Where should I reinvest?
Investor · Provo, UT · Member since 2013 · 37 posts · 18 votes
Where should I reinvest?
Most Popular Reply
Rental Property Investor · San Francisco, CA · Member since 2013 · 1k+ posts · 1k+ votes
12yto whomever. Yeah look, I'm not interested in a pissing match on cash flow vs appreciation. My only point was, how many small/mid size RE investors do you know who have made a few million dollars from cash flow? I know many small/mid size investors in the Bay Area who have a few million dollars in equity. And they still have their equity, just a few years after the "Great Recession." Plus they have cash flow too, although maybe not as much as other places optimized for cash flow.
45 Replies
- Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes12y
How much cash are you going to 1031 from the proceeds of this sale??
- Investor · Provo, UT · Member since 2013 · 37 posts · 18 votes12y
It was a primary residence before rental so the gain is tax free (no 1031 necessary). For me the amount is substantial but I'd rather not say exactly. Enough for down payments on several properties outside the Bay Area.
- Investor · San Jose, CA · Member since 2012 · 2k+ posts · 3k+ votes12y
Toby,
Congrats. Sometimes, the best thing to do is nothing. Sounds like you know where you want to buy. Unfortunately, the market is fairly valued at this time. One might even argue that it's a little frothy. As long as you can find something that would give you an acceptable yield, and it's located where you want, I'd say go ahead and pull the trigger. The days of low hanging fruits are way behind us.
With respect to low interest rates, I'd put my money on even lower interest rates in 2024. I know it's not the conventional wisdom. That's why I like my chances. :-)
- Investor · Honolulu, HI · Member since 2013 · 3k+ posts · 1k+ votes12y
Wow! What numbers don't work in San Jose? Sounds like you've already pissed away your Prop 13 tax base but you'll find it very hard to get better appreciation, rent growth & profitability than the Bay Area.
- Investor · Provo, UT · Member since 2013 · 37 posts · 18 votes12yI don't want to rely solely on appreciation for my return on investment so I'm looking for cash flow with average appreciation. Those numbers don't work in San Jose any more.
- Rental Property Investor · San Jose, CA · Member since 2013 · 486 posts · 170 votes12y
@Toby Johnston why out of sate? Have you looked in Sacramento and other areas outside of the bay area? Opinion: At least you will have some control over your property if you buy it within driving distance.
- Realtor · McLean, VA · Member since 2009 · 184 posts · 80 votes12y
I am currently investing in Jacksonville, FL but I'm with @Jordan Thibodeau Check out the Central Valley - Sacramento, Stockton, Modesto, Merced, Sonora. I'm looking for properties from Chico down to Fresno.
- Rental Property Investor · Brookline, MA · Member since 2013 · 1k+ posts · 777 votes12y
how about New Mexico? I don't see much about Santa Fe or Albuquerque on here.
- Investor · Sacramento, CA · Member since 2012 · 144 posts · 65 votes12y
Try looking in Sacramento, in particular the Sacramento duplex market it's still under valued (in my opinion). Example- I'm selling a duplex for 159k ($1590 gross rents) on MLS that I just repaired and its still active after a few weeks. I would try and stay in California if possible.
- Rental Property Investor · San Francisco, CA · Member since 2013 · 1k+ posts · 1k+ votes12y
how long ago did you by that home? And how long have you been renting it out?
Are you saying it won't cashflow at all for you?? Because if it does, even if it's a small positive, I'd keep it. You probably have equity in it, so why not pull cash out/refi and buy something else with that? If it's in an even halfway decent area in SJ I would not under estimate the appreciation value, plus you have a lower property tax base too, which is no small potatoes in CA.
My philosophy is always keep decent property in the Bay Area! Of course I manage cash flow, but I don't optimize for it. In my mind it's short term vs. long term thinking. You'll never get rich from cashflow; real wealth almost always comes from equity appreciation.
- San Jose, CA · Member since 2011 · 160 posts · 167 votes12y
I have rentals in Oakland, Santa Rosa, Sacramento and Stockton, and I live in San Jose. So I am exposed to a lot of markets in NorCal. It looks to me SAC and Stockton appreciation has hit a wall lately. Both have gone up a bit too fast in the last 18 months and digesting gains right now? But Oakland is still on fire and North Bay is moving along at a steady pace.
Oakland should benefit from overflow from SF if gentrification continues. I would put more money to work in that market.
- Rental Property Investor · San Jose, CA · Member since 2013 · 486 posts · 170 votes12y
@Dennis Lanni Can you send me a link to your listing?
- Investor · Great Falls, MT · Member since 2014 · 163 posts · 132 votes12y
I was just thinking about this... Where I'm investing it's a bit pricey (though nothing like the bay area) and being in the military I don't really have a say in where I live so I have to be comfortable being an out of state investor no matter what. Ya, maybe you can get to the outskirts of your area but you'll be competing with a lot of people just like you for fewer opportunities. Sure, successful investors will come on here and share their stories about those areas. But there will always be that top tier of investors that will make it anywhere. What about the competent but perhaps not stellar small investor? Seems to me like an affordable area is a lot more forgiving and leaves a lot more room for margin of error. I remember before I got really into RE investing when I lived in the Monterey Bay area I would look at some potential investments, run some crude calculations in my head, and wonder who the hell was paying these prices. Even without a strong RE education I knew I wanted no part in that. Of course, the area was devastated in 2008. When I lived in Omaha though I would see properties I knew made sense. I wish I had started then. The fact that I lived in CA for 4-5 years is what kept me out of the market for too long until I decided I would go out of state.
Appreciation above inflation is great. As a bonus. But I wouldn't want to count on it either. And why when you should able to find somewhere more affordable that can also appreciate? And do you really think these 2nd/3rd tier CA cities are going to be long tern gems? I'm skeptical.
I totally agree with the OP. Favorable growing demographics, pro-growth/pro-business climate, high quality of life areas and preferably good weather. I happen to think over the next 20-30 years a lot of our well positioned smaller cities are going to boom. In larger cities there will always be that top 20% succeeding and thriving and drawing in the elite but, and not to get too political here, the high cost, anti-growth policies, debt, and low quality of life for the middle class in these areas is likely to push a lot of people out. I see places like CA getting eerily close to a third world dynamic. There is/will be great opportunity for the wealthy, highly educated go getters but 90% of the people will be locked out of it. I just have a very hard time considering investing in an area where the political climate is anti-growth. Those types of places also tend to be very anti-landlord as well. With the political pendulum swinging in that direction how long before more of those types of places tart implementing rent control and another REI killing practices? That being said, once you are really established and have a lot of holdings the anti-growth policies can be beneficial. If no one is allowed to/wants to build your holdings are that much more in demand.
I have a lot of young single friends/young families I know who are choosing new places to live as they separate for the Air Force. First of all it is amazing how many are choosing Texas. They're choosing to go to places like the OP mentioned. No one I know is going to NY or CA. I do know people leaving those areas though. The population is remaining stable in a lot of those areas due largely to immigration. My anecdotal observations seem to be in line with the evidence so I feel pretty strongly about it.
Like the OP I'm still considering choosing a different area for investing. I like the long term prospects for my market and I can make the 1% rule (with difficulty) but still want to do better. I guess that would be my minimum requirement. If I couldn't find decent properties (good neighborhoods, good condition properties with prospects for growth) that would meet the 1% rule I would be looking elsewhere. In my market (and probably most areas) if you're doing 25% down at the 1% rule you've got a smallish but reasonable cash flow. At 10% down you're probably breaking even. If you've got some capital with strong reserves and are a long term buy and hold investor this seems like an acceptable situation. There's some room for error, you have a small cash-flow, you're paying down the mortgage, you have the tax benefits, and since you like the area you think there's a good chance you can meet/beat inflation through appreciation. Because you're choosing a decent area your property is probably newer and you're likely attracting a better type tenant on average. Under these conditions, long term, even a break even property is hands down better than any other investment opportunity and will bring long term wealth. The reason so many here can't stomach these kind of returns is because they're starting from scratch and require high cash-flow to fund future deals. There's a trade-off, certainly.
I'll admit, while I would never touch Detroit watching the numbers some guys are tapping into in Indianapolis, Colombus, Miluakee, etc. blows my mind and I get pangs of jealousy. But I'm leaning towards a middle ground approach. Both Detroit and San Fran type places are clearly off the list. But I'm drawn to places like Boise, Oklahoma City, Dallas, Phoenix, etc. and even some of the smaller third tier cities more off the radar. There are a lot of smaller third tier cities that are off the grid that I think will one day grow into a new set of second tier cities as well. These places don't offer 2% rule returns but are somewhere in between the spectrum with long term growth on the horizon. So I'm spending a lot of time considering picking one, studying the heck out of it, learning as much as I can about it, visiting and exploring every nook and cranny, building a team, and setting up shop there. I figure once I retire in here in 7-8 years I'll can simply roll into it.
But every time I start leaning in a certain direction I come across Brandon talking about his 2%+ Waldo property or some newbie investor who just picked up a 45k house renting for 700 bucks in a decent area in Indianapolis etc. and I get pangs of doubt. Tough choices no matter what. - 12yMike D'ArrigoPro MemberTurn key provider · San Jose, CA · Member since 2010 · 4k+ posts · 3k+ votes
@Toby Johnston I'm from San Jose also so I understand your dilemma. Yes, the appreciation potential here is great but it's only realized when you sell which is kind of like killing the golden goose. For out of state investing, I like Indianapolis and Kansas City a lot. I'm in Indy right now. Both of these markets have great cash flow and are very affordable. I have a report on how to evaluate a market and how to invest out of state. I'll send you copies if you'd like. Feel free to contact me if you you'd like to bounce ideas around.
Best wishes,
Mike
- Investor · Great Falls, MT · Member since 2014 · 163 posts · 132 votes12y
So after pages and pages of writing... Boise. What about Boise? Quick flight, good days drive away, meets all your criteria except weather which is mild for the NW. It's booming, high QoL, diverse economy, etc. Not as cheap as some places but compared to SJO you'll feel like a kid in a candy store. I think the pro-growth NW will continue to see growth/investment fueled by Californians like yourself. I know the locals whine about it quite a bit, haha.
- Investor · Provo, UT · Member since 2013 · 37 posts · 18 votes12yHow about Reno? Obviously smaller market but I can drive there in less than 5 hours. Numbers look pretty good. Not nearly as good as two years ago but still good.
- Real Estate Broker · Cypress, TX · Member since 2013 · 822 posts · 468 votes12y
I always start with unemployment and then back my way into a good cash flowing area from there. Frankly, there are a lot better areas with stable employment than Reno :)
- Engineer · Portland, OR · Member since 2014 · 1k+ posts · 1k+ votes12yI would keep looking for a market in which you can get both cash flow and appreciation. Obviously you are never going to get the best of both worlds. Amit your statement on cash flow being inferior to appreciation as the road to real wealth makes absolutely no sense to me. Please explain your logic
- Investor · Honolulu, HI · Member since 2013 · 3k+ posts · 1k+ votes12y
Originally posted by @Steve B.:
Amit your statement on cash flow being inferior to appreciation as the road to real wealth makes absolutely no sense to me. Please explain your logicA good example could come from the OP since he stated.." It was a primary residence before rental so the gain is tax free (no 1031 necessary). For me the amount is substantial but I'd rather not say exactly. Enough for down payments on several properties outside the Bay Area."
Even if he was negative cash flow for all his holding time it sounds like his appreciation is great. I believe in another thread that you posted in someone pointed out how you may be negative a thousand a month for 3 years but have a few hundred thousand in appreciation. I'll take the appreciation any day. Toby, what was the total of your negative cash flow and the total appreciation? You can give it as a percentage if you're afraid the relatives will come out of the wood work now that you're rich. Let's see how those numbers work!
- Investor · Great Falls, MT · Member since 2014 · 163 posts · 132 votes12y
Bob, cash flow is a real tangible thing, as is debt pay down. What happens when the market tanks and there is no appreciation for quite awhile? What happens when your projections of appreciation don't materialize? What if you want/need the cash in your property before you have seen the appreciation? What if your financial situation changes? And when the economy tumbles the markets with the lowest cash flow take it on the chin the worst. I was a home owner in Omaha in 2008. The downturn was marginally felt relatively speaking. When I saw the price/rent ratio when I moved to CA I knew I would never buy there in case I had to turn it into a rental. That's how a lot of people lost their shorts though.
Additionally, cash flow has the ability to propel you into more investments. Lenders will be looking at your cash flow numbers and DTI. If you have a cash flow pig and promise them future appreciating that won't get you any friends at a bank. You buy a few cash flowing properties and not only will they pay for your next down payment but lenders will be happy to keep opening the door.
There isn't a doubt in my mind that cash flow > appreciation. Break even cash flow might be acceptable under the right circumstances. Ultimately I think the "Holy Trinity of debt pay down, inflation, and long term conventional financing is the key but I would never knowingly sign on to a property losing money every month. Again, why? There are properties that will both appreciate and cash flow.
- Investor · San Jose, CA · Member since 2012 · 2k+ posts · 3k+ votes12y
@Account Closed and @Amit M. ,
I don't think you two give enough credit to the OP. He's a CPA and a CFP. I would think he weighted his options and decided taking the capital gains tax-free was the best option at this time. Since he has another house in the Bay Area, taking possibly up to $500k tax-free + his original down payment and diversifying the money into a cash-flow market might not be a bad idea. Everyone has different comfort level so one size might not fit all.
For the record, I have been investing in the Bay Area, and I don't see myself investing out of state in the near future.
Toby, I go to Reno 2 times a year. I don't gamble. I go there to play games and win stuffed animals at Circus Circus for my daughter. Based on my observation, Reno is a dying town. I would not invest there. YMMV.
Good luck.
- Investor · Great Falls, MT · Member since 2014 · 163 posts · 132 votes12y
Dying town? I don't know too much about the city though I've been a couple times but it has seen explosive growth in population for as far back as you can see. NYC, on the other hand, has about as many people as it did in 1970.
- Rental Property Investor · San Francisco, CA · Member since 2013 · 1k+ posts · 1k+ votes12y
to whomever. Yeah look, I'm not interested in a pissing match on cash flow vs appreciation. My only point was, how many small/mid size RE investors do you know who have made a few million dollars from cash flow? I know many small/mid size investors in the Bay Area who have a few million dollars in equity. And they still have their equity, just a few years after the "Great Recession." Plus they have cash flow too, although maybe not as much as other places optimized for cash flow.
- Austin, TX · Member since 2014 · 3 posts · 0 votes12y
Texas! Texas! Texas!
I have been here for 23+ years and it's one of the best places to invest. You can't beat the cap rates. Avoid saturated Austin but look at the surrounding areas. I am a Realtor and can help identify properties if you want.
Currently, I'm facilitating the sale of a large project to a well known worldwide corporation (sorry, can't mention the company name right now) in the Texas Hill Country. So, Texas should be a lucrative market for a while.
- Residential Real Estate Broker · Indianapolis, IN · Member since 2010 · 1k+ posts · 557 votes12y
Originally posted by @Account Closed:
Toby,
Congrats. Sometimes, the best thing to do is nothing. Sounds like you know where you want to buy. Unfortunately, the market is fairly valued at this time. One might even argue that it's a little frothy. As long as you can find something that would give you an acceptable yield, and it's located where you want, I'd say go ahead and pull the trigger. The days of low hanging fruits are way behind us.
With respect to low interest rates, I'd put my money on even lower interest rates in 2024. I know it's not the conventional wisdom. That's why I like my chances. :-)
Well said!
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