Is Moving from LA to another Market a Good Idea?

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Is Moving from LA to another Market a Good Idea?

Account Closed
Burbank, CA · Member since 2015 · 27 posts · 3 votes

Hi Everyone!

I currently live in Los Angeles and I am actively looking to start investing in real estate. My ideal first deal would be a multi-family (anything from a duplex to a quadplex) in which I would live in one of the units and rent the rest. I want to work my way up from there, acquiring more rental properties maybe doing some flips. 

As you are aware, the market in Los Angeles is insane. I am reaching out to the community to get some advice.

Should I physically move to a market that is a little more favorable to investing? I'm originally from Ohio and have been tossing around the idea of going back to the Buckeye State (probably Columbus) to start acquiring properties. I am also interested in Pittsburgh and Philadelphia. 

I've heard mixed things about starting off with out of state investments. The thing I like about investing in your own backyard is that you can closely monitor the market, network with local investors, and give back to your community. I'm not sure if you have the same opportunity with out of state investments. Plus with out of state investments, it's hard to check up on your properties and your property managers regularly. 

What are your thoughts on investing locally or out of state? 

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Jo-Ann LapinPro Member
Loan Officer · Tustin, CA · Member since 2015 · 3k+ posts · 713 votes
11y

Erin. No ones knows your situation more than you do. In my humble opinion I think being an absentee landlord is never a great idea. You always want to be close to that rental. I hope that helps. I do here that Colombus Ohio is just a wonderful community that is growing minus the whether. LOL

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  • Account Closed
    OP
    Burbank, CA · Member since 2015 · 27 posts · 3 votes
    11y

    @Jo-Ann Lapin I have to remind myself of those seasons and what expenses go along with them. Heating a home is killer and in the midwest it's crazy humid in the summer so your gas and energy costs are always high. I've been doing some research about taxes in different cities and states to see what areas are most favorable. Appreciation is another thing to consider. Would I be content with a property that value remains basically the same year after year or would I rather find property that will appreciate steadily throughout the years? Since I want to buy and hold, rents are an important factor too. 

    I have to look into Nashville. There are so many cities that I have heard nothing but positive things about and Nashville is one. 

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  • Jo-Ann LapinPro Member
    Loan Officer · Tustin, CA · Member since 2015 · 3k+ posts · 713 votes
    11y

    all the best with your research 

    [email protected]
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  • Account Closed
    Professional · Jacksonville, FL · Member since 2015 · 397 posts · 34 votes
    11y

    Investment decisions aren't emotional. The numbers tells you if it makes sense or not. The minimum entry for a multifamily investment in Los Angeles may be in the $500,000 range. If you were to invest that amount in another market, where you are likely to get the best internal rate of return (IRR) on the sum is where you would invest in.

    Negative cashflows on rentals in Los Angeles is very common which by itself is sufficient cause to drive income driven investors elsewhere. 

    Its like investing in stocks. Some income driven investors only invest in stocks that pay dividends. Some only count on the price of the stock appreciating. 

    Each investor has their motive and agenda.

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  • Account Closed
    OP
    Burbank, CA · Member since 2015 · 27 posts · 3 votes
    11y

    Thank you, @Account Closed. I totally agree. When it comes down to it, the numbers speak for themselves. I really don't think I'll be able to start off in LA, perhaps surrounding counties like Riverside or San Bernardino but the properties in LA County don't seem like a good idea for a newbie investor. The cash flow isn't there, the prices are high and the competition is fierce. 

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  • JT Spangler
    Buy and Hold Investor · Nashville, TN · Member since 2013 · 264 posts · 102 votes
    11y
    Originally posted by :

    I have to look into Nashville. There are so many cities that I have heard nothing but positive things about and Nashville is one. 

    Nashville was a crowded investment market two years ago, and seems to be even more crowded now. I scour the good areas for deals, and mine are all 1% properties that cash flow because I manage the rehab and then property manage (to be fair, they would cash flow if I hired those out, but be much thinner deals). 

    Not to talk you out of it, because it's a great city with good growth metrics, and I'm still buying here. But if you're looking for turnkey as an out of towner, I don't know if you'll find a place where the numbers are anything like what you can get in Atlanta or the rust belt.

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  • Account Closed
    OP
    Burbank, CA · Member since 2015 · 27 posts · 3 votes
    11y

    @JT Spangler - Thanks for the advice! 

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  • Jonathan Dawkins
    Los Angeles, CA · Member since 2015 · 10 posts · 4 votes
    11y

    I also recently lived in Los Angeles. West Hollywood more specific. Im originally from the east coast. I faced the same dilemma as you around 3 months ago when I decided to move to Virginia and start investing in real estate here. The end goal will definitely have me back in California, I just want to set myself up with a substantial amount of passive income from my rental properties. 

    But yes multi family units in LA are not cheap and the ROI isn't really worth it for a first time investor. There are so many international investors in LA so you have to have deep pockets.

    I invest in Maryland and Virginia rite now. Baltimore markets is extremely cheap with a lot of people renting. I Flip homes in Hampton Roads, VA.

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  • Account Closed
    OP
    Burbank, CA · Member since 2015 · 27 posts · 3 votes
    11y

    Thanks for your response, @Jonathan Dawkins! Would you mind telling me a little more about your experience in moving across the country to start investing? Did you already have some prospects lined up? Did you do any investing from a distance in California?

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  • Jonathan Dawkins
    Los Angeles, CA · Member since 2015 · 10 posts · 4 votes
    11y

    @Account Closed , Well I worked for an investor in Los Angeles for around 9 months. After gaining a lot of knowledge and research I realized it would be best for me to move back to Virginia. Investing wise there was no way I was able to stay and do it in LA. For the amount of a duplex in LA you can get 10 properties in Baltimore. Financially is was a great decision but I sure do miss LA.

    Now my story is a little different. I have friends who are lawyers and realtors so when an upcoming deal becomes available, I'm usually the first to know. So to answer your question, I do have an inside scoop. In Virginia I strictly flip , being that the market is a buyers market.  I own two properties in Baltimore. A duplex and a single family that both are being rented out. I use hard money loans for my flips and the profits from my flip I purchase rental units in Baltimore. 

    If your looking to flip, I suggest to move to the city that your focus on. Due to the fact you will have to be a the property pretty much every day. Now for rentals are different. I have a property management company that does all the work for me . 

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  • Account Closed
    Professional · Jacksonville, FL · Member since 2015 · 397 posts · 34 votes
    11y
    Originally posted by @Account Closed:

    Thank you, @Account Closed. I totally agree. When it comes down to it, the numbers speak for themselves. I really don't think I'll be able to start off in LA, perhaps surrounding counties like Riverside or San Bernardino but the properties in LA County don't seem like a good idea for a newbie investor. The cash flow isn't there, the prices are high and the competition is fierce. 

    What would you estimate your investment horizon/holding period to be on a multifamily investment and what would you estimate your cost of funds to be? Assuming you are getting a mortgage of some sort to finance the investment.

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  • David Faulkner
    Investor · Orange County, CA · Member since 2015 · 2k+ posts · 3k+ votes
    11y

    If your sole definition of Real Estate investing is buy-and-hold for cashflow, then yes, you should move out of LA. However, there are thousands of ways to make money in Real Estate and probably even more ways to lose money. The key is to assess the local market, identiy what strategies work in that geography in that part of the market cycle, and either 1)adjust your strategy accordingly or 2)move to another market where your ideal strategy works. I would advise 1 over 2, because assessing and adapting your strategy is a much more robust way to invest. Somebody who can do the first can make money anywhere, anytime, in any market. Somebody who does the second can succeed initially but over time can become a one trick pony ... what do they do when the market changes and their one trick no longer works? One thing is for sure, start hands on in your own backyard, wherever that backyard may be.

    In LA in 2015, what seems to be working includes flipping, wholesaling, and RE services (e.g. RE agent, mortgage broker) ... with these strategies, the insane demand and high prices can actually be benificial. Plus, in LA you have a wealth of insanely astute RE investors to network with and mentor you. 

    As for moving, that can also work. I'd move somewhere you would want to live if RE were not a factor ... if you'd want to live there then so would other RE buyers and renters. I'd try to get a well rounded market that has positive rental cash flow as well as potential appreciation rather than a pure cashflow play (like Columbus) or a pure appreciation play (like LA). I would choose a 2nd or 3rd tier city or suburb just outside a 1st tier city (but not the boonies), which has some of the same desirable features as a 1st tier city but isn't yet teaming with investors. Somewhere where you have some social infrastructure (friends/family) is a plus too ... go on an exploratory roadtrip to visit them and assess these markets 1st hand (once you figure out how to analyze a market and strategies) rather than asking BP to name a good market, which inevitably will already be stacked full of investors to compete with. 

    Actually doesn't matter so much where you start, so long as you do start and pursue a strategy that makes sense in that market. Best use of this forum is to try to figure out HOW experienced investors think, rather than WHAT they think ... then you can apply a similar thought process to figure out for yourself the answer that makes sense for you. Feel free to reach out direct if you'd like to discuss further.

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  • Account Closed
    OP
    Burbank, CA · Member since 2015 · 27 posts · 3 votes
    11y

    @Jonathan Dawkins - It's great that you had those connections in Virginia. It sounds like you're off to a fantastic start in your investing! I'm not looking to flip as much as hold. But I'm just trying to get my feet wet, so who knows what the future holds. 

    @Account Closed - Thank you so much for your advice. It's very helpful. You outlined and stated so eloquently many of the thoughts I've been pondering. I keep teeter-tottering between the "if I can make it here, I can make it anywhere" mentality and "start small, grow big." You have given me a lot to think about, thank you. 

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  • Amit M.
    Rental Property Investor · San Francisco, CA · Member since 2013 · 1k+ posts · 1k+ votes
    11y

    read this thread about the So Cal market: https://www.biggerpockets.com/forums/311/topics/23...

    Pay particular attention to moshun mah's story (hint, it's all about future values, both rent wise and appreciation wise.)

    That's why the market is so competitive in LA for 2-4's.  If they sucked, no one would be buying them!

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  • Account Closed
    OP
    Burbank, CA · Member since 2015 · 27 posts · 3 votes
    11y

    Thanks for sharing the link, @Amit M.. I read through the thread and it was really helpful. I loved reading Logan Allec's story on his acquisition. 

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  • Account Closed
    Professional · Jacksonville, FL · Member since 2015 · 397 posts · 34 votes
    11y
    Originally posted by :

    @Account Closed - I'm not sure what my holding period would be on multifamily yet. I'm still trying to figure out the basics and create my plan. My plan right now, and this is 4 weeks in of starting my investing research, is to buy a multifamily property with an FHA loan (if I can) and live in one of the units. If I do move to a less expensive market, I think I have enough capital to do a traditional mortgage if necessary.

    If you are analyzing any investment (particularly a real estate investment), at some stage you have to be aware of what your holding period of the investment is to make any sense of the investment. Not knowing your holding period isn't a good sign --as it often also means not knowing your exit strategy and will likely spook any anyone trying to fund a deal.

    From an FHA standpoint, 3.5% compared to 20% for down payment may be good (less hit to the wallet) but also may be moot in terms of getting a deal to make sense for a noob investor in LA. The grittier matters of concern is likely to be your mortgage rate and consequently your monthly payment and other monthly expenses and to what extent these expenses are completely covered from rental income (think debt service coverage).

    When researching, you of course want to look into the FHA loan limits on a multifamily as it applies to you and where you are able to buy in/at per the limit. Reserve requirements and debt service coverage are also things you want to look into as if the numbers don't make sense from a debt service coverage requirement perspective, why the headache?

    Remember, this isn't an issue of whether or not properties appreciate in Los Angeles. 5.8% per year is the historical average there. 

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  • Account Closed
    Professional · Jacksonville, FL · Member since 2015 · 397 posts · 34 votes
    11y
    Originally posted by @Amit M.:

    read this thread about the So Cal market: https://www.biggerpockets.com/forums/311/topics/23...

    ...(hint, it's all about future values, both rent wise and appreciation wise.)

    That's why the market is so competitive in LA for 2-4's...

    The future value of a property or rent will not rescue you from a foreclosure if the present rental income is insufficient to cover the present mortgage and expenses and you do not have sufficient extra funds to cater to the deficiency. 

    This is the fundamental problem in markets like LA where cash flow on many of the rentals have a ways of being negative. 

    If you are an investor in LA with multiple properties (not just buying a personal home), having to spend (or set aside) an extra $2500 to $3000 per investment/unit every month and for years (or however your holding period is), because rental income was insufficient on each of the multiple rentals can become a problem.

    The LA market is the way it is due to forces of demand and supply and what some spend $300,000 or almost $400,000 on in LA, some in many areas wouldn't touch with a 10 foot pole.

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  • Account Closed
    OP
    Burbank, CA · Member since 2015 · 27 posts · 3 votes
    11y

    That's the truth right there! 

    Thanks for sharing your wisdom, Greg! You are always bringing up things that I need to focus on before I make a move. I really appreciate it. 

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  • David Faulkner
    Investor · Orange County, CA · Member since 2015 · 2k+ posts · 3k+ votes
    11y
    Originally posted by @Account Closed:
    Originally posted by @Amit M.:

    read this thread about the So Cal market: https://www.biggerpockets.com/forums/311/topics/23...

    ...(hint, it's all about future values, both rent wise and appreciation wise.)

    That's why the market is so competitive in LA for 2-4's...

    The future value of a property or rent will not rescue you from a foreclosure if the present rental income is insufficient to cover the present mortgage and expenses and you do not have sufficient extra funds to cater to the deficiency. 

    This is the fundamental problem in markets like LA where cash flow on many of the rentals have a ways of being negative. 

    If you are an investor in LA with multiple properties (not just buying a personal home), having to spend (or set aside) an extra $2500 to $3000 per investment/unit every month and for years (or however your holding period is), because rental income was insufficient on each of the multiple rentals can become a problem.

    The LA market is the way it is due to forces of demand and supply and what some spend $300,000 or almost $400,000 on in LA, some in many areas wouldn't touch with a 10 foot pole.

    I live in LA (well, OC, down the road, actually) and agree with you Greg. Buying in LA today, renting it with negative cashflow, and hoping that rent and/or price appreciation will bail you out eventually is insanity. That is trying to squeeze a round peg into a square hole ... the OP or anyone else who wants to employ the buy and hold for cash flow strategy should move to a market other than LA that is more suited to that strategy (and there are plenty of them, but not LA today). Noticed I said today and not forever ... I actually pulled this strategy off in LA, but I bought in Palmdale (~1 hr outside of LA city, but in LA county), and I bought in 2009, and I bought trashed foreclosures where there was plenty of value-add opportunity. Different time, different market, different strategy. Today I'm considering getting my license to sell RE while the market is hot, or if I don't I will just get paid to wait until the market comes back down to where buy-n-hold makes sense again. If I were young, single, and w/out kids, I'd probably do a live-in flip, fix up over 2 years, maybe with some roommates, and sell tax free (or rent it out or continue to live there if the market tanks). Different time, different market, different strategy. When (not if) the market tanks again, I will adapt and adjust my strategy again. All the while, I put plenty down and invest with multiple exit strategies to cover my downside and ensure I don't have to give it all back to the bank if the market moves out from under my feet. To me, this is what it means to be a truly professional RE investor, as opposed to a gambler ... not saying that I'm 100% there yet, but this is the end game for me at least. The path taken may vary, but this same principal applies to any geography (LA to Florida, and all points in between) IMHO.

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  • Amit M.
    Rental Property Investor · San Francisco, CA · Member since 2013 · 1k+ posts · 1k+ votes
    11y

    @Account Closed well if you have some money to invest, your loan is proportionally smaller and hence you'll have a small or no neg cash flow, depending on the specifics. 

    I never said people should take a big negative w/o resources. I'm simply pointing out the fact that rent increases and significant appreciation come form blue chip markets like costal CA. If you can manage to get into this market, and you make a decent investment, you stand to do well. Investing in fly over states may give you initial cash flow, but capital expenses will eat into that, and the near zero appreciation and rent growth in many areas will leave you spinning your wheels. Especially if you're relying on a turn key operator to make and manage your investment decisions.  I wouldn't touch them with a ten foot pole. OTOH I know many, many investors who made bank investing in CA, including moi. 

    Oh, and if you plan to buy 2-4 units and owner occupy, that is one of the best ways to start investing, even in competitive markets like LA. Soon you'll be living there rent free. Plus you get great loan terms and first hand experience managing tenants. Best way to start IMO. 

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  • Josie Roman
    Real Estate Agent and Investor · Los Angeles, CA · Member since 2015 · 52 posts · 20 votes
    11y

    The first thing you should do is to talk to lenders and get qualified for loans: owner occupied and non-owner occupied, SFR and residential 2-4. Every type of loan has different requirements that will determine your maximum purchase price. Until you do that, you do not know how much you can afford. For instance, you will not be able to use FHA financing for a property unless you occupy it.

    Then you can start looking into where you can buy at the price you can afford! The other way around is a waste of time.

    There are areas in LA where a triplex or a fourplex are a good way to get into buy and hold investment, as the price per door is more affordable than SFR/condos. We have properties where you can live in one unit and the rent from the other units will more than pay for the mortgage. We also have programs that would allow you to buy with as little as 1/2% down and might not be available in every state.

    As far as buying out of state and continue living in California, you need to consider factors such as the management expenses and the fact that you may not know the market well enough to make a property purchasing decision. There are areas in other states where you can buy a house with a credit card, but historically, they have not appreciated much. You need to be careful and do due diligence.

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  • Account Closed
    OP
    Burbank, CA · Member since 2015 · 27 posts · 3 votes
    10y

    Thanks for the advice, @Josie Roman! 

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