San Jose, CA · Member since 2013 · 18 posts · 3 votes
As someone looking to buy their first buy-and-hold investment property sometime within the next year or two, it's really disheartening analyzing properties in my area. I live in San Jose (right in the heart of the Silicon Valley in California), so my market (including the surrounding area) is full of very very very high priced real estate. Because of this, I have been considering investing outside of California. Do you think this is a good idea for a first time investor? It may be my only option to generate any kind of meaningful cash flow.
I understand that it depends on the specific deals, but any general advice would help. Any Bay Area investors who feel the same way? Anyone have experience investing oustide of their state? Any insight would help.
Investor · Los Angeles, CA · Member since 2013 · 231 posts · 260 votes
12y
@Jag Sekhon , as others have said this an age old topic that has been debated many times.
I am surprised your post did not attract the turnkey providers out of the water. They will make the argument that no property in CA will ever make sense, you'd never want to manage your own property and so on. Of course, this "advice" is a bit over the top and self serving.
There are others on BP who have done okay with out of state investing and that may well work for you, but I'd be skeptical for the following reasons:
1. Managing a property manager is always more difficult from a distance. Your one property will be at a disadvantage vs. a local owner that can have face to face meetings and is driving by a property on occasion and has multiple properties. Also, don't you think it will be tougher finding a new manager from so far in an unfamiliar place.
2. Doing any type of rehab will be more difficult and while you may buy a recently rehabbed property, what happens years down the line when the property gets beat up and out of date and you are thousands of miles away?
3. It is going to be much more difficult for your to evaluate neighborhoods to invest in from thousands of miles away and also trends like rental rates in those neighborhoods.
4. You'll need to add travel costs and additional state tax returns to your costs.
5. If you go the turnkey route, realize that you are you are at the end of the line after they have made their fees.
I would first go to your local real estate clubs. There you can meet people and see their strategies. If you want a cheaper property there are many inland areas of CA that you can drive to easily that have cash flowing properties that you can find with a little work. If after that you still want to go out of state go for it.
Investor · Santa Clara , CA · Member since 2013 · 155 posts · 144 votes
12y
yes, I definitely understand where you are coming from. 2012 was the last year to get in on deals and still get cash flow. In the Bay Area, the numbers simply dont work anymore.
I got lucky and was able to land some deals last year. Even so, my focus has completely shifted to investing out of state. If I was starting today, I would look out of state. Sure, you could try Sac and areas farther out, but the returns in those areas have started to dry up as well. To me, investing in Sac vs out of state is no different. I can't manage from afar anyway, so I might as well find a market that offers better returns.
San Jose, CA · Member since 2013 · 18 posts · 3 votes
12y
Thanks for the insight Jay. I was thinking the same thing. The only California markets that make sense are so far away that I might as well just go out of state.
If you don't mind sharing, does out of state investing give you a lot of problems compared to your investements close by? Because I have no experience in re investing, I want to make sure that I don't jump into out of state investing and get crushed for being a newbie! Anything I should watch out for?
There have been many debates over the years regarding investing in state and out of state.
Investing in your local market - those who advocate this insist that there are deals to be had in any market.
Investing out of state - those who advocate this indicate that this can be done to increase profits, whether partnering with someone in the area you want to invest, or by going turnkey.
I don't think either answer is inherently wrong or more right than the other, it just depends on what someone is comfortable with and what they feel is best for them as an investor.
San Jose, CA · Member since 2013 · 18 posts · 3 votes
12y
Great point Dawn! I have come across that as well in terms of "every market has something good to offer". Our Bay Area market does appreciate really quickly, so it's definitely not all bad. For buy and hold, however, right now is a terrible time here. I missed the boat a few years ago as I was in college and did not have the money or intention to invest. Now, prices have really shot up and the cash flow numbers just don't add up. That's why I'm leaning towards out of state for now.
Thanks for the input!
Jag
Investor · Santa Clara , CA · Member since 2013 · 155 posts · 144 votes
12y
I'm pretty new with out of state investing, but so far that property has been a lot easier to deal with than my local properties. I don't use a PM locally, and probably get a text/call once every 3-4 months. I'm not complaining at all and actually have some great tenants locally, but the out of state property has been 100% hands off. I log on to the web portal and see any maintenance requests, etc. but I let the PM handle that.
I hear what Dawn is saying about good deals that can be had in any market... However, this would only hold true for those seasoned investors who know what they are doing. For newbies just starting out without any experience (and not much capital), I really doubt they're going to be able to find these bargains.
Realistically, if you're going to invest in the Bay Area, and you're not going in with all cash, all you're really banking on is future price appreciation. You can look at condos, townhouses, SFH, etc. and you won't find anything that cash flows with a typical 25% downpayment... not today. And it would be a real shame to not cash flow when you have to drop $70k+ on a downpayment. Why not take your money somewhere else and get a much better return?
A lot of folks recommend finding a multi-family, so you can live in one unit and rent out the rest... This sounds great in theory, but again, you have to consider your local market. I've been to the bad neighborhoods in San Jose, and even there, quads start at $800k+. For someone just starting out, that's a sizable downpayment, even if you go FHA...
I love the Bay Area... just not as an investment opportunity right now.
Los Angeles, CA · Member since 2013 · 5 posts · 0 votes
12y
Jay,
My father in-law lives in San Jose and has an incredible cash flow model for real estate and great business opportunities in the Bay. Please email me at [email protected]
I would like to get you in touch with him. I think you may find it beneficial.
I know an investor from Oakland that has all of his investments in OK & TX, some 35 properties. He has a local property manager who takes care of the day to day and visits the area 2 or 3 times a year.
Another investor I know lives and works in DC and has 20 houses in FL. He has a handyman/property manager on the ground there and gives all his tenants the owner's phone number. If a problem can't be resolved with the handyman/PM then the tenants can call the owner.
i used to own property in 7 states, key words is used to. I've already sold investment properties that were 30 minutes away, as been too far away. I self manage my properties and like to have them close by that I can look after them and closely manage them. If there is a problem, it is often corrected that day. I also believe that "Nobody will manage your property as good as you will yourself." I've seen management companies that don't work nights or weekends for example.
Prices of investment properties drop off once you get beyond the commuter zone. Around here few people drive more than 50 miles one way to work, in your area it may be further. But beyond that commuter zone the purchase prices drop off, and so do the rents, but the prices drop off more, at least around here. Even in small rural towns where there is not great appreciation or growth there are still rental properties some of which have great cash flows. Some Philadelphia investors sold all the Philly properties and bought a bunch of houses 100 miles away. Their typical house was $20,000 and renting for $500 a month.
Just made an offer on a package of 20 houses in St. Louis (I live in Austin and feel your pain). If the deal goes through I'll be able to answer your question in about 6-12 months :)
San Jose, CA · Member since 2013 · 18 posts · 3 votes
12y
@Jay Y. absolutely agree with you. For a first time investor, it's just way too expensive here.
@David Krulac I have looked at properties that are slightly further away from me (outside the "commuter zone") and the cashflow still does not add up. The rent is much too cheap and the prices still relatively high (I don't think you can even buy a shack for $20,000 in Cali!). The deals only slightly start making sense about 2-3 hours away, in which case I might as well be out of state because I can't manage from that distance anyways. These California prices inflate very quickly. Thanks for your comment!
@Gunnar Teltow Glad to hear! Good luck and keep us posted! =]
Investor · Santa Clara , CA · Member since 2013 · 155 posts · 144 votes
12y
@Account Closed Incredible cash flow in the Bay Area? Sounds awesome, would you mind sharing some numbers? There are so many investors interested in investing in the Bay, I'm sure they would jump all over that...
This thread is focused on the new investor making their first buy and hold purchase. Does the model still work?
Los Angeles, CA · Member since 2013 · 5 posts · 0 votes
12y
@Jay Y. We look for apartment buildings on the peninsula in C or B shape in A locations. We invest with more equity than debt for immediate cash flow on a 5 to 7 year hold. We remodel and re-tenant for cash on cash returns distributed to investors quarterly starting at 4% but building to 10% and ultimately selling the property in year 5 to 7 to double the equity. The position is held in a TIC structure so the investor receives a grant deed for the position and remains independent in the deal for the duration with the ability to 1031 upon exit independent of other investors in the deal.
To answer your last question, yes, we are currently performing to the above returns to our investors in the Bay Area buying 20 to 70 unit buildings on the peninsula, specifically San Mateo county. If you shoot me an email I can get you more info.
Investor · Los Angeles, CA · Member since 2013 · 231 posts · 260 votes
12y
@Jag Sekhon , as others have said this an age old topic that has been debated many times.
I am surprised your post did not attract the turnkey providers out of the water. They will make the argument that no property in CA will ever make sense, you'd never want to manage your own property and so on. Of course, this "advice" is a bit over the top and self serving.
There are others on BP who have done okay with out of state investing and that may well work for you, but I'd be skeptical for the following reasons:
1. Managing a property manager is always more difficult from a distance. Your one property will be at a disadvantage vs. a local owner that can have face to face meetings and is driving by a property on occasion and has multiple properties. Also, don't you think it will be tougher finding a new manager from so far in an unfamiliar place.
2. Doing any type of rehab will be more difficult and while you may buy a recently rehabbed property, what happens years down the line when the property gets beat up and out of date and you are thousands of miles away?
3. It is going to be much more difficult for your to evaluate neighborhoods to invest in from thousands of miles away and also trends like rental rates in those neighborhoods.
4. You'll need to add travel costs and additional state tax returns to your costs.
5. If you go the turnkey route, realize that you are you are at the end of the line after they have made their fees.
I would first go to your local real estate clubs. There you can meet people and see their strategies. If you want a cheaper property there are many inland areas of CA that you can drive to easily that have cash flowing properties that you can find with a little work. If after that you still want to go out of state go for it.
Investor · Sacramento, CA · Member since 2011 · 87 posts · 56 votes
12y
I'm from SF, but now live in the Sacramento area. I can't speak to out of state investing. There are opportunities here, but you need to move fast. I'll toot my own horn (weakly). I'm currently busy with buying/fixing/selling my own properties, etc, but I am a RE Broker/ GC/ PM. Feel free to contact me to discuss opportunities and the market here. I may be able to help.
Also, bummed I missed the BP meet up yesterday in Sac!
Investor · San Francisco, CA · Member since 2010 · 910 posts · 889 votes
12y
I live in San Francisco but have been buying out of state. There are some areas for cash flow close to here such as Sacramento, Richmond, Fresno and Modesto. However, I saw more value in Phoenix a few years ago and now looking at Houston closely.
San Jose, CA · Member since 2013 · 18 posts · 3 votes
12y
@Matt Mason Definitely good points to consider. My next step is to get involved with local clubs to see what they are doing. I would much rather buy a property within driving distance vs out of state. Thanks for the post!
@Craig E. The only problem with Sacramento for me is the distance. It takes me 2 and a half hours to get there and 2 and a half to come back. As I've never managed a property before, can someone share their experience with property management? How often can I expect to have to drive up there if I were to manage it myself? And if I got a property manager, then wouldn't that just be the same as investing out of state, as I would not go to the property anyways? Thanks!
San Jose, CA · Member since 2013 · 18 posts · 3 votes
12y
@Johnson H. One of my big concerns with out of state is property management. As a first time investor, I will only be starting off with one property. I've heard that if you only have one property, property managers won't manage it very well because they're more focused on their larger clients. How did you choose your property managers? Did you encounter this problem? Thanks!
Specialist · San Dimas, CA · Member since 2011 · 350 posts · 122 votes
12y
@Jag Sekhon - As everyone has already stated in the forum, there are pros and cons to both. However, if you were working with me as a client or if you were a friend looking for advice - I would reccomend you stay in state (at least for your first property).
I'm not advocating you stay in your local market, but there are plenty of markets within 3-5 hours of your home you could find cash flowing deals. I can't speak to investing out of state, as I never did that, I bought my entire portfolio here is CA. All of my rentals cash flow, all my rentals have property managers and there are still opportunities in my local to buy - not as good as they were 4 years ago thought :(
The key to your success is going to be: learning a new market, building partners in your target market, and of course building systems to minimize the day-to-day operations. This will take time, but the more you understand your target market (in or out of state), the more confident and secure you will feel about your investment.
The main advantage I've found with investing IN STATE is the proximity. My market is roughly 2+ hours away from my house, which is close enough to handle urgent matters and retain a large amount of control. I don't manage my own portfolio, but I do keep a close handle on my property management team and I am very active in the market.
Before you buy anything, make sure you learn the various aspects of the business mainly, flipping, landlording, lending, etc. and see which avenue(s) line up best for your lifestyle. Owning rentals is not "passive", just less "active", they still require work and they should be viewed in the same light as starting a small business. They require significantly less amount of day-to-day work, but if your intention is to own multiple properties, you'll need to invest time in building systems so you don't get bogged down with the day to day operations. Many newbies make the mistake of trying to do everything themself (repairs, property management, etc.) this doesn't work once you start to scale, or if you just don't have interest in being a handyman/property manager.
Depending on your goals, trust deed investing (LENDING) may also be a viable option (depending on your working capital). I know many investors who would much rather take a 8-11% annual return without having to deal with all the headaches/risks associated with owning rentals.
Lastly, start at your REIA club, talk to other investors, learn about the various aspects of RE investing and connect with other folks here on BP.
I hope that help shed a little light on your inital question.
Lender · Tampa, FL · Member since 2013 · 2k+ posts · 2k+ votes
12y
Given we don't invest directly in real estate, but in non-performing 1st mortgage notes, we've had a great deal of luck investing in areas outside of our home MSA. We convert the NPNs to REO and take it from there. The hardest part is finding great "boots on the ground". In some areas it's been pretty easy. In others, it's been tough. Someone in the restaurant industry told me one "no one watches your money like you do." I was really, really reluctant to buy anything that I couldn't watch like a hawk, but I did find that I could build a team that made the venture profitable. Good luck with your endeavor.
Specialist · San Dimas, CA · Member since 2011 · 350 posts · 122 votes
12y
Hi @Account Closed !
Thanks for reaching out. No, I do not invest in the Bar Area. I'm very active in a few sub-markets in central California. I've found them to be incredibly lucriative and often over looked by the other investors.
It's amazing, how everyone in my local real estate club is eager to jump on a plane and fly across the country to find cash flow. I understand why people buy out of state, but I'd much rather be able to hop in my car and get to my market as needed.
Investor · Santa Clara , CA · Member since 2013 · 155 posts · 144 votes
12y
@Arthur Garcia You bring up a very good point about the first property. Like buying your first stock, it's initially very nerve racking if you haven't done it before. Over time, I've found that this fear starts to wane a bit... kind of like having a basket of 20-30 stocks... if one goes bad, you're still well diversified.
Obviously, when first starting out this isn't the case as all your eggs will be in one basket, so to speak. So, yes, you definitely have to assess your own risk tolerance and comfort level before deciding to go out of state. If you are in any way doubtful and feel uncomfortable, don't do it. It's better to stay in state and accept a smaller return than to not invest at all.
With all that said, and I know not everyone is a fan of turnkeys (you obviously pay a premium for their services), the one thing they do provide for an out of state investor is a complete solution. Most turnkey providers will sell you the property directly (you don't need to find a realtor), rehab it, place the tenant, and then run the PM. Thanks to BP, it's easy to ask around and get referrals to reputable companies.
Of course you could do all this work yourself locally... However, if you're going to be investing in an area that's a few hours drive away, do you really want to spend all your free time on the weekends trying to put a team in place? Time is money after all. And how do you even know that your local PM will take good care of your property? It's still going to be a risk/gamble, in state or not. Also, if all they're doing is running your PM, that's the only way they're going to make any money off of you... With turnkeys, the companies do have incentive to excel from the PM side b/c they'll want you to buy more properties (this is where they make their real money) in the future and help with word of mouth referral...
Specialist · San Dimas, CA · Member since 2011 · 350 posts · 122 votes
12y
@Jay Y. - I have no problem with turn keys. In fact for many investors , this is the perfect fit. However, when I set out to build my portfolio, I wanted to maintain control and accessibility. I have found in my business that being able to jump in my car to get to my market has been extremely useful.
That being said, I think you can build contacts and a business team through networking here on BP and in your local REIA.
I will say that one of my reasons for noting going with a "turn-key" company is the lack of discount on subject property. When I started buying, I needed to purchase SFH 20-30% under market value (built in equity), my experience has been that turn keys are typically at full list. Again, not always a bad thing, if your goal is a healthy cash on cash ROI.
It sounds like you have a great plan in place, thanks for sharing!
San Jose, CA · Member since 2013 · 18 posts · 3 votes
12y
Thanks for responding everyone! You guys rock!
@Arthur Garcia You said your market is about 2 hours away from you. My question is, since your property manager and contractors are the ones handling the operation/repairs, why does it matter whether your property is close or not? It seems to me that the only way proximity would help is if you were close enough to actually manage the property yourself. Hopefully I'm not just being a total newb right now!
@Jay Y. What is a turnkey company? I've heard of turnkey properties, but it sounds like you're talking about something different. Again, sorry for the newbness!
Specialist · San Dimas, CA · Member since 2011 · 350 posts · 122 votes
12y
@Jag Sekhon - the reality is that you CAN"T outsource everything. You can do your best to create systems to scale, but I've found (collectively overseeing 20+ rental properties and multiple rehab deals), that you still have to have access. Meeting contractors, reviewing work, scoping new properties, etc.
Again, I'm not saying your CAN"T buy "turn key", but there is still pieces of the business that are better suited in person, IMO. It would be like running a small store front business, you can hire people to do all the work for you, but I'd rather be driving distance.
Investor · Los Angeles, CA · Member since 2013 · 231 posts · 260 votes
12y
@Jag Sekhon , don't think you can just buy a property and forget about it and just cash the checks coming in. Invest in stocks if that is your intention. Even though investing in real estate is work, many aspects are quite enjoyable at least IMHO.
There are quite a few success stories with out of state investing, but there are also a few horror stories too. For example, check out this thread. You definitely have to manage your PM no matter how good they are.
Not trying to scare you, but you need to understand risk and if you feel you can live with that or mitigate it.