Out of State Investing

[Jonathan Lowe]

Hey everybody! I am new to the forums here, but have been listening to bigger pockets podcasts for a few years and have read a couple of David's and Brandon's books. I am 22, just graduated from college and am moving to San Diego to start work, however I am reluctant to make this move as I am aware that SoCal is not a great market for REI. I have been doing research on real estate investing for the past 2 years and know it is something that I want to do, or at least try, but this job offer was too good to pass up. Through research, I have really only heard negative things and horror stories about OOS investing (dealing with property managers and finding a trustworthy team). My initial financial plan was to buy a duplex wherever it was I moved to and live in one side and rent out the other but this wont be possible in SD. For someone who is looking to purchase their first MFH, is it worth all the headaches to invest OOS? There are still many things that I do not fully understand about REI and I don't want to get taken advantage of by being a "California investor". BTW I ordered David's book on OOS investing and will read that soon, but I'd like to know what the bigger pockets community thinks.

[Dan H.]

Originally posted by @Jonathan Lowe:

Hey everybody! I am new to the forums here, but have been listening to bigger pockets podcasts for a few years and have read a couple of David's and Brandon's books. I am 22, just graduated from college and am moving to San Diego to start work, however I am reluctant to make this move as I am aware that SoCal is not a great market for REI. I have been doing research on real estate investing for the past 2 years and know it is something that I want to do, or at least try, but this job offer was too good to pass up. Through research, I have really only heard negative things and horror stories about OOS investing (dealing with property managers and finding a trustworthy team). My initial financial plan was to buy a duplex wherever it was I moved to and live in one side and rent out the other but this wont be possible in SD. For someone who is looking to purchase their first MFH, is it worth all the headaches to invest OOS? There are still many things that I do not fully understand about REI and I don't want to get taken advantage of by being a "California investor". BTW I ordered David's book on OOS investing and will read that soon, but I'd like to know what the bigger pockets community thinks.

I do not know why you think So Cal is not great for REI. Your belief does not match the historical reality. I agree that if the only criteria you are using to judge the quality of the RE is the initial cash flow, then So Cal is not good (it is bad).

I also question your belief that you have the capital to go out of state but not to purchase a duplex where you live (owner occupied). OOS you are typically looking at a maximum 75% LTV. Owner occupied you are looking at a maximum 95% LTV with an FHA. So your down payment would purchase 5 times the value owner occupied (not including closing costs or reserves). In addition, a percentage of the rent of the 2nd unit would count against the mortgage payment providing some assistance at qualifying for the loan. You could further house hack the unit you live in by renting BR. This would not help with qualifying for the loan but would help your cash flow.

I would recommend a detached duplex or a SFR with a detached ADU. My protégé recently sold a SFR with detached ADU. He got an offer at $540K but appraisal came in lower so he may have sold it a little less than the offer (I do not know how they handled the low appraisal). His was a 3/1 SFR and a 1/1 ADU. If you had purchased this you could have lived in the 1/1 while renting out the 3/1. At 5% of $540K you would need $27K (not including closing costs and reserves). However, if you were going to house hack the unit you live in, an ideal (but not easy to find) configuration would be both units 3/2. Rent out one 3/2 unit, and rent two BR in your 3/2 unit. I would suspect the rent would more than coverage the mortgage (full PITI) but I would not refer to it as living rent free. The PITI is not all expenses. Rent greater than PITI does not necessarily imply positive cash flow. There is vacancy, maintenance/cap ex, property management (even if self managed allocate for PM and pay yourself), and miscellaneous (extra tax costs, office stuff related to managing tenants (applications, leases, reminders, etc.)) expense allocations. Understand the 50% rule to have some basis for expense estimates.

Where there is a will, there is a way!

Good luck