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and while you may buy a recently rehabbed property, what happens years down the line when the property gets beat up and out of date and you are thousands of miles away?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.
San Jose, CA · Member since 2013 · 18 posts · 3 votes
12y
@Arthur Garcia I can see what you're saying. Personally, the only reason that I am looking out of state is because the Bay Area (and most of California) market is so insanely inflated that a first time investor like me really has no chance. I would MUCH rather invest close to home. You bring up a good point about not outsourcing everything. That is one of my big reservations about investing out of state.
San Jose, CA · Member since 2013 · 18 posts · 3 votes
12y
@Matt Mason I definitely see your point. I'd much rather invest nearby where I can keep an eye on things. The only reason I'm even considering out of state is the ridiculous California, and escpecially Bay Area, prices. To be honest, I've done a lot of handyman/repair work on homes with my father in the past and I really enjoy it (no I'm not crazy)! Ideally I would buy, repair (within reason), and manage my own property.
I'm starting to get the feeling that for my first property, I might want to just suck it up and try to find something relatively close (2+ hrs away in the Central Valley) to get my feet wet before considering going out of state.
Did you quit your job by any chance? Heard your podcast. What a bold move to sell your primary house.
@Michael Stonehill
That's a value add play, and it's very profitable. However, a beginner typically doesn't have that kind of dough.
@Jay Dao and @Jag Sekhon ,
If you're investing out of state, do you get the benefit of leverage OPM? Will you get any kind of appreciation? If you guys are purely looking for yields with no appreciation, why not invest in Trust Deed & Tax Lien.
With stocks, you can hit a button & you're out. With turnkey properties, you're guaranteed to lose money when you want out more than 1/2 of the time.
Investor · Santa Clara , CA · Member since 2013 · 155 posts · 144 votes
12y
@Arthur Garcia , @Matt Mason are right, you can't outsource everything. Turnkey investing (and real estate in general) will never be 100% passive. Semi-passive income is the best you can hope to achieve.
I also agree with the lack of discount when going turnkey. That's something you'll likely be forfeiting. It's kind of a trade off between time and money... Again, using stocks as an example, you can purchase an index fund that tracks the entire S&P 500 for a small fee... or you could hand pick your own stocks and build your own dividend growth index fund for income. If you want total control and higher yield, do it yourself. If you want to be more hands off, go with the index fund.
Building a local team is definitely possible if that's what you want to do. But also ask yourself, which markets do you want to invest in? Does it make sense to invest a lot of time and effort into building a local team if you only plan on buying one property there? Just something to think about...
For myself, sure, I'd love to own 10 properties in the Bay Area (an area that's always in high demand for rentals b/c of all the jobs here)... and I have built a local team here. I could go further out to Modesto or Stockton and grab a few properties over there and establish a local team... but how many would I really buy? Is that a growth area I want to invest heavily into? Would it be worth all the work? However, if I decided to go turnkey instead, I could buy a few in Houston, Dallas, Indy, etc... and diversify that way. Remember, it's extremely important to buy in areas where the jobs are and where the people want to be. You have to be certain of the area you are investing in before you start planting down any roots.
Investor · Santa Clara , CA · Member since 2013 · 155 posts · 144 votes
12y
@Jag Sekhon A turnkey company is simply a company that specializes in selling "investor ready" properties. Basically, they market to investors who want to buy a property that has been rehabbed, and rented out to a tenant (usually a condition to closing). Typically, they also run the property management as well. They try to make it as hands off as possible for the investor, which is part of the attraction, especially for busy professionals.
@Account Closed Appreciation will vary depending on location. Generally, I think people focus on out of state for the cash flow. I'm a fan of leverage since the cash on cash is so much higher... and I want to take advantage of the low interest rates.
Real Estate Coach · Venice Beach, CA · Member since 2012 · 6k+ posts · 3k+ votes
12y
Hey Jag! Super cool name.
I live in LA so basically the same situation as the Bay area when it comes to buying properties. I only buy turnkeys out-of-state. I would say as a new investor I would only go turnkey just because the teams are already in place and the work is already done. If you decide to do everything on your own from a long ways away, that is much more advanced and risky for a newer investor. My first properties I ever bought were turnkey and I think it's the perfect setup for someone new. Most people I know buying turnkeys are fairly new, if not brand new, investors. The only trick is being sure you are working with a legit team. If you are, you're in good hands.
I get many calls from Californians with the same "disheartening" complaint. The reality is that coastal California is very expensive and the numbers don't make sense (unless you can find a steal of a deal in a distressed property to fix up, but even then I have my reservations).
Investing in another market, probably out-of-state, may be your best bet. There are many markets where the numbers make sense, and the local economy and housing market is better than your backyard. This is where you should look for opportunities. You may want to download our "2013 Housing Market Forecast" to give you some food for thought and a few ideas to get you started. Also...
San Jose, CA · Member since 2013 · 18 posts · 3 votes
12y
@Jay Y. That sounds like it might be a good idea for me. Thanks for the info!
@Ali Boone Thanks! Hipster Investments is quite a snazzy name as well! If I do end up investing out of state, I think I will go the turnkey route. Any advice on finding a good turnkey company? What should I look for?
@Marco Santarelli Great article! I like the idea of being "market agnostic". Thanks for the suggestions!
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!
I have out of state properties & have experienced first hand the pluses & minuses.
Proximity is important to me:
1) The ability to monitor a situation with first hand information.
2) The ability to step in if needed to manage a situation
3) Familiarity of areas, laws & regulations.
Here is my personal preference ladder of priorities for rental property:
1) Locally owned property
2) Regional owned (no more than a 3 hour drive one way)
3) Joint venture locally
4) Joint venture regionally
I live in an city where the average home price is $616,000
That $616,000 house would rent for $2,800-$3,000/month. Not a place to find positive cash flow.
But if I am willing to drive a bit further & focus on a niche. I can find opportunities. I don't need that many to live a very comfortable life.
The concerns I have with some "turn-key" markets are:
A) There has to be adequate inventory in order for these companies to be viable. When supply is so plentiful you need to consider what will drive future increase in rents & value? If it's Job growth, then make sure there are barriers for new construction which will also increase supply.
B) If your target neighborhoods are getting flooded with investors & for rent signs, you may not have pricing power
C) The words "Strong rental areas" are not something I consider desirable. I have had better returns when I own rentals in a neighborhood where they are very few homes available for rent & more of a owner occupied demographic.
Real Estate Coach · Venice Beach, CA · Member since 2012 · 6k+ posts · 3k+ votes
12y
Thanks! Tried to come up with something that would catch people's attention :)
I think the best way to find the best turnkey companies are through connections and networking. Find out who people have used and like, and learn what even constitutes a "good" turnkey company. The best turnkey companies I know have the following components: good communication (you'd be surprised how bad it can be in turnkey world), good quality properties, and good property management. If those three things are in line, although I guess communication isn't required for a good investment (lol), you should be fine.
I have worked with both bad and good turnkey companies, so I am very up on who I think is good and bad based on the several learning experiences I've had. I'd be happy to share who I think is good, with the caveat that if you were to buy from them I would make a referral fee. Required BP disclosure :)