Where are my pitfalls?

22 Replies

Hi all,

I am a newbie in real estate and getting to learn from BP. I live in the bay area, CA (on rent) with my family. Home prices here are so high, more so in good school districts, I cannot afford (my be I do not want to ) buy a house to live here. I have some cash in hand and was thinking of buying an apartment (Potentially managed my a company -so that I can do things from here) in Texas (Plano or Austin). My target is to earn rentals which should be 100% more than my mortgage.  In the long run, I want to develop equity and buy more similar properties or sell it off if the market looks better.

1. With your experiences, what could be my pitfalls if I take this strategy? 

2. Is it a good idea to put money in an investment property or rather buy a home to live?

3. Is it a good idea to invest in Texas living in bay area CA?

Thanks,

HD

i suggest listening to show 37 of the BP podcast.

http://www.biggerpockets.com/renewsblog/2013/09/26/lifestyle-investing-podcast-aaron-mazzrillo/

First off, investing in real estate while still paying someone elses mortgage so he can cash flow would be the first thing i would want to eliminate. This is where i currently am in my strategy. I am renting and refuse to do so any longer. 

My plan to get out of it? Buy a multi family property. Live in one unit and let the other tenants cover my mortgage. So all the money you used to be throwing away into someone elses pockets, can now be used to invest in other properties. But this is my plan because i dont have a lot of money to invest with so i need to free up as much money as possible.

Hi Hitesh,

I can understand your situation as I have had multiple investors from California work with me here in Austin under the same circumstances. They live in a place they don't want to move from but can't afford to buy but they have cash to invest. That is where I come in for the perfect fit as I an an investor Realtor here in Austin and find them the perfect properties that will give them positive cash flow above their PITI (principal, interest, taxes and insurance) payments and put them in areas of generous appreciation. I also can handle the property management for them. Really a one stop shop. Feel free to contact me with questions. My info is below.

Dan Burstain, Real Estate Agent in TX (#616078)

The only positive in RE these days seems to be in locking in a low interest rate, but plenty of "forecasters"  see rates rising very slowly.  Prices are high.  Property taxes in Texas are high and have no caps on how quickly they rise for landlords.  And if your state has personal income tax, well...   I don't know how much money you have or how large your stock exposure is but you should weight bad tenants, poor choice of neighborhood, bad PM risks against stocks.  I like brkb because you get a degree of inflation hedge, diversification and no dividends to pay tax on.  If youre overweight stocks and want RE, then just tread carefully and good luck. 

If you like Plano, you could look at Richardson around UTD...very good school but it is small--there are some condos there but there are also a lot of apartments in the area.  But I know nothing about the k-12 schools there and that can be very important.  San Marcos, Tx has condos around TSU.

@Hitesh Deka  

Hi Hitesh

That is really a numbers question. If you are living in the Bay area and paying rent then I would suggest buying there. I keep up with both markets Austin and Bay Area and travel back and forth. The Bay Area is exploding and rents are going up so high. I know that Oakland is rapidly gentrifying and rents are being pushed up high. That entire area is doing really well. 

Austin is also doing very well with some areas producing 20% plus returns. City wide, I think the area appreciated by around 8% from last year to this year. Its doing really well but the prices aren't nearly as high as the Bay area, thankfully.

Here in Austin, one can buy a rental property and produce rental cash flow due to the low interest rates. Of course, with the higher down payments one can make even more cash flow. 

Of course, being a real estate broker in Austin, I am going to say invest in Austin. But, truly its a numbers game and what works best for you. 

Also, don't feel like you are Christopher Columbus discovering a new world. There are many many investors from California that have invested in Austin, I think over a 1000 the last time I checked. 

If you want to know specifics in terms of appreciation rates, rents, typical property management problems, etc. please feel free to reach out to me. There are some investors where I manage their properties whereby I rarely talk to them. I simply send them statements, manage their properties efficiently and profitably for them, deposit monies, tell them what is going on via voicemail and/or emails and that is it. Its when something is problematic with the property that there is substantial communication, usually.  

If I can be of assistance please let me know.

Most of our cash buyers are in California. You have to be careful who you invest with out of state, but I have a great contact/mentor here in the Alamo city. Austin investors do well but it's hard to break in there with the high prices. My partner started there 13 years ago and came down here quickly when he discovered he could buy 30k distressed houses and make 15% cap on them with no maint, if you owner finance. Obviously I am a fan of investing in TX :), but I work with a guy who's done 1000 deals in 13 years, and he is really changing my life in a great way. 

Originally posted by @Joe Pickett:

Most of our cash buyers are in California. You have to be careful who you invest with out of state, but I have a great contact/mentor here in the Alamo city. Austin investors do well but it's hard to break in there with the high prices. My partner started there 13 years ago and came down here quickly when he discovered he could buy 30k distressed houses and make 15% cap on them with no maint, if you owner finance. Obviously I am a fan of investing in TX :), but I work with a guy who's done 1000 deals in 13 years, and he is really changing my life in a great way. 

 

So can you show how you are calculating NOI? What operating expenses are you including? Can you provide a couple of 15% cap rate comps in your area that you were NOT involved with?

As far as risk and expense, a higher cap rate means the market perceives the NOI to be worth LESS than lower cap rate properties. Why do you think your properties (NOI) are perceived to be worth less if not because of high expenses or risk?

Very interesting thread since I am in the same exact situation. I moved to San Francisco for work and currently rent. Recently sold primary home back in our hometown so now want to buy. In the last year we got priced out. (We are a family of 4).

So now I am looking at buying a smaller property to rent to offset my rent! Sounds bizarre doesn't it? That would take up all of my capital for one small property to get it to cash flow for the offset. 

Or, I could look to the East Bay and buy a family sized property that we could live in if we really needed to. I would have cash left over to invest in another fixer property to fix and hold thus starting my REI journey. Does this sound like utter madness to you all? I am not interested in out of state investments yet because I want to get my feet wet and hands dirty.

Great conversation. I'm in the Bay Area but own vs. rent. I've been looking at Oakland b/c its cheaper then the Peninsula; forget SF unless you have $300K cash. I've been looking out-of-state (including TX) but its scary b/c you have to trust people you've never met, in geographies you've never visited.

I've found a company via BP that makes purchasing in "key markets" easier. These are turn-key properties so there is no "deal" in the purchase, per say. I cannot fathom how to (a) find a distressed property (b) rehab it and rent it out-of-state. I think that @Joe Pickett said he's making this happen but ... he's local.

Perhaps per @Wilhelm Nothnagel  & @Hitesh Deka  questions, could/would it make sense to partner up & buy a multiplex locally (in our case NorCal) and split the cash flow ... ? Of course, without getting into another 'conversation' about the benefits/perils of partherships :)

We do it here matt, but we don't rent. We owner finance everything. Our CA buyers do what you're saying every month. 4 new CA cash buyers have purchased our distressed homes here since Jan. 1, we do partial rehabs for 10k max and resell owner finance. 

It's all about finding a real expert in that distressed market you can trust. Whatever market you are investing in. I am not telling you to come this way. 

There is an individual above that has latched on to me in various threads. He apparently has ample time on his hands. I am too busy working to engage. :)

@Hitesh Deka Today is almost always the second most expensive time to buy in the Bay Area. The most expensive time to buy: Tomorrow! My point is that having lived in the Bay Area for over 20 years, I can tell you that RE has always felt expensive and looking back always looked cheap. I bought my first house in 1998 for $330K. IT was the most insane price for a home (or so I thought). I got out of that house in 2003  when it was valued at almost $800K. At the time I bought the $330K house in San Jose, there was another house we looked at in Cupertino for about 50K more. It seemed too much for me then but that house is probably almost $1.4M now. I bought my next house in 2007. Peak of the market right? Okay but at the very bottom of the market its value dropped by only 10% but 8 years later that one has also surpassed its peak values by about 15-20% and climbing every year now. I have that rented now for over $3000 and getting positive cash flow from that as well. My fiancee bought her house in 2004 for almost 6X her annual income. A stretch? Yes. BUt now its also rented at over $3K with positive cash flow, large appreciation and someone else paying down the mortgage. So my point is, buy a home here first. You can't go wrong over any 10 year period. Plus rents are so high that when you decide to move, you automatically now have a positive cash flow investment in one of the highest appreciating markets in the country. BTW, I also do out of state investing for cash flow and thats fine too. But I would buy the Bay Area home first.

Well this indeed an interesting thread touching on the "issue" with Bay Area real estate.  "It's crazy expensive, should I invest here or out of state, rent or buy here?"  No prefect answer I guess.  Prices and rents are higher than ever all over the area and it seems like an inflection points is on the horizon.  Though as Anish pointed out, prices and rents tend to climb in the Bay Area over time.  There are thoughts now of, "It can't possibly get more expensive here!  It's not sustainable."  But people have said that for 40 years.  When my wife and I bought our 950sqft 2br/1.5ba townhouse in San Mateo for $335k in 2002 I thought it was insanely priced, but also decided we needed to buy something by hook or by crook as prices were only going up.   Three years later we sold it for $480k.  Then when we bought our 3/2 house in Redwood City for $857k it seemed insanely priced.  During the crash it dropped to high $600s.  Now its worth over $1m.  A 2/1 down the street with 1/2 the sqft and 1/2 the lot sold for $750k a couple months ago. Insane?  Totally insane, but this is not a new phenomenon.  It is a decades long trend.

Having said all this, I own buy and hold out of state, I buy, fix, and flip out of state and in the Bay Area. One of my goals is buy and hold multi-units in the Bay Area. If my current living/family situation was different I'd go the FHA route on a duplex, triplex, or 4-plex and rent the other 3 units out. Great way to get in around here for those looking for a way.

Originally posted by @Marian Smith :

The only positive in RE these days seems to be in locking in a low interest rate, but plenty of "forecasters"  see rates rising very slowly.  Prices are high.  Property taxes in Texas are high and have no caps on how quickly they rise for landlords.  And if your state has personal income tax, well...   I don't know how much money you have or how large your stock exposure is but you should weight bad tenants, poor choice of neighborhood, bad PM risks against stocks.  I like brkb because you get a degree of inflation hedge, diversification and no dividends to pay tax on.  If youre overweight stocks and want RE, then just tread carefully and good luck. 

If you like Plano, you could look at Richardson around UTD...very good school but it is small--there are some condos there but there are also a lot of apartments in the area.  But I know nothing about the k-12 schools there and that can be very important.  San Marcos, Tx has condos around TSU.

 Richardson is one of my primary areas.  The Richardson ISD is an "A" with some A++ schools that rival high-quality private schools.  With that said, the areas of Richardson feeding the best schools have < 30-days of inventory and properties routinely go under contract in less than a week.  Other areas of Richardson have <2.5 months of inventory, so it's still highly competitive.  The best bet for finding condos at a reasonable price is East of 75 in the area around Richland Community College, both north of and just south of I-635.

Most of those units were build mid-60's to mid-70's.  There are some available just south of 635 that were purchased by an investor who tanked in the middle of the rehab.  They have been gutted and are pretty much down to the studs, but they can be had really cheap.

@Wilhelm Nothnagel 

Since you are an architect then you probably like to get dirty too. I really enjoy getting involved with fixing up houses. On the job site I will do anything and everything to help the project along and to make it smooth as possible. Here in Austin, one doesn't need to be a gc to pull permits like one does in SF or Oakland. So, its a bit easier to take on a project. So, I will pull permits, make runs to home depot/lowes or wherever is necessary, pick up materials in my truck, do carpentry, do electrical work with a buddy and plumber or just about anything. One can save a ton of money if you work on the site too and the folks that are working for you will appreciate it 100% and work even harder. Also, you will probably be able to fix whatever issues that invariably happen on the site, immediately instead of the next day or the two or three days later. Time is money and so I try to get the project done asap. The contractors are very much appreciative too! 

You should look into the fha 203k loan for a fixer upper. Its a really really good way to go! 

East Bay is happening. The last time I was there in December I was blown away with the work happening in the east bay.  I saw some really cool work there. Idk anything about the schools there or other possible drivers of value but I do know that I liked what I was seeing. Do yourself a favor. Ride a bike and go from the west oakland station to Emeryville. Lake Merritt is also very cool but looked expensive. I did hear of folks that have done very well there though.

But if you have ideas of flipping, I have learned the hard way about taxes. Talk to a Cpa especially one that is knowledgeable about real estate and real estate investments. I think it makes sense to buy and hold for 2 years so that whatever gains that you make you aren't taxed on the capital gains. 

Whatever you do though don't fall in love with your project so that you forget the end result: selling it on the market for a profit. I have seen architects fall in love with their projects and go way over budget, unfortunately!

I hope this is helpful!

@Aaron Gordy  Very helpful indeed! I will look into the 203k loan, and do some bike rides through different neighborhoods. The East Bay has some great schools, while the SF school lottery is hit or miss so it's an attractive move for young families before their kids hit 5. 

Hi @Wilhelm Nothnagel  

As someone who lives in SF, is an out of state RE investor, and has two kids in SFUSD public schools, here are a couple of thoughts from my perspective:

1) If you choose to live in SF, you can find a good public school, especially an elementary school, if you don't just look for the "top-rated" schools but get out, go on school tours, and talk to parents who send their children to those schools. I cannot more highly recommend connecting with Parents for Public Schools, no matter what side of the bay you live on. Of course, prices in the city are insane--families are looking at areas such as Mission Terrace, Outer Richmond/sunset, Glen Park areas to live. 

2) Out of state investing is not as scary as it sounds--go visit a market or two, connect with people from those markets on BP, and you'll find out that there's not a lot of barriers to investing out of state.

3) Buying a multi-unit in the E.Bay, living in a unit, and renting the others can be a great investment. But, you have to think of it as the place where you live first. Buying a multi-unit that "works" as an investment may well put you out of areas where you'd want your family to live. Finding a multi-unit around Lake Merritt, a fine area, that works from an investment standpoint, is going to be pretty challenging. 

4) Make sure to attend a SF RE meetup. Great people, and you'll be able to learn so much by connecting with others in the area. @J. Martin is king--do contact him!

Best of luck and don't hesitate to give me a shout.

Steven

As a TX investor, and yes, I do have CA investors, I do like what we have to offer here. but you really do need to check out whoever you may work with. Many of our CA buyers do fly out and spend a day with us first. I don't blame them - I would probably do the same thing!

Originally posted by @Aaron Gordy :

@Wilhelm Nothnagel 

Do yourself a favor. Ride a bike and go from the west oakland station to Emeryville.

If you make it to Emeryville without getting robbed, then I'll say well done. I lived right between West Oakland Bart and Emeryville for 2 years. Housemates were robbed, neighbor went to jail for murder, and everyday crack deals across the street were the norm. I emerged unscathed.

Get off at Ashby Bart if you want to bike to Emeryville.

Well, I know first hand two people that have investment properties that are doing very very well. Must I say another very. And no they aren't crack dealers nor are they robbers of any sort. They are just two very nice people that are doing well in real estate. But i don't live there personally and I just travel through there going to friends houses or the new bars in the area when i go to the Oakland.  There may be other areas for sure that may be more enticing. I don't know. 

I certainly wasn't implying that everyone in West Oakland is a criminal or degenerate. Of course there are good people and smart investors there. I believe West Oakland is a great place to hold an investment. You just won't catch me riding a bike around the streets because I know better. Scoping it out in a car would be much more sensible. Source: lived in Oakland over 30 years.

http://abc7news.com/news/cyclist-hit-in-west-oakland-robbed-while-unconscious/474341/

@Steven W.  

Great advice thanks! We plan to do a lot of school tours and I will keep my mind open about out of state investing. 

@Graham K.  

Thanks for the warning! I moved here from a country in the Caribbean with a super high crime rate and very unsafe areas where I would never go, so I know it when I see it. When I find a good target area by car, then I will go walk or bike it. I want to live!

Thanks all for the valuable insights. I was wondering if after reading your views, I am more confident or confused :-) . Anyways, I have to decided to dig in more on knowledge building for now. I will contact a few of you for more information when I need. Thanks again. BP rocks

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