Out of State versus California (Home)

12 Replies

Hi all,

I have been in a hard spot for a while now trying to determine if investing out of state in cash flowing rentals is too risky versus saving up for a home nearby me in pricey California. Some background info: I am 22 years old, bachelors in math and 50k/year job teaching. I plan to have 20k saved in 2 years and want to be able to hit the ground running by that time. My initial thoughts on out of state were that it was a great opportunity to be able to get started in real estate but I keep getting many mixed messages on how risky it is versus managing it here in Cali myself. My thoughts are what am I going to do anyway if the property is right next door to me? I don't see how management will be impacted just by distance. Also if I buy in other parts of the country I can get started earlier, fail faster and then know what I am doing by the time I would have saved up money just for once house in Cali! I already have a residence with my wife so that is a great position to start in as I don't have to pay as much for my own living expenses. 

Can the BP community weigh in on this and give some advice on the pros and cons so I can weigh this out myself?

Responses will be appreciated, especially if they are from Cali(real estate joke)

Cody, 

Thanks for posting. I was at this point and still struggle with it as I am too in CA. I have purchased in FL, TX, AZ and California. Where are you looking to purchase outside of CA?

Regards,

Corey

@Corey Tobin

I am very new to this. I've only heard of the Midwest and places like Cleveland, Indy, and Memphis. I don't really know what defines a good market except for (in rank order of importance)

1) Population growth

2) Job Growth

3) Rent/price or price/rent ratio

4) Property management companies to choose from(Have to be able to switch those on a dime amiright?)

I've been looking into what determines a market for the past week now. I am usually described as a very quick learner so I am not sure if I've hit the nail on the head or am leaving out variables. What is your favorite market and why? Also why did you choose to invest in California? Was that your first purchase or last? 

Hi Cody,

You make some very good points and observations. I personally have not invested in the places you mentioned above. Although i've heard they were doing pretty well. 

I have personally invested in places I had contacts which helped me meet property managers, contractors, and locals. 

I really enjoy California because it is close (but pricey). I also really enjoyed Texas and have had some great success with some good people. California was actually my first. 

@Cody Evans "what am I going to do anyway if the property is right next door to me? " Well, you will know the truth and not some line of BS. In other words are there parties day and night and 22 people living in the house? Living next door you will see exactly what the problem is. All that out of the way I would start in your back yard. You're in a great are my friend. Find a property and fix n flip or wholesale or buy a 4 plex, duplex etc. The deals are out there and you can walk things and meet with people face to face. Get to know your local area (which is large and presenting many opportunities) and you will eventually be in a position to go out of state. Hope this makes sense.

Hey @Cody Evans ,

I am a new investor also from California, also a mathematics teacher, and am investing out of state. California is not the market for cash flow, it is the market for appreciation which is speculation (gambling). I would recommend looking to markets in the midwest or southeast that follow the 1% rule.

I'm curious, which part of CA are you from and what grade do you teach?

-James

have you folks looked into investing in non-performing notes? trading paper is a very lucrative investment. we JV on notes, and our investors are realizing double digit returns. for those who are interest in passive investments JV'ing on notes or CFD's is an excellent move.

Cody,

Your goals and mine are quite similar. I'm down in Fremont, with a few more years on me.

Since you're up in Fairfield (which I think is a little more affordable than my neck of the woods!) and you're sharing expenses, I'd say you'll be in a pretty good position in 2 years. Let's both use that time to learn, talk with people, and grow some skills.

I'm of the mind that, given the communicative power the Web gives us, property management out of state is much easier than it was only a few years ago. In 2 years, with your cash on hand & still-advancing technology, it almost won't better where you buy & manage property.

I suggest doing two things:

  1. Identify the markets where you want to buy.
  2. Reach out to property managers, real estate agents/brokers, and other investors in that area. Ask for input (like you're doing now), but also make it clear what your goals are, and find out theirs.

This is what I plan to do as well. Haven't nailed down #1 yet, but if it helps, I'm considering lots of places. Oregon (most of the state, sans Portland proper), Washington's south and east, Indiana, Pennsylvania, and either Ohio or upstate New York.

Hope that helps.

Originally posted by @Cody Evans :

Hi all,

I have been in a hard spot for a while now trying to determine if investing out of state in cash flowing rentals is too risky versus saving up for a home nearby me in pricey California. Some background info: I am 22 years old, bachelors in math and 50k/year job teaching. I plan to have 20k saved in 2 years and want to be able to hit the ground running by that time. My initial thoughts on out of state were that it was a great opportunity to be able to get started in real estate but I keep getting many mixed messages on how risky it is versus managing it here in Cali myself. My thoughts are what am I going to do anyway if the property is right next door to me? I don't see how management will be impacted just by distance. Also if I buy in other parts of the country I can get started earlier, fail faster and then know what I am doing by the time I would have saved up money just for once house in Cali! I already have a residence with my wife so that is a great position to start in as I don't have to pay as much for my own living expenses. 

Can the BP community weigh in on this and give some advice on the pros and cons so I can weigh this out myself?

Responses will be appreciated, especially if they are from Cali(real estate joke)

You are not alone! It is very common for people in CA, or other expensive markets, to invest in the Midwest where the ROI is greater. Sure, you can get a return in CA, it is just a different kind of strategy/method. Others like to buy and hold in a market that will cash flow for a long time. It really just depends on what you are looking for. Midwestern markets, like Cleveland, can get you an amazing ROI if you do it correctly.

Best of luck to you!

@Corey Tobin

How did you meet these contacts from the areas you invested in? Were they just friends you knew or investors you met through BP?

@Dylan Vargas

I am interested in exploring options. I think perhaps a flip would be a way to gain capital quickly. Would you agree? Also I just had a thought; Do you think i could out in the contract with my PM company that they do a Skype walkaround the property once a month? If so how often should I do this digital tour because i dont want to disturb the tenants too much by snooping (unless theyre bad ones)

@John Miller

I have not looked into notes. I will look into those when I get home. Do you have a suggestion on a good source to learn more about these? 

@Chris Williams

Your thought process sounds strikingly similar to mine. I really like your opinion on communication and growing skills. I want to be able to hit the ground running as soon as I store enough capital for an investment. Referencing your thoughts on managing out of state being easier due to technology evolving: Is it standard to have a clause in PM contracts that include digital walkthroughs of the propertt every once in a while?

@Cody Evans , I think it would be helpful for you to identify the specific risks you are concerned about and consider if there are solutions or if they are deal breakers for you.

I started by investing out of state in different markets.  Initially, I wanted to invest locally but after getting frustrated and finding that the numbers didn't make sense for my goals, I considered it.  I built a team and did more research and more due diligence than I probably would have if I had had an investment close by.  I'm glad we went out of state because I think it really encouraged us to set up systems and only consider numbers and research instead of making a more emotional decision about my local area.  

Now I live closer to one of my investments but since I had bought it when I was out of state, I have a team taking care of it and we have systems in place.  The only time I think about it is when I get the email for my direct deposit from my property manager.

I hate to sound negative, but it takes a good chunk of money to make passive income from real estate. That 20k might get you something like 100-200 mo, but you're going to be on the hook for a repairs expenses. Are you going to be able to cover a vacancy and say new sewer line (5-10k)? We are going into winter, what if you can't get a renter till after the holidays and then the prop mgmt company is taking 75-100% of your first month rent. What about if your renters just stop paying, you ready to go through eviction?

If I had limited budget but owned a house here, I'd look at either making my house more friendly to house hacking or getting a better house locally. You'd likely be able to get more than 100-200 mo in value out of that and not have to deal with OOS.

@Cody Evans

"Referencing your thoughts on managing out of state being easier due to technology evolving: Is it standard to have a clause in PM contracts that include digital walkthroughs of the property every once in a while?"

Quite frankly, I don't know. But I see no reason you can't put one in.

I've toyed with the idea of getting a drone & flying it around a property. Yes, even inside. "Live stream from inside your potential investment!" Likely not too practical, especially when a PM can just walk the property with their phone. But it's fun.

Another (slightly more serious) idea I had was to insert twice-annual walkthroughts into both the PM and tenant contracts. Twice a year, at random times throughout the year, someone will come do a walkthrough. The PM, a rep, or even myself if I'm close enough. The tenant will have the standard 24 hours notice of course. This way we can catch issues...hopefully before they get bad.

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