looking at the average sale price and trying to compare that with the $16,000 deal I got? You are going to be very disappointed. The average price for a home in my area is over ten times more expensive than what I offered. I’ve only seen a few properties that cheap -and most have MAJOR problems with them.  The $16,000.00 deal was a special deal. The apartment complex for half a million was also. I only buy special deals. They are not once-in-a-lifetime, but they are also not every-day deals.

I forget now where I heard it (probably the BiggerPockets’ forums) but to find a good deal you should look at 100 homes, offer on 10, and only get one offer accepted. This means that only 1% of the deals that look promising actually are.

What does this mean for your business?

It means you need to look at a lot of properties. You can speed up the time by having very defined standards that you follow, but in the end you are simply going to need to look at a lot of properties.

Is The Price Relative?

Let’s go back to that analogy about milk.

In fact, I have a bit of a math problem for you:

When would it be the same for my bottom line to pay $5.00 for milk as $2.50?

The answer, of course, is if I made twice as much money. In other words, if I suddenly made double my income but spent double the amount on milk – the percentage I’m spending on milk doesn’t change.

This is also true in real estate. A home that sells for $100,000.00 in one area may produce $1000.00 per month in rent. However, that same style house in another area may sell for $300,000.00 – but the rent may be $3,000.00 per month. It’s all relative. So before you instantly assume you live in an area that is too expensive to invest in, decide first if the math still works.

Often times certain investments are working in your town – they just are not working at your financial level. Perhaps saving $150,000 is too large of an investment for you. If so, there are always partnerships you can form or wholesaling you can do to still be involved.

I understand, or course, that in some areas a home for $300,000.00 still may only rent for $1000 per month. I understand that in some areas the price relativity between rent and price is out-of-wack.  Sometimes properties are just not worth buying.

What then?

What Is Working In Your Area?

Perhaps your goal is to buy-and-hold single family homes in Manhattan.

I’m sorry – but it’s probably not going to work out real well for you.

Each area is good at certain things – but not at everything. If the math doesn’t seem to work on a certain type of investment in your area, perhaps it’s time to consider what is working.

  • Would wholesaling commercial properties be a better use of your time?
  • What about multifamily properties?
  • How about condo conversions?
  • Fast food triple-net leases?
  • Subsidized low-income housing?

Before blacklisting your entire town, make sure you take time to investigate exactly what your town is good at.  Perhaps you’ll discover a highly profitable investing strategy that your “expensive town” is excellent at. Check out my list of “The Top 100 Ways to Make Money In Real Estate” for more ideas.

Have You Checked The Outskirts?

How much do Starbucks’ employees make in downtown New York City?

My guess is not a whole lot more than they make in my town.  Simply put – the large percentage of society who make under $15 an hour still need to live somewhere near those cities.  Baristas are not making six figures (unless you live in Northwest North Dakota) yet still manage to get to work in downtown expensive areas.

How?

In nearly every expensive city there are still pockets of low priced properties.

Have you found these areas?

Don’t get me wrong – I’m not advocating slum-lording or investing in the ghetto (though, some investors do make good money from these properties – I steer clear). Location is still key in any real estate investment. I’m referring to the middle-class neighborhoods on the outskirts and in the suburbs. Generally these areas are found twenty to forty miles outside the city center.

Talk with a good real estate agent about these areas. Find the best location with the lowest prices and focus your efforts there.

If still you find that there are no decent locations nearby that you can invest in, perhaps it’s time to look outside your area and look into long-distance investing.

Investing Outside Your Area

One of my favorite Podcasts is the Real Estate Guys Radio Show. Each week, they interview highly successful real estate investors and offer a lot of great advice.  One of the phrases they state often is “Live Where You Want, Invest Where It Makes Sense.”  I think there is a good amount of truth to that- but it must be approached with caution.

I included this section last because I don’t want people to jump the gun and start investing thousands of miles away from their home.  When you are first learning the ropes behind real estate investing you will quickly learn that there are a lot of ropes. Sometimes those ropes get tangled and need to be untangled.

No matter how many books you read, forums you ask questions on, consulting you pay for, or blogs you consume- you will still find there are hurdles you need to overcome. If you immediately begin investing from thousands of miles away, your ability to handle these problems can be severely hampered.

That said, if investing out of the area is the path that makes the most sense to you, be sure to research your market carefully and plan on using excellent property managers. If you are looking to invest in smaller single-family homes, there are turn-key investing companies who specialize in assisting you in investing from a distance. For a great example of a company that is helping many investors across America as well as thousands of BiggerPockets’ readers each week, check out Chris Clothier and his company Memphis Invest.

Now It’s Your Turn…

What is your market like?

  • Is it low priced, with great cashflow?
  • Or is it high priced with no cashflow?
  • What about the sub-markets?
  • Or different investing strategies?

These are all questions you need to ask yourself when deciding how to move forward with your investing career. Don’t let “prices are too high” be an excuse for you to continue sitting on your couch each night watching re-runs of Supernatural. Get out there and find some sale prices or find an area where they exist.

I love comments and I’m curious like a cat (meow.)

So if you have a minute, please leave me a comment below and let me know about your area.

What kind of market do you live in?

Photo: Images of Money

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{ 41 comments… read them below or add one }

Maria September 23, 2012 at 2:14 pm

Hi Brandon,

Again, great article. It targets a question that I’ve been wondering about. I’m currently in New York City and as you know real estate is beyond expensive in this city. Figuring out what’s the best strategy is probably the hardest thing right now considering my location.

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Brandon Turner September 23, 2012 at 4:51 pm

Thank you Maria. This is a very tough question for a lot of people. Hopefully this sheds a little bit of light!

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Maria September 29, 2012 at 6:46 am

Sorry for the late reply Brandon I forgot to click the notification box for this article. Yes, it does shed some light on how to go about it or at least where to start. Thank you! :)

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Brandon Turner October 1, 2012 at 1:49 pm

Awesome! Good luck and keep in touch Maria!

Dale Osborn September 23, 2012 at 3:11 pm

Being in WA the prices are high and the cash flow is low. There are deals that pop up every now and then and they usually do not last over 10 days after hitting the market. In order to work these, you need to be ready to move fast. The strategy I have decided on is to watch and wait as things keep getting better here. Soon there will be many great opportunities available for those ready to act.

Nice article to get people to take a look at their markets and by stepping back see the whole picture as to how things play out. This also give you a chance to evaluate what you really want to do in your existing markets.

Dale

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Brandon Turner September 23, 2012 at 4:52 pm

Dale – that is an excellent point and should have actually been another section in my article – being quick. Good deals are usually snapped up quickly, so being first can often mean the difference between success and failure. Thanks for the advice!

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Shane September 23, 2012 at 3:36 pm

Another great article, Brandon. Earlier this year, I started working with a realtor in the Phoenix, AZ, area, because the rent to purchase price ratio is much better there than where I live in Portland, Oregon. (I’m looking into other areas as well.) However, I still actively search for deals locally, just as much as ever. And there are indeed huge challenges with trying to invest in real estate far away from where you live, especially if your funds and funding choices are limited.

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Brandon Turner September 23, 2012 at 4:54 pm

Yeah, Portland seems pretty crazy expensive! I’ve heard great things about the Phoenix market though. Have you moved forward on anything there yet?

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Brandon Turner September 23, 2012 at 4:56 pm

By the way – I like your website Shane!

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Shane September 23, 2012 at 5:20 pm

Thanks Brandon! The site was primarily done by my good friend (and drummer of a band I used to play in) named Nick – his site is at http://development.nicorellius.com/

Shane September 23, 2012 at 5:15 pm

I’ve made several offers – most of the properties I’be been really interested in went too quickly or were bid up too high – my realtor was actually “berated” by a listing agent on a recent offer because my offer was $5K under what they were asking and they had already received several offers, one being $15K above what they were asking. But I have my criteria – the rent to purchase price has to make sense to me, and I use private money loans, which means higher costs. Finding funding has been my biggest challenge. I’m looking primarily at multiplexes in AZ.

Portland has quite a few deals which still make sense as well. You’re just paying more for them in general. But sometimes the profit margins still work out. And clearly it’s a better area than most the areas in and around Phoenix.

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Brandon Turner October 1, 2012 at 1:50 pm

My agent once told me that if he didn’t blush when submitting an offer, he offered too much. :) Funny, agents get “offended” like that. Silly agents!

Portland is pretty classy, which is evident in the high prices!

Kevin Dickson September 23, 2012 at 3:39 pm

In Denver, about 70% of the city is too expensive for buy and hold. In other neighborhoods, you can achieve cap rates of 12%+ on single family homes. (Multifamily is crazy right now, with cap rates at 5% in good locations, 8% in the worst locations)

I’ve tried to target a neighborhood on the border between the expensive and the ugly neighborhoods. With the easy money of 2002-2008, I was able to created a “sustainable, distributed land bank”. Each house I’ve bought has a decent cash flow of about an 8% cap rate.

My strategy is a “patient money” approach. The neighborhood has only 400 homes. I’ve joined the Neighborhood Organization even though I don’t live there, and volunteered as the webmaster.

All the active neighbors (15% of the ‘hood) know that I have rentals, am always buying, and am keenly interested in improving the neighborhood and property values. Now I’m getting mostly word of mouth deals.

Just now I have started to scrape and build new homes. I’m hoping this activity will give other builders the confidence to also start working the neighborhood. If they do, the gentrification tipping point is reached, and value is added to my holdings without any work on my part.

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Brandon Turner September 23, 2012 at 4:58 pm

Hey Kevin,

Ouch, those are tough cap rates to make good cashflow.

How are the suburbs around Denver? I used to live up near Fort Collins and remember prices being pretty high there. I guess that’s what you get for having some of the most perfect weather in the US! I miss those 300 days of sun. We get 300 days of rain out here!

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Micki McNie July 22, 2013 at 3:23 pm

Hey Kevin, I checked out your blog and was excited to see your focus is green real estate as well. I work for a green brokerage downtown. Are you a member of any local investing groups? I’d love to hear more about what you do.

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Carl September 23, 2012 at 3:44 pm

Hi Brandon, Great article! I live in a “Buy and Hold” area (Huntsville, AL), but I am committing the sin of worrying about Financing before locking-in the deal…but I have to tell you that financing IS a problem. I can get a great (relatively cheap) deal on a rental property, but I have to have funding for acquisition, fix-up and holding costs; however, I’m not overly concerned about holding cost because every seller I talk to is “sick and tired” of callers who see the “For Sale” signs but still want to rent. I don’t have cash reserves, wholesaling to build-up cash is not a viable course of action here, but I have decent credit. Any suggestions would be appreciated.

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Brandon Turner September 23, 2012 at 5:02 pm

Hey Carl –
I don’t actually think it’s that bad to worry about financing first. I know they say “find the deal and the financing will find you” but truth is – lots of people get caught with their pants down because they didn’t get financing first.

There are tons of different strategies on buying rental property without any money (search BiggerPockets or my own blog), but my favorite is generally to use partners. Become an expert on all things related to what you want to do (read and meet with investors), create a road map to get there, and then tell everyone you know what your plans are. If the math makes sense, and you can sell your ideas well, you will have plenty of people who would like to get involved with real estate who have the down payment amount and credit/job/income. A few 50/50 partnerships could get you off on a very good start.

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Mark Stella September 23, 2012 at 6:55 pm

Hey Brandon, enjoyed your article!

Regarding investing outside your area, you nailed it!
I found success about 90 miles from my home and have often said that everyone needs to live somewhere. It turns out that the prices for SFR’s and their market rents are more favorable than those in my area. That being said, as in any business, it’s important to provide a good product at a great price and investing outside the area allows me to offer this.

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Brandon Turner September 26, 2012 at 10:54 am

Thanks Mark,

That’s awesome that you can testify to what I’m saying! Sometimes it requires a bit of a drive -but it can be done. Thanks for the addition!

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Randy Phillips September 23, 2012 at 8:22 pm

Great article. In my area we have some of the lowest priced homes in the Country,Central California, and some of the most expensive too, and everything in between. But I admit the higher priced areas scare me. Your milk analogy makes perfect sense. When I get a few more deals under my belt I will be exploring the higher numbers. Let’s make some money.
Randy

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Brandon Turner September 26, 2012 at 10:56 am

Hey Randy,

That seems like an interesting market, but perhaps a great one because there isn’t a ceiling on the lower priced homes? It seems like that might be the ideal market to “flip” homes in. You think? And I get scared of the expensive prices too, unless we’re talking commercial. A Million dollar single family home seems dangerous, but a million dollar apartment building sounds fun! :)
Thank you for the comment!

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Brian Gibbons September 24, 2012 at 7:01 am

Ok, great info!

Making money in this crazy market can be done ANYWHERE if you can find modest homes in a great public school district.

The key is to find a home 3- 4 bedroom with no equity. Get the property under a lease and an option. Assign the deal to a buyer that can not get FHA financing.

This is not buy and hold, it is lease and option as a principal, then assign for a fee.

If anyone wants to do this in an expensive area, please PM me.

Great article about buy and hold, Brandon!

Brian Gibbons

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Randy Phillips September 24, 2012 at 11:02 am

Hey Brian, you seem to be doing similar to what I’m doing. How can we exchange ideas?
Randy

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Brian Gibbons September 24, 2012 at 7:05 pm

Email me w your details!

Let’s talk!

Brian

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Christine Kwasny September 24, 2012 at 1:35 pm

Very good points. My husband and I live in Portland, OR and have been looking at investment property for more than five years. We initially considered small plexes since they were affordable and seemed like a good way to go. But, there was no cash flow, so we steered clear. We are glad that we did since people were (and still are) buying on speculation. This market still doesn’t give returns. We also looked at pre-buying new condos. Also speculation. Glad we didn’t do that. When we found out the sale price per sq ft would have to be higher than downtown San Francisco we said no way that is going to happen. And it didn’t. lots of these units and whole buildings were foreclosed. Fast foreword a few years to today. I looked at all kinds of investment properties and found that mid to large size apartment buildings are best but far too expensive for us. Second best is SF homes in the close-in burbs. We employed the fix and rent with a long term hold strategy and are getting a 12% cash on cash return. As you stated, we knew what we wanted and waited to get a good deal. We also only did drive-bys and then made an offer. Saves everyone time.

The market has since strengthened so we are watching and waiting. My goal for the new buy is directly from the seller to avoid the “retail” cost of listed properties.

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Brandon Turner September 26, 2012 at 10:59 am

Hey Christine,

I love the fix and rent strategy!

And yeah – Portland is kinda crazy with prices (Though I am absolutely in love with the city)! I have a friend who bought a condo there a few years ago for $200,000 – and it’s currently worth half that. Ouch.

Thanks for the great advice in this comment!

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Jerry W September 30, 2012 at 10:15 pm

I live in a small town in the middle of wyoming. With banks requiring 20 to 25% down on loans, coming up with the initial down payment is tough. I own 2 nice single family rentals that were in for sale in the 100 to 125K range but were not good considered good rentals as they were too expensive to cashflow. After over a year on the market with several failures to close I was able to get the sellers to take a second mortgage at 2% for 25% of the puchase price. The houses were empty as they were afraid of renters damaging them so they had no income. I financed the rest at 5% with a 15 year conventional loan, The seller will get yearly interest and a balloon in 5 years. In 5 years the balance left on the conventional loan will be low enough to refinance and pay off the 2nd mortgage the seller has. I fully disclosed this to my banker and he was fine as long as the sellers mortgage was 2nd to his. I was able to fix up with cash money and keep a decent nest egg for emergencies. I was turned down about 15 times before it worked, but it finally worked. I save just under 100$ a month on interest. The cash flow just barely breaks even but these are nice houses (4 bedroom in nice neighborhoods) that rent very well. The average length a tenant stays is about 2 years, and usually they buy a house of their own. The drawback is this makes the payoff take 20 years not 15 years.

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Brandon Turner October 1, 2012 at 1:48 pm

Hey Jerry,

Thanks for the comment! Nice work getting the second mortgages and making those deals work. You are definitely on a great path!

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Wayne October 1, 2012 at 1:21 pm

Thank you, answered quite a few of the questions that I’ve been having for a while now great article keep up the good work

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Brandon Turner October 1, 2012 at 1:46 pm

Thanks Wayne!

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Ali October 5, 2012 at 2:17 pm

Great article! Great perspectives a lot of people don’t think about regarding how to find cheaper properties. Don’t forget to add in there- buying in mass. Even if you can’t buy a lot of something, someone else (like a private equity fund or similar) can, so if you can wiggle your way into their channels, you can get individual units cheaper when buying them from a larger chunk of properties.These deals aren’t listed on the MLS though, so don’t bother finding them through a normal agent.

Market-wise, at least for buy and holds:
Phoenix- new construction is now cheaper than existing properties. Turnkeys are no longer the way to go. New construction only. (that window closed about 6-10 months ago)
Atlanta- the hottest market right now, but following Phoenix’s trend, so it won’t be much longer before new construction is the way to go there too. High cash flow, appreciation potential is very high. The appraisal system is broken, tho, so financing is a little squirrly.
Memphis- good cash flow, mild appreciation potential, but limited exit strategies because 45% of the population rents so resale later will likely be to another investor.
Charlotte- good cash flow, medium appreciation potential, smaller city but up and coming, especially being so close to Atlanta.
Houston- lots of built-in equity from the start (good appraisals), good cash flow, good appreciation potential
Indianapolis- crazy high cash flow! Little chance of appreciation.
Detroit- Don’t let the numbers fool you. Detroit investors have been in trouble for awhile. Tenant-friendly state with bad tenants (at least for where the investment properties are)
Los Angeles- Horrible price-to-rent ratio, no cash flow, tenant-friendly state (can’t get rid of bad tenants easily)

Hope that gives a good idea of some of the differences between areas!

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Brandon Turner October 5, 2012 at 6:01 pm

Dude Ali – That was like the biggest and best comment I’ve seen in a while! Thanks for that valuable info! It’s great to see it in a list like that. It would be interesting to get that sort of analysis for every major area in the US. You should throw something like that up on your website! I’d link to it!

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Ali October 5, 2012 at 7:52 pm

Just did it, Brandon! :) I wish I didn’t have to admit this, but I’m somewhat computer and blog dumb, so let me know if you can’t link to it? (I’m not sure how linking happens. haha). I promise I’m better at investments than I am computers.

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Yelena Milne October 15, 2012 at 12:35 pm

Getting investing advice on a budget can be tricky, but it is not altogether impossible. When you consider by how much your wealth could benefit from good investment strategies, you should be willing to put in all of the time and effort necessary to get the advice you need without having to pay an arm and a leg for it.

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Ned Carey April 24, 2013 at 1:13 am

Superb article Brandon. All are great points but one I think most new investors miss it the “Invest in the outskirts” I have lived n the grater Washington DC market all my life. I have wanted to invest in real estate most of my adult life.

I didn’t becuase I didn’t think I could afford it. Little did I know that I could have driven 40 minutes away and bought houses for 1/4 what properties cost where I lived.

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Brandon Turner April 24, 2013 at 8:58 am

Thanks Ned! Great to know from someone who has been there! Thanks!

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Mary August 13, 2013 at 10:39 am

This was an inspiring article. I live about 30 miles outside of Houston, close to NASA and the market is tough! I had just told my real estate agent that maybe flipping houses was not the way to go anymore, she told me other small investors were having problems finding deals also. So I did think maybe I should venture further out, but know nothing about the outer areas so was a bit hesitant. Your article has inspired me to do the research and get out there. I love taking neglected houses and turning them into homes. I also noticed that there is a large rental market in Houston now. So that may be the way to go also. Can’t wait to read your other articles.

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gabriel October 16, 2013 at 7:08 pm

Thanks for the article, Brandon. I moved from a small city (where I flipped 12 properties) to L.A. and have been frozen on what/where for my first investment as an Angeleno. I’ve been considering a long-distance purchase in the South to Birmingham or Atlanta (two markets I know fairly well), or going to the outskirts of LA (which I don’t know well, but are closer). I do know Los Angeles very well, but prices and offers seem to be out of reach. As you probably know, the market here is extremely competitive. If LA, then I would definitely need to work with a Private Lender, understanding that I am seeking a 9% net profit (if I can land the deal) before 3 pts and 12% interest. I work for investors who submit 10-20 offers a week (and compete with 30-80 other offers on each property), all-cash, over asking, no contingencies, and get mayyybe 1 of those.

Which way would you go? Far away to a sensible world with less appreciation and greater return, closer to home on the outskirts that you don’t clearly know, or home with a low margin and high competition?
What are your thoughts? Thanks for all the great articles!

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Brandon Turner October 16, 2013 at 7:29 pm

Hey Gabriel,

Personally, I think I’d invest out of the area if I were in LA, but I wouldn’t do it without first spending a few weeks in that area on vacation exploring everything I could and really becoming familiar. I’m not saying this is the right thing for everyone, but personally that’s what I would do!

Hope that helps some :)

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Lorna January 25, 2014 at 12:40 pm

Brandon I live in New York and want to move to a warmer climate to do my real estate, it’s not happening here for me at all, you have some great idea’s in all your post. I find it very hard to make my first deal here in New York , I really want to get low price and great cash flow , I wonder if no money out of pocket work in other states?
Thank You
Lorna

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Andy February 24, 2014 at 2:43 am

I’m in the same boat as you Lorna. I’m in Brooklyn and after deciding that real estate would be my main vehicle for building wealth, I realized that the price to play in NYC is very high. I have come to terms with the fact that I’ll probably have to invest elsewhere and hire a property management company.

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