Should I invest in my own state?

19 Replies

I live in Arvada, Colorado, a suburb of Denver. The housing market here is very expensive compared to other places in the United States, where even a small townhome (2 beds, turnkey, no repairs, good area) runs around 100k. Ouch. And the kind of property I want to buy, multifamily, easily runs 250k to 400k (unless you're rehabbing, then slightly less). 

I'm only 22, and I don't have any other financial resources besides myself and my hourly wages. No money in the family, no asking mommy or daddy for a down payment. I'm afraid that the amount of money I can save within a short amount of time won't be worth investing in my own area because of the over inflated prices. The same $20,000 or 3.5% investment I could make on a fourplex in my own state, FHA and therefore owner occupied, could also be 20% down on a fourplex in another area with no need to owner occupy.

That being said, should I invest in a different state with a weaker housing market? 

I would actually prefer to owner occupy in a fourplex and do my own property management for the experience and extra cash flow, but I just don't think I can purchase in my own area...

I've read the blogs and watched the videos of some other successful investors, namely @Lisa Phillips and @Joe Fairless who invest in other states with a lot of success. However, investing outside my own neighborhood feels daunting, since I don't have personal contacts anywhere but Denver.

How do I determine what is right for me? Thoughts?

If you don't have your own house yet I would definitely suggest an owner occupied loan on a duplex/triplex/Quad. Duplexes aren't to hard to find. The others a bit tougher. Hard part is you will be up against some cash buyers. So be smart with your offers and don't over pay. If you are brave enough to buy in a fringe area you can do pretty well. See what you can get qualified for on a loan. 

Originally posted by @Tom Spaeth:

If you don't have your own house yet I would definitely suggest an owner occupied loan on a duplex/triplex/Quad. Duplexes aren't to hard to find. The others a bit tougher. Hard part is you will be up against some cash buyers. So be smart with your offers and don't over pay. If you are brave enough to buy in a fringe area you can do pretty well. See what you can get qualified for on a loan. 

 Agree with this 100%!

@Tom Spaeth  and @Anson Young  There's no question that I want to go toward multifamily - everything seems to support that idea, from blogs of other investors through to my own number crunching. Hands down on this decision.

The issue is in raising finances - I can produce only ~15-20k in the next 6-8 months which will barely cover down payment on a multifamily plex in the Jeffco area, and I may not qualify at all due to lack of enough personal income from my full time job and lack of reserve funds (6mo reserve mortgage payments and reserve repair funds), etc.

The same 15k could be 30-50% down on a fourplex somewhere much, much cheaper like Chicago, Detroit, Cleveland, Milwaukee etc. With some repairs, there can be a lot of cash flow there. 35k and some repairs seems like much less to swallow than 350k and some repairs.

Because of my lack of cash, am I thinking way too big looking at my own cities? Should I even invest in Colorado? 

The hard part about other cities is that you don't know them. It can be pretty hard to really know where you should invest. I lived for many years in Chicago. I knew this wholesaler who was working Chicago from Here. I would have been scared to go to most areas where he was wholesaling. The areas where you can get great deals may not be good areas to own something. They look great on paper.

That all said (as a gentle warning), There are great deals that can be found in other cities. You just have to do your research.

However, maybe you are looking at this problem with one solution in mind. Namely having to earn money through your job. The first money I earned in real estate was to find a deal and give it to another investor for a fee. Do that a few times and then you might have some down payment money.

This works if you are have the time to go look for a deal and willing to do the work. It's not quick and easy. But it works.

Call anytime if you want some thoughts on that.

One suggestion. Look further outside the Denver metro area. Some of the smaller towns out on the prairie and even up in the mountains (away from the skiing areas of course) have possibilities.  When I moved here, I could have bought a house with a postage size lot in town, but I picked a place 16 miles from town out on the prairie, and for the same price I bought a house with over 2 acres.

I'd be very careful about owning anything you can't drive to. I've done it, and won't be doing it again. If you do, make sure you have competent and trustworthy prop. mgt. on the ground there.

You might try places like Pueblo or Greeley or any number of other towns in Colorado.

@Kayla Davis  

I'd stay close to home. you can buy up to a 4 unit, with one unit owner occupied with FHA financing for 3.5% down and FHA also allows the seller to pay up to 6% of the closing costs of the buyer. Pretty hard to beat that deal. They will require you to sign a document at settlement saying that you will move in and live there for at least 1 year. but I've also seen where they allow a grace period for a property with full occupancy until there is a tenant vacancy.

Once you stay there for a year, you keep that property and buy another. Somebody I know did that 7 times moving and buying owner occupied properties including a 3 unit, a 4 unit, a townhouse, a condo, several SFH and a farm. All with the lowest interest rates and lowest down payments of owner occupied mortgages. All perfectly legal.

@Kayla Davis  what about trying to pick something up with owner financing?  That would eliminate the down payment problem, but you have to make sure the numbers work out well.  If you take a look on the forums, you'll see that local deals are very, very tough to find right now and some investors are just not buying until the market changes.

Another option is to buy a place and rent out the extra rooms if you're comfortable with that.

Kayla, one way around not having enough funds for downpayment is creative finance. Here's a sample deal and how I would pay a lot less cash as downpayment vs conventional way:

Rent: $10,000/mo

Sales price: $1,000,000
Offer: 80% 1st mortgage/ 10% 2nd (owner carryback)/ 10% downpayment
Downpayment required: $100,000  ($200,000 less $100,000 owner carryback 2nd)
I will close this close to the time they collect the rent so I can get pro-rated rents and security deposits (assume sec deposit is the same as the monthly rent)
By doing this, the downpayment required is now $80,000  ($100K - $10K prorated rent - $10K security deposit)
Then I will have an inspector inspect the property and find deferred maintenance items that need to be fixed. Let's assume the property needs $50,000 deferred maintenance items. I will negotiate a DEFERRED MAINTENANCE CREDIT at closing...
So the downpayment becomes:
$80,000 less $50,000 deferred maintenance credit = $30,000

Think about what just happened here: your downpayment went down from $200K (if you do things the conventional way) down to $30,000 on a $1M deal - only 3%!

In addition, you can also SYNDICATE a deal. I described in my podcast how I got a 100+ unit apartment building by putting just $5,000 of my own money in the transaction. Here's the link if you have not listened to it yet:

http://www.biggerpockets.com/renewsblog/2014/04/10...

This post has been removed.

@Wendell De Guzman I like your creative way of doing deals! only thing i would add that you also find a creative realtor/buyer's agent and you can borrow your his/her commission also and use it towards closing cost on your investment property you about to close on! 

Back in the 90s I called about 25 realtors, 24 said no but one said yes for my asking if he/her  would accept monthly payment in lieu of full commission at settlement.

So i ended up paying this guy about $150/month /property, so after purchasing a couple of more property with him, he would start receiving $1200-$1500/month every month, even during snow storms, when other realtors were starving. And it allowed me go purchase SRs with very little money,  Win-Win

@Nick Keesee I think what @Wendell De Guzman was saying that differed maintenance could help you to acquire a property that otherwise could be out of your league. (you don't have enough cash to purchase it at time of listing) But If YOU are CAREFUL and make sure you have great cash flow from day one than you could save up for the maintenance items that are coming at you soon.

@Nick Keesee , deferred maintenance is different from repairs the property needs upfront to make it operational. Agree with you the money will have to come somewhere - yes from the cashflow the property makes. So only do this if the property has positive cashflow.

Wow, BIG response on this question! Haha. Thanks everyone that responded with great insight - much appreciated!

@Tom Spaeth  Research is my middle name. ;) There's definitely something to the idea of trying to track down deals for others, but I would hate to be misleading to a possible investor. My gut feeling is that I won't know a good deal until I have some experience at finding them for myself, investing in them and making a profit, but I also understand things like wholesaling are how a lot of people start out. I'm not sure it's right for me. Do you know any good basic guides or investors who have blogs on this?

@Randy Rought  I've often looked at larger country properties, more for what I would prefer to buy and where I would prefer to live... Any advice for looking at semi-rural properties, and how to determine cash flow on a property in a more suburban or rural area?

@David Krulac Were all of those properties bought with an FHA deal? Or was it with a more similar conventional loan that also required owner occupancy? Is this fairly common practice? If so, I would be willing to purchase a townhome locally right away, knowing I could rent it out as my first buy and hold later while using a low down loan to move into something with more units or more substantial cash flow in a year or 18 months...

@Adrian Tilley  I know a perfect duplex with an aging owner who wants to be out from under the responsibility. He said he'd owner finance someone he trusted with 5k-10k down - only downside is, my mother lives in the duplex as a tenant and I really, really can't be my mom's landlady! Haha..  As I was saying to David above, if I could purchase something small and jump to something larger on it's equity or some other leverage tool, that would be peachy as well. Just not sure how feasible it is. 

@Account Closed  That's an excellent win-win for closing costs - going in my newly created file of tips. It's not something I would have thought of, thanks for sharing.

Once again, thanks everyone who has responded and kept this conversation going, I really appreciate all the info!

Kayla

@Kayla Davis  

Some of the properties that my friend bought were FHA, others were conventional, some with only 5% down. All were owner occupied mortgages and all he actually did live in for at least a year, and when he moved he kept the old place as a rental.

The end result was that he had the lowest interest rates, the lowest down payments and a nice little portfolio of rental properties.  When he started he was single by the last one he was married with kids.  To make this work you need to be willing to move frequently.

Originally posted by @David Krulac:

@Kayla Davis  

Some of the properties that my friend bought were FHA, others were conventional, some with only 5% down. All were owner occupied mortgages and all he actually did live in for at least a year, and when he moved he kept the old place as a rental.

The end result was that he had the lowest interest rates, the lowest down payments and a nice little portfolio of rental properties.  When he started he was single by the last one he was married with kids.  To make this work you need to be willing to move frequently.

Does moving within your neighborhood qualify as moving frequently or is there a distance criteria that has to be met? This is in regard to FHA loans.

@Shane Willcox  

 & @Kayla Davis  

As long as you stay at least 1 year, you can move anywhere, even next door.

Say you got a job transfer out of state, that might get you out of the year commitment, that you signed at settlement.  But they are keen on looking for scammers.  The penalty of lying to the Fed is up to $250,000 fine and 5 years in jail.  Don't lie and say you are owner occupied for a year minimum if you are not.

Hi Kayla,

I live just down the road in Wheat Ridge. After several years of being frustrated about the fact that it would take me for ever to be able to afford to get into a multiunit here in Denver I decided to look out of town actually out-of-state. About three years ago I purchased a single-family in Memphis. Then about two years ago I purchased a duplex in Buffalo and I'm currently closing on a four Plex in Buffalo.

I haven't had any problems yet. Making money on both the two deals and expect to on the third. But trust me it is scary. I didn't have bigger pockets when I first started but now that I do it's a great way to meet people in the town that you want to invest. Do some research on markets you're interested in and then set up keyword alerts be active on the posts and you'll get to know people in those markets. I found that people are generally willing to help you. You can travel to those markets and set up appointments with the people that you get to know. Also this is a great way to tap into agents and property managers that have a track record with investors.

The great thing about some other markets is that you can start small ( cheaper) and not get in over your head. I think it's important when you first turn off to be pretty conservative with having plenty of reserves to cover unexpected things. I've been lucky and actually haven't had to use my reserve yet but I would be too nervous without that.

With all that said if I had to do it over again I would definitely buy my first home as a multiunit so I could get FHA financing. And you can definitely do that here in Denver. That would be my first move. Good luck!

If you do set up a keyword for Buffalo be sure to use the new feature you can put multiple keywords down at once. Because I get nonstop alerts when people are having meet ups at Buffalo wild wings.

Free eBook from BiggerPockets!

Ultimate Beginner's Guide Book Cover

Join BiggerPockets and get The Ultimate Beginner's Guide to Real Estate Investing for FREE - read by more than 100,000 people - AND get exclusive real estate investing tips, tricks and techniques delivered straight to your inbox twice weekly!

  • Actionable advice for getting started,
  • Discover the 10 Most Lucrative Real Estate Niches,
  • Learn how to get started with or without money,
  • Explore Real-Life Strategies for Building Wealth,
  • And a LOT more.

Lock We hate spam just as much as you

Join the Largest Real Estate Investing Community

Basic membership is free, forever.

By signing up, you indicate that you agree to the BiggerPockets Terms & Conditions.