Is it better to invest in my area that has sky high prices or invest in other markets?

48 Replies

I just recently moved to San Francisco and was curious with the home prices being so high here, is it better to look at other markets (Atlanta, etc) to invest in or continue to learn the market out here in the bay area and find those diamonds in the rough?

I would love feedback from anyone who has done investing from a far just to see the pros and cons of it all. 

Cheers!

Heyo. I live down in LA, so same housing price problem here. I've always invested out-of-state for cash flow. I can't speak for any diamonds in the rough, but if cash flow is your goal, you aren't likely to find it in SF. Maybe Fresno or somewhere, but even then it's fairly minimal and there are a lot of issues with buying rentals in CA (tenant-friendly laws, etc.). In my opinion the only thing investing in CA makes sense is for flipping or speculating on appreciation.

Hey Ali! Thanks so much for the response. I completely understand what you're saying and cash flow is definitely the goal for my investment strategy. I didn't think buying rentals especially in the Bay Area would be possible but I figured I would ask anyway. Any tips or advice for someone who is just starting out when it comes to investing out-of-state? 

I always suggest to stay in your local market since you know the area and can better manage your portfolio. But in your case... If you choose to stay in SF to invest, seek out JV partnerships with other established investors in the area.

If there are diamonds in the rough you need to work within an established system of finding them.  Otherwise, invest out of state or in other parts of California.

@Shayne - before you look out of state consider looking for other areas in California. Investing out of state can come with some additional expenses. Also consider what your strategy is - SFH, Multi-Family etc as each market offers different options. Where we invest out of state we have support systems (family, friends, contractors etc) which helps us a great deal.

I hope that helps.

Plenty of people find cash flowing deals right here in California. That whole "tenant-friendly laws" is the biggest cop out I hear again and again. I purchased 6 rentals last year and eventually sold 2 of those, but the other 4 are doing great. And, I bet I get more cash flow out of them and better appreciation than whatever you might find in some distant land. Lots of my friends find, buy and hold properties every month and there are other investors here on BP who have found great cash flowing deals right in your back yard. 

Where I live is super hot also and there is very little chances of getting cash flow which is why I decided to invest out of state also as of about a year and a half ago.  Ive purchased 3 properties out of state so far and they are great so far.  

Takes a lot of work and research to find good income producing properties out there.  Be very weary about about pulling the trigger with anyone until you are absolutely sure.

I would be more then happy to help you by answering any questions.  I know when I first started it would have made my life a lot easier.

Thank you for all your feedback and knowledge from past experiences. I am looking to invest in smaller multi-families, refinance, and then eventually do a 1031 exchange for larger multi-families. Obviously these strategies depend on the market and is unique to each situation but let me know your thoughts. 

I love the Real Estate Guys podcast, and here is their advice. "Live where you want to live but invest where the numbers make sense."

You'll need to decide exactly what you invest for (cash flow, appreciation, cool factor) and what your ultimate goal is (be the awesome landlord, manage the managers, drink mohitos on the beach, etc.). If your local market supports your approach and destination, jump on it. Otherwise, look to other markets.

@Shayne Hastings I'm always a big advocate for staying close to where you live. However; many others such as Ali (a turnkey broker) think going out of state is the way to go. The truth is, both have their pros and cons. 

Whatever you decide to do, make sure you do your own due diligence. Get up to speed on the market you are looking at: rents, sales prices, compare prices (and be sure to compare apples to apples with age of house, size, lot size, finishes, etc.) What is the local economy like and how broad based is it? Are there a lot of units on the market for rent or few? Are rents high or low? What about properties for sale? Are there a lot of foreclosed, vacant properties in the area, or is it a tight market with high demand? Are there a lot of families buying homes or mostly investors? 

The reason that California cities with appreciating values are like they are is due to the high demand, strong broad based economies, great weather, and much more. As was mentioned earlier, there are areas of California where you can still find cash flowing properties. There are also niches that can cash flow in high valued areas sometimes (vacation rentals, short term room rentals to college students, senior housing, sober living or other type of transitional housing, etc.) 

Originally posted by @Shayne Hastings:

I just recently moved to San Francisco and was curious with the home prices being so high here, is it better to look at other markets ...

If you can weather the next 6 year down cycle with negative cash flow then jump head first into the SF market.

I don't know how far away the down cycle is some are saying 1 year I think possibly more than 3. But what is your exit strategy? Sell for appreciation before the collapse? Will the property cash flow BEFORE the fall? Enough to survive the hold time in the fall?

I relocated from Orange County CA because the numbers made no sense. I'm in Detroit where I buy properties with unbelievable cash flow.

AND

better appreciation than anywhere else .

@Shayne Hastings

If you do decide to go across the country make sure to do some due diligence on the area first. Many people fall into the trap of buying in areas they have not researched enough. You don't want to be the guy who bought the houses on the wrong side of the tracks.

A common problem that many investors make who are considering investing out-of-state is they ONLY focus on the market and just assume they can find a good property management company.  They find a market they love and find a property where the numbers work for positive cash flow (at least on day 1.)  Very little time is spent interviewing the property management company.  

When looking into cash flow markets, you'll find a handful that have low prices, high rents, strong and growing economies.  What I would do is make a short list of those markets that you want to consider (3-5) and then focus on finding the best property management team in those markets.  Stay disciplined and only pull the trigger when you have fallen in love with both the market and the property management team. 

The property management team is the only thing that turns your numbers on your spreadsheet into actual money in your bank account. :)

Disclosure: I am also a turnkey provider

Originally posted by @Gregg Cohen :

A common problem that many investors make who are considering investing out-of-state is they ONLY focus on the market and just assume they can find a good property management company.  They find a market they love and find a property where the numbers work for positive cash flow (at least on day 1.)  Very little time is spent interviewing the property management company.  

When looking into cash flow markets, you'll find a handful that have low prices, high rents, strong and growing economies.  What I would do is make a short list of those markets that you want to consider (3-5) and then focus on finding the best property management team in those markets.  Stay disciplined and only pull the trigger when you have fallen in love with both the market and the property management team. 

The property management team is the only thing that turns your numbers on your spreadsheet into actual money in your bank account. :)

 PM is a big deal anywhere but especially when investing out of state. @Chris Clothier had list of great questions to ask a PM/turnkey provider. 

http://www.biggerpockets.com/forums/311/topics/200098-questions-to-ask-turnkey-providers?highlight_post=1348203&page=1#p1348203

Investing out of state has some major challenges.  The #1 being property management.  

When you only have a few units in another market you are forced to hire a PM and being so small, you are not their priority.   And PM will make or break your investment.  So unless you can scale quickly to have your own in house PM then it can be a very rocky road for you.  

The other option is buying from a TK provider.  They usually have their own in house PM and their business relies on repeat customers, so they are incentivized to make sure your investment is profitable.  The initial cost may be greater but in the long run I think they are better equipped to run the property.  

@Shayne Hastings

  This is of course is a much talked about topic on BP  the CA investor  ( basically the West coast investor)  thinking they are priced out of their market and go look at others.

If its multi your interested in.. Then for sure you can find cash flow in CA. its the SFR;s that are problematical in the high demand areas of CA. Basically anything within 40 miles or so of the ocean.

Also the strong urge to migrate east is based on price of entry.. IE price of entry being so low.  There are great teams in most every market.. and then there are one's to be avoided of course.  Its your job to cull them.

Pm as stated above will make or break you experience..

However if your from the Atlanta area that could be a good place to start as you know the market ( or I presume you do) and there is all sorts of inventory to buy there.

Just do not get sucked into buying the highest cap rates as those are always the highest risks.. it stands to reason correct ?

The San Francisco Bay Area is probably the most profitable area for real estate investing.  

Rents?  http://www.inquisitr.com/2139618/new-median-rent-p...

I've always invested in high cost areas.  i did buy in Vegas in 1994.  Meh.  Rents not much more 20 years later and appreciation just keeping up with inflation.  

Hawaii property bought in 2008, yes Sept 2008, has now appreciated about $300,000.  

Think about what that $50,000 Memphis/Indianapolis home sole for in 1980, 1990, 2000, 2010.  Compare to SF.

http://www.zillow.com/research/landlord-profit-735...

Welcome to BP. I recently wrote a blog post on this subject.

You can make money in any city. 

According to the historical numbers S.F is #2 @ $6000 per mo so keep that in mind. 

Atlanta came in at a $1700 per mo. ( check zillow link above)

For long term buy and holders I think it is important to factor all investment fundamentals.

If you only focus on initial monthly cash flow you could miss out.  

Good Luck with your search! 

Originally posted by @Matt R. :

http://www.zillow.com/research/landlord-profit-735...

Welcome to BP. I recently wrote a blog post on this subject.

You can make money in any city. 

According to the historical numbers S.F is #2 @ $6000 per mo so keep that in mind. 

Atlanta came in at a $1700 per mo. ( check zillow link above)

For long term buy and holders I think it is important to factor all investment fundamentals.

If you only focus on initial monthly cash flow you could miss out.  

Good Luck with your search! 

 Seems like a pretty terrible chart. Doesn't take into account purchase price or cash invested. Avg home price in SF 1.04M avg home price in Atlanta 169k. What is going to better long term? 9 houses in Atlanta or 1 in SF.

Originally posted by @Shayne Hastings:
 

I just recently moved to San Francisco and was curious with the home prices being so high here, is it better to look at other markets (Atlanta, etc) to invest in or continue to learn the market out here in the bay area and find those diamonds in the rough?

I would love feedback from anyone who has done investing from a far just to see the pros and cons of it all.

Welcome to BiggerPockets!

This is a good question and one that will attract great debate across bigger pockets.  You will get many different opinions but the bottom line is what do you want to achieve?

If you have the skills, capital, resources, and most importantly TIME to be an active investor in order to locate the "better" deals in your area then that may be the right strategy for you.


On the other hand, if your time and resources are limited and you prefer to be a passive investor then you shouldn't limit yourself by your local market.

Real estate investing is based on the numbers-which means the rates of return. If you can find deals that meet your goals and criteria in your area then you have found your answer.

However, I'm sure you've discovered that aside from affordability below, property prices being very high, and rent a value ratios being under 0.5% in most areas, you will have a very difficult time finding a deal that generates the returns you find attractive.

A large percentage of our clients come from California, New Jersey, New York and other coastal markets for obvious reasons. The numbers simply don't make sense.

I've been investing out-of-state from California since 2004. There are a great many deals to be found in other markets without relying primarily on the hope [speculation] of appreciation. My number one criteria is cash flow, followed by equity, then appreciation.

I could go on about the pros and cons, including some of my personal horror stories, but I won't bore you to death in this thread.  I'll save that for another day.

Continued success!

Originally posted by @Jay Hinrichs :

@Kevin Wood

  most likely the SF one  I 10 years SF worth 2 mil plus... Georga houses go up say 50 k each

 Could be right and SF is definitely a better appreciation play, but I think comparing a house in Atlanta to a house in SF is just a poor reference. Should look at equal cash invested as that would be a core factor for any financial decision.

@Kevin Wood

  I hear ya.. but I am personally a product of CA  appreciation. I bought my first home in Milpitas in 77   then Palo alto in 82  and another in Palo alto then moved to Silverado and finally sold all and came to Orygun.. over those 25 years and just moving up in personal residences I pocket right at 2 million tax free... and that's just personal resi.. I did not even own any rentals... Bay area other than 1990 to 1995  and the 08 to 2011 has shown constant move up in the market...

I grew up in Cupertino.. I remember when houses hit 100k there.. everyone thought the bubble was going to burst then who could afford a 100k house.  :)

regardless of where you want to invest.. I would buy were you live grab something in Mt. view.. buy a small multi... Multi's work in the bay area they make 4 to 6% and you have a blue chip asset.