Advice for Investor in High Priced Market
San Diego, CA · Member since 2016 · 19 posts · 9 votes
BP,
I live in the San Diego area and I'm looking to invest in cash-flowing rental properties. However, in San Diego, it seems nearly impossible to find a property that will cash-flow without a huge percentage down, and even then, the ROI won't be very good (if I'm missing something here, please let me know). Since San Diego doesn't look like a good investment market for me, I've been researching out-of-state investing (which I understand comes with it's own challenges), and specifically have been considering turnkey investing.
Please let me know what you think about this strategy for someone in an area where cash-flowing properties are very hard to come by, and please let me know any advice you have.
Thanks so much!
If you cannot afford to buy in SD, that is one thing ... however, you should not go out of state because you think it will be more profitable, because it is highly unlikely that it will be in my opinion and experience as an investor both in state and out of state over the last 15 years.
The first thing to ask yourself is why is SD so expensive and other markets so much cheaper? Is it because all Californians are stupid and crazy as many others on BP would often seem to imply? Or is there something more to it? Could it be that the supply and demand fundamentals are stronger in CA because more people want to live here then there are properties to house them? If so, what impacts do you think it will have over your long term profitability investing in markets with weaker demand and greater supply relative to that demand? Do you think that markets like this will likely be more or less profitable in the long term? Why? If your tenants could buy a place for much, much less money than they could rent one from you, and yet they are still renting from you, then why would they do that and what does that tell you about them?
The second thing is to realize what advantages you have investing locally that you will be giving up by going out of state, and what giving up those benefits will do to your costs and risks. Locally you are more familiar with the market. Locally you can learn hands on. Locally you can start with much more favorable financing terms by house hacking your primary residence. Locally you can self-manage ... or even if you immediately or eventually choose not to self manage, at least you can keep a close eye on your contractors, PMs etc. to validate that they are doing a good job at what you are paying them to do. If something goes wrong locally, you can spot it more quickly and more easily step in to fix it. Locally you can find better deals below retail market. Locally you can more easily complete a remodel to force some appreciation. I could go on and on, but hopefully you get the idea ...
Out of state you are putting all your money in a market you are not familiar with, where you will give up almost complete control over your investment, and will be 100% reliant on the kindness of strangers to keep your best financial interests at heart and make or break your investment for you. And why do you do this, because it is cheaper ... but does cheaper mean it will be a better investment?
@Andrew Kewley The bigger pockets podcast #155 is a great resources for investing out of state! In the midwest properties can run in the 30k range, BIG difference from SD..So it might seem like cash flow is inevitable but I've heard that lots of the good cash flowing properties in these promising cities are picked over and the low priced houses are typically in bad areas of town.
Sorry I can't be more help. I will say, you can probably cash flow in AZ that's where I'm starting out but it looks like the margins are slim with 1% deals in the Tempe area..maybe better margins in Mesa or the general Phx area.
If you cannot afford to buy in SD, that is one thing ... however, you should not go out of state because you think it will be more profitable, because it is highly unlikely that it will be in my opinion and experience as an investor both in state and out of state over the last 15 years.
The first thing to ask yourself is why is SD so expensive and other markets so much cheaper? Is it because all Californians are stupid and crazy as many others on BP would often seem to imply? Or is there something more to it? Could it be that the supply and demand fundamentals are stronger in CA because more people want to live here then there are properties to house them? If so, what impacts do you think it will have over your long term profitability investing in markets with weaker demand and greater supply relative to that demand? Do you think that markets like this will likely be more or less profitable in the long term? Why? If your tenants could buy a place for much, much less money than they could rent one from you, and yet they are still renting from you, then why would they do that and what does that tell you about them?
The second thing is to realize what advantages you have investing locally that you will be giving up by going out of state, and what giving up those benefits will do to your costs and risks. Locally you are more familiar with the market. Locally you can learn hands on. Locally you can start with much more favorable financing terms by house hacking your primary residence. Locally you can self-manage ... or even if you immediately or eventually choose not to self manage, at least you can keep a close eye on your contractors, PMs etc. to validate that they are doing a good job at what you are paying them to do. If something goes wrong locally, you can spot it more quickly and more easily step in to fix it. Locally you can find better deals below retail market. Locally you can more easily complete a remodel to force some appreciation. I could go on and on, but hopefully you get the idea ...
Out of state you are putting all your money in a market you are not familiar with, where you will give up almost complete control over your investment, and will be 100% reliant on the kindness of strangers to keep your best financial interests at heart and make or break your investment for you. And why do you do this, because it is cheaper ... but does cheaper mean it will be a better investment?
BP,
I live in the San Diego area and I'm looking to invest in cash-flowing rental properties. However, in San Diego, it seems nearly impossible to find a property that will cash-flow without a huge percentage down, and even then, the ROI won't be very good (if I'm missing something here, please let me know). Since San Diego doesn't look like a good investment market for me, I've been researching out-of-state investing (which I understand comes with it's own challenges), and specifically have been considering turnkey investing.
Please let me know what you think about this strategy for someone in an area where cash-flowing properties are very hard to come by, and please let me know any advice you have.
Thanks so much!
There are many different markets out there where you can get a great ROI. You should look into turnkey providers. They will most likely be the best option for investing out of state. Just make sure you go with a true provider and not just some agent who finds the property on the MLS.
BP,
I live in the San Diego area and I'm looking to invest in cash-flowing rental properties. However, in San Diego, it seems nearly impossible to find a property that will cash-flow without a huge percentage down, and even then, the ROI won't be very good (if I'm missing something here, please let me know). Since San Diego doesn't look like a good investment market for me, I've been researching out-of-state investing (which I understand comes with it's own challenges), and specifically have been considering turnkey investing.
Please let me know what you think about this strategy for someone in an area where cash-flowing properties are very hard to come by, and please let me know any advice you have.
Thanks so much!
I agree with @David Faulkner reply but thought I would respond to the ROI statement in OP.
San Diego residential real estate rose 10% in the last year (source Trulia). So if you purchased a cash neutral financed buy n hold RE investment in San Diego a year ago with 80% LTV (20% down) you would have had ROI of near 50%. It is verifiable fact that few locales have returned better ROI on financed buy n hold than San Diego for virtually any duration (1 year, 3 years, 5 years, ..., 50 years).
Rent appreciation typically corresponds with property appreciation. So the cash flow neutral property purchased a year ago that appreciated 10% likely had about the same appreciation in rent and now has some small cash flow. Fast forward 5 years and the property that was cash neutral could have significant cash flow.
Another benefit of investing in California is the property tax protection provided by prop 13.
I believe in the long term San Diego will continue to have better ROI on financed buy n hold than virtually all other locales. Note San Diego RE has always appreciated long-term but there have been many short-term depreciation cycles but it has always recovered and continued to appreciate.
Good luck
@Account Closed Thanks for the recommendation! The BP podcast is awesome, I'll definitely have to check out #155. That's interesting, I've also heard some not so good things about the ~30k properties. I still find it amazing hearing about properties at that price level, since the cheapest house in my area is around ~400k. I looked into the Phoenix area a little, it seems like there are some ok deals. Good luck in AZ!
@Rami W. Thank you, Rami! Do you have any personal experience with turnkeys?
@Andrew Kewley No sir. There are turnkey investment groups out there where you can invest in a pool of properties together. Another option to consider to spread your risk if you don't want to "go-it-alone" so to speak…
@Andrew Johnson That's a great point. I'd definitely want to go out and see the property before making a purchase and would want to make the occasional visit, which would certainly eat in to profitability and cash-flow, and could easily kill a ~30k deal. Do you recommend a larger investment in a multi-family, so that the travel costs make up a smaller portion of the total costs?
@Rami W. Got it, thanks for the quick reply! Good to know, I'd actually never heard of turnkey groups that pool properties together.
@David Faulkner I really appreciate the thoughtful response! You make an excellent point with each question. SD certainly certainly has different supply and demand fundamentals than many lower priced markets, which make them hard to compare. I would definitely prefer to invest locally, but the numbers just don't seem very appealing to me, if I'm looking for cash-flow.
As someone with both in-state and out-of-state experience, how do you make that decision on buying locally vs. long-distance?
@Andrew Johnson Thanks for clarifying. That all makes a lot of sense. That strategy certainly makes the trip more worth your time and money. Although your point is about volume, rather than just multi-families, would you recommend out-of-state multi-family investing for a new investor?
@Andrew Kewley I like it because it's a little easier for the property to self-support vacancy. And because of that it can just plain self-support a lot easier. The glaring caveat is that you should have the necessary reserves, know the area well, and re-run your analysis multiple times (you should do that anyway), to see if it's the right property for you. The hypothetical 4-plex or 8-plex will have reduce per-unit roofing costs but when it hits it will be substantial. And if it hits in 5 years instead of 20 years and you haven't built reserves, well, good luck with that! Honestly, I'd never feel comfortable recommending in-state vs. out-of-state or SFR vs. commercial multifamily to anyone. I just like to offer perspective and what I've learned from my experience. Just because it works for me with my financial situation, timeline, goals, etc. doesn't mean it will work for anyone else. The one thing that I think is extremely under-discussed on BiggerPockets is how real estate strategies have to match your personal goals and situation.
@Tom Ott Thanks for the tip regarding agents finding MLS "turnkeys." Good to know!
@Tom Ott Thanks for the tip regarding agents finding MLS "turnkeys." Good to know!
You're welcome! There are so many companies out there that throw the word around and do not understand it is a lifestyle! Turnkey providers should; own, renovate, and manage an investment property ALL in house. Everything should be done under one roof.
@Andrew Johnson Got it! I appreciate those insights. Couldn't agree more about the strategy match and I'm still narrowing down my own. I have to say, as a numbers guy, the economies of scale you're taking advantage of makes a lot of sense to me.
BP,
I live in the San Diego area and I'm looking to invest in cash-flowing rental properties. However, in San Diego, it seems nearly impossible to find a property that will cash-flow without a huge percentage down, and even then, the ROI won't be very good (if I'm missing something here, please let me know). Since San Diego doesn't look like a good investment market for me, I've been researching out-of-state investing (which I understand comes with it's own challenges), and specifically have been considering turnkey investing.
Please let me know what you think about this strategy for someone in an area where cash-flowing properties are very hard to come by, and please let me know any advice you have.
Thanks so much!
I can understand it is much harder or more complicated to get initial cash flow and better returns in SD. One might have to use a non traditional method, future redev, add rooms, vacation rental or half way house type deal to obtain. Keep in mind higher initial cash flow does not always translate to higher overall total profits. If it did Detroit is # 1 for that usually. So the hot and stronger market solution may not be to invest in a cold or marginal market just because it initially can cash flow more.
I would also say if cash flow only is your goal, a far away sfr is hardly the best business solution. You also maybe missing one important fact to your roi math...that is SD is #3 in the nation for rei total profits since 2000. This partly explains why SD cost so much more to enter. Not exactly specific advice for you other than future profits almost always circle back to exact locations and SD has a long history of being one of the more profitable locations on average. Lastly, when your kids or future kids ask daddy where he invested in 2017 what location do you think they hope you picked? The one with more initial cash flow or the one with the highest total profits ( cash flow+equity).
Good luck with your search!
yes being in a high priced market sometimes sucks. One thing I will note is that you don't necessarily have to only have 2 options either invested in a high priced but scary and risky market or less scary (at least by entry price) but maybe more difficult to make work as an out of state investor cash flow market. There are many strategies like lending that can give you a return and maybe get your feet wet. Also, being in CA you are much more likely to be accredited (since $200K here doesn't really mean a whole lot in CA or NY) which opens up a world of possibilities. I personally do a little of everything.
If you're willing to hustle, I think managing airbnb rentals could be rather profitable. I'd recommend going to some REIA meetings and see if you might be able to find some partners with properties in desirable locations that could be prime vacation rentals. The biggest issue is day to day management of them. But if you have time and energy, that could be exactly what someone with higher priced property in your area needs to increase the gross monthly income.
If you're looking to strictly buy and hold, I'd search within an hour or two of your city. Even if they're not as desirable now, they may be as appreciation generally creeps into areas that have already appreciated.
I am amazed that literally every time someone posts a question like this about no cash flow in their local area and thinking of going out of state, 90% of the responses immediately mention turnkey properties and most of them are, well, turnkey providers. That's some coincidence.
My observation aside, you as the individual investor must first come to a conclusion of what your goals are by owning real estate long or short term. If it is for a monthly paycheck like a dividend, then cash flow is key. If it is in cash flow that can come in chunks down the road, the buy, hold, break even and ride market appreciation, amortization, value add may be for you. To each is his own but for starting out, investors with some capital should partner with a more experienced operator who is currently doing what they want to do. Learn and then see if that strategy is right for them moving forward. Buying a turnkey on your first purchase doesn't teach you much and I would argue you are overpaying in many (not all) cases).
I am amazed that literally every time someone posts a question like this about no cash flow in their local area and thinking of going out of state, 90% of the responses immediately mention turnkey properties and most of them are, well, turnkey providers. That's some coincidence.
My observation aside, you as the individual investor must first come to a conclusion of what your goals are by owning real estate long or short term. If it is for a monthly paycheck like a dividend, then cash flow is key. If it is in cash flow that can come in chunks down the road, the buy, hold, break even and ride market appreciation, amortization, value add may be for you. To each is his own but for starting out, investors with some capital should partner with a more experienced operator who is currently doing what they want to do. Learn and then see if that strategy is right for them moving forward. Buying a turnkey on your first purchase doesn't teach you much and I would argue you are overpaying in many (not all) cases).
I am amazed that after 3 years of reading BP you are the first moderator to mention this. Sales folks are great but the constant identical TK peddling posts aimed at the newer members is getting old to have read all the time too. Perhaps BP can let the sales folks know this is not supposed to be a (pm me I can assist) poorly disguised solicitation everytime someone new from LA or high priced area chimes in. You seem to be the only mod so far who can spot this.
Maybe the first to mention it, but likely not the first to notice them all. As BP grows, these ads become more and more common and the forum violators seem to find an end around to the rules. The moderator team and BP management is aware of the situation and is working diligently to find solutions.
A word to all newbies and visitors to the site, look not just at the content of the response but at who is writing it and what their potential self interests are. If someone states that turnkey investments are the best idea for a new investor and they happen to be a turnkey provider, take caution, it is simply a self promotion and not necessarily good or valid advice.