The great California vs Out-of-State debate

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The great California vs Out-of-State debate

Ruben Parra
Real Estate Investor · Mission Viejo, CA · Member since 2015 · 24 posts · 5 votes

Hi BP members!

This is just my second post and it feels great to have received such good feedback and support.

Since I don't usually carry around $100K in cash, my southern California backyard market can seem a little intimidating and out of reach for someone who is looking to invest in their first rental property. I think many of us start looking out of state as a better option to get our portfolio started. I have seen many passionate posts either advocating out of state for better returns, or defending the CA rental market as a stable cash flow strategy.

I'm personally looking for positive cash flow with somewhat decent returns  and the possibility of appreciation. I'm a little worried about another housing correction in California. Even Bakersfield seems like it could be in trouble with the oil job layoffs. I plan to stay out  any rehab or property management work myself so not having immediate access to the property is a risk I'm willing to take in any case.

Can anybody from CA who has tried both in and out of state markets share their experiences? What were the greatest difficulties you faced in each? What are the benefits or rewards you found in each one? And finally what advice would you give a new investor who is looking for their first property in an out of state market?

Then there's the question of certain markets or cities being better suited for multifamily units vs SFR's, but I'll leave that discussion for another day!

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Will BarnardPro Member
Moderator
Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
11y
Originally posted by @Ruben Parra:

I'm personally looking for positive cash flow with somewhat decent returns  and the possibility of appreciation. I'm a little worried about another housing correction in California.

 Ruben, your statement here is similar to saying i want to make $100k a year and want the possibility of not having to work for it. I say that not to be mean, but to point out that cash flow AND appreciation do not often come hand in hand. More often, it is one or the other. In states like CA, there are many areas that offer large opportunities for appreciation, but that requires good timing on the investors part (or luck if you want to roll that way). As for true cash flow, typically that is in lower priced areas where the cost of the dirt and the cost of the building is far less in relationship to the rental rate ratio you get.

So the question is, what is your goal, to have enough cash flow from rental doors to support you for life, or is your goal not monthly income, but future appreciation to obtain larger chunks of cash at one time? In cash flow markets, if you nail some appreciation, that is just the gravy, stay focused on one or the other, trying to get both and you may find yourself with neither.

The largest obstacle for investing out of state is not having the ability to be there in a moments notice, managing property managers, and you having to rely on third parties. Investing in your own backyard affords you the ability to have boots on the ground and more control, but, if you live in non cash flow locations and your goal is cash flow, you have to jump through those hurdles.

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  • Leonard Tekaat
    Real Estate Investor · Bakersfield, CA · Member since 2014 · 2 posts · 1 vote
    11y

    Mr Parra

    I don't understand your last sentence in paragraph three.  Do you want to rehab or manage rentals, or do you not want to do these things.

    I live in Bakersfield Ca. I was in the rental market for forty years.

    1Reply
  • Ruben Parra
    OP
    Real Estate Investor · Mission Viejo, CA · Member since 2015 · 24 posts · 5 votes
    11y
    Originally posted by @Leonard Tekaat:

    Mr Parra

    I don't understand your last sentence in paragraph three.  Do you want to rehab or manage rentals, or do you not want to do these things.

    I live in Bakersfield Ca. I was in the rental market for forty years.

     Hi Leonard. I think I missed a word in there. I meant "stay out of" doing any rehab or property management. I would want to hire someone else to do that for me. How is it currently looking in Bakersfield?

    0Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    11y

    @Ruben Parra 

      you will no doubt get a lot of help with this... But if its out of state investing you want to do.. I wrote a little e book on the subject.. having owned over 350 Cash flow rentals in the mid west I just jotted down some real life experiences.. I do not make any recommendations of companies or markets.. just little things you should know .

    There are over 30 different cash flow markets in the US with hundreds of different providers catering to LA based investors.  And of course there are still deals on the west coast little harder to ferret out but they are here.

    Best of luck 

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  • Ruben Parra
    OP
    Real Estate Investor · Mission Viejo, CA · Member since 2015 · 24 posts · 5 votes
    11y

    @Jay Hinrichs 

    I would definitely look forward to reading about some of your experiences in the out of state market. I will email you shortly. Thanks for the offer.

    0Reply
  • Elizabeth Colegrove
    Hanford, CA · Member since 2013 · 5k+ posts · 1k+ votes
    11y

    We live in central California. We invest both locally and out of state! There have been its ups and down moments! Honestly if I could I would invest only locally, being active duty navy that's not possible. Therefore I invest where it makes sense and meets my parameters.

    1Reply
  • Ruben Parra
    OP
    Real Estate Investor · Mission Viejo, CA · Member since 2015 · 24 posts · 5 votes
    11y

    Hi @Elizabeth Colegrove . What would you say is the one thing that weighs the heaviest in your desire to invest locally?

    0Reply
  • Gene HackerPro Member
    Flipper/Rehabber · Lake Isabella, CA · Member since 2011 · 974 posts · 488 votes
    11y

    I agree with Mr. Tekaat that Bakersfield is a diverse economy with more than just oil as an economic base.  Ag is big, and distribution is expanding.  

    If there is any fallout from the recent falling oil prices, that may help if one was looking to buy right now.  Of course if oil prices stay low for a very long time or fall further then there many be more layoffs in the future but that could have a negative effect on the local real estate market.  But on the flip side, oil prices might go up.  

    Will oil prices go back up or go lower?  I don't know but I am always more comfortable buying after a large price decline rather than buying after a large price increase.

    2Reply
  • Kimberly T.
    Investor · Colorado Springs CO · Member since 2014 · 535 posts · 253 votes
    11y

    Hi @Ruben Parra , a fellow OC resident here. :)  My husband and I own locally and out of state, so I'll give you our thoughts on that.

    We buy for cash flow.  Our goal is to be able to live off our cash flow so we can quit working, so appreciation is not something we focus on.  We bought our house when we got married in 2008, and bought a triplex in OC 2 years later after saving up for the down payment.  We self-manage that property, and fine tuned a lot of our criteria regarding how we want our rentals run (tenant screening requirements, up keep standards, etc.).  We also became intimately familiar with how anti-landlord CA is.  My parents were landlords when I was growing up, so I knew some of this stuff, but it's not the same until you have your own rental.

    The following year, we decided to branch out to invest in AZ, for a few reasons: it's much more landlord-friendly, better ROI, cheaper prices, and it's not too far away (6 hr drive). We bought a 4plex in 2011 and another one 20 months later. We got a PM to run it, but drove out a few times to do some of the major work (xeriscaping, etc.).

    A few months ago, we pulled the trigger and bought a 4plex in CO. We are planning on leaving CA in the next 5ish years, and CO is the state we're considering moving to. It's another very landlord-friendly state with better ROI and cheaper prices than OC.

    There are a lot of things to consider when deciding where to invest. Do you plan to stay in CA long term? Do you want to be able to drive to your rental? One thing you'll need to do is determine what lending options are available to you. Talk to some local mortgage brokers and some brokers in other areas you're considering buying in, and see what your options are since you don't currently own any rentals. Another option to consider, if you don't currently own your residence, is to buy a multifamily and then live in one unit while renting out the other(s). That is one thing we wish we'd done, in retrospect. It might just put an OC rental within your reach, since you wouldn't need 25% or even 20% down. If you do own your home, you could sell it and buy a multifamily to live in, if you're open to that. Another option is to buy in the Inland Empire area - cheaper and better ROI than in OC, but not too far away. If you don't plan to ever be physically involved with your rental and plan to hire someone for everything, then I'd question the purpose of buying in CA - why not buy in a state with better ROI and more landlord-friendly laws? You will need to do lots of research on areas, good/bad neighborhoods, etc., if deciding to buy somewhere else, though. Anyway, like I said, lots to consider with this decision.

    4Reply
  • Will BarnardPro Member
    Moderator
    Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
    11y
    Originally posted by @Ruben Parra:

    I'm personally looking for positive cash flow with somewhat decent returns  and the possibility of appreciation. I'm a little worried about another housing correction in California.

     Ruben, your statement here is similar to saying i want to make $100k a year and want the possibility of not having to work for it. I say that not to be mean, but to point out that cash flow AND appreciation do not often come hand in hand. More often, it is one or the other. In states like CA, there are many areas that offer large opportunities for appreciation, but that requires good timing on the investors part (or luck if you want to roll that way). As for true cash flow, typically that is in lower priced areas where the cost of the dirt and the cost of the building is far less in relationship to the rental rate ratio you get.

    So the question is, what is your goal, to have enough cash flow from rental doors to support you for life, or is your goal not monthly income, but future appreciation to obtain larger chunks of cash at one time? In cash flow markets, if you nail some appreciation, that is just the gravy, stay focused on one or the other, trying to get both and you may find yourself with neither.

    The largest obstacle for investing out of state is not having the ability to be there in a moments notice, managing property managers, and you having to rely on third parties. Investing in your own backyard affords you the ability to have boots on the ground and more control, but, if you live in non cash flow locations and your goal is cash flow, you have to jump through those hurdles.

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  • Account Closed
    Real Estate Investor · San Antonio, TX · Member since 2014 · 785 posts · 190 votes
    11y

    [Removed]

    But carefully vet whoever you work with. I would check into them on BP, see if you can get recommendations in whatever market you consider. Best of luck. 

    0Reply
  • Ruben Parra
    OP
    Real Estate Investor · Mission Viejo, CA · Member since 2015 · 24 posts · 5 votes
    11y

    @Will Barnard 

    Haha.. yes you are right, it sounded like I want too much of a good thing. I might have re-worded that sentence better.

    I am looking for cash flow primarily, as most buy and hold investors do. I am not a speculator by any means, and find it too risky to bet on short term appreciation. My goal is to generate enough passive cash flow income to support my living expenses. I would then have the freedom of choosing if I want to continue working a full-time job or venture into something else.

    I'm also well aware of the trade-off you mention (good cash flow vs poor appreciation, and vice versa). That is why I am leaning towards out of state investments. I would rather my first investment be in an area where out of pocket is less, and ROI is higher. I know the risk is bigger, but I am willing to live with that.

    As far as property management goes, I would outsource it. I think my current job as a Project Manager has allowed me to look at the bigger picture and manage teams and logistics better than individuals. Personality-wise I think I would over-manage properties if I did it it myself. I am too much of a softie to manage individual tenants. I could be hard-nosed when it comes to another business handling my money, but may become to attached to the personal situations of tenants if done myself.

     I want to keep this as passive as possible at first, since my primary income is the one that puts food on the table for now. 

    Thanks for the input Will. And by the way, have you had any out of state investments? Have there been more positives than negatives on those?

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  • Will BarnardPro Member
    Moderator
    Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
    11y
    Originally posted by @Ruben Parra:

    @Will Barnard

    Thanks for the input Will. And by the way, have you had any out of state investments? Have there been more positives than negatives on those?

     Yes, I have had many out of state investments, primarily in TX. I got my start doing that and one of my biggest mistakes being a rookie was overpaying. Next was managing all the people who start out great and turn lazy. Like the old saying goes, nobody cares more about your money than YOU! All in all, it was positive, however, when I do it again, I will do it much better with the experience I know hold.

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  • Ruben Parra
    OP
    Real Estate Investor · Mission Viejo, CA · Member since 2015 · 24 posts · 5 votes
    11y

    @Kimberly T.

    Great post! That's exactly the type of feedback I'm looking for. You mentioned advantages and disadvantages in your own experience. This allows me to weigh each one in my personal situation and gives me a great starting point. You make a very good point in the overall market research. Things like landlord friendly states, micro-economy in the region, property taxes, ROI, vacancy rates, are all things I'm starting to look at. That type of research and analysis is actually something I quite enjoy (coming from an Engineering background).

    I love SoCal and would not trade it for the world. I plant to ultimately buy a place here in OC or San Diego when the time is right. I like CO  as well and is great place to visit. Maybe I can start looking at investment markets there.

    0Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    11y

    @Will Barnard 

      as you state out of state investing can have a steep learning curve if one is not diligent.

    I know when my first out of state house suffered a fractured foundation It was a night mare and something that just does not happen in my area.. little local foibles are important to know.

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  • Will BarnardPro Member
    Moderator
    Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
    11y
    Originally posted by @Jay Hinrichs:

    @Will Barnard 

      as you state out of state investing can have a steep learning curve if one is not diligent.

    I know when my first out of state house suffered a fractured foundation It was a night mare and something that just does not happen in my area.. little local foibles are important to know.

     It is not actually the big things I was referring to, but the little ones which wind up being the biggest ones. While a foundation issue is something big, it is not going to be a common issue for the landlord or an ongoing one each month or even year while managing tenants, picking tenants, tenant turnover ratios, and managing repairs are a very big deal and make or break you.

    mentions above that he plans to hire a professional property manager. That is the only way in my. Ok to tackle this task if you invest more than a 3 hours outside your home. I once had a professional property manager send me a repair bill for a sprinkler head that the tenant broke by running it over with their truck (it was the one closest to the driveway). I sent the Bill back to him and said he should pay for it. He asked why he would pay for it and I answered him with the same question. Having strict rules and clear verbiage in tenant contracts is a must and your PM must manage tenants accordingly to prevent the landlord from being taken advantage of. This may appear like common knowledge but for some reason, it is not at all times. Little things like this turn into big things and happen on a monthly basis so managing this effectively is key. (Granted this is the case with local or out of state, but with out of state, it requires the third party to employ).

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  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    11y

    @Will Barnard 

      good scenario with the broken sprinkler head... some of our units require foundations to be watered.. not a common scenario in most of the country but in parts of TX mandatory.

    herding the cats with all these little items is a learning process for sure.

    My favorite is the garage door got bent somehow and won't open  !!

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  • Account Closed
    Investor · Singapore · Member since 2013 · 1k+ posts · 3k+ votes
    11y

    I do both. I have a portfolio of cheaper homes (40-50K purchase price) in Indianapolis that rent between 700-860/month. We also own two Bay Area rentals which were our primary homes until we moved into a new one. The Indy portfolio (about 3 years now) has had its ups and downs but returns about 12-25% per year CoC when you include mortgage pay down. I pay down the mortgage on a 10 year schedule (20-25% down) and there is adequate cash flow to accomplish this. I dont expect appreciation but I think I got some on the earlier purchases. The tenants there have issues, I have had 2 evictions (both inherited tenants, not my selection) relatively higher maintenance costs and more frequent turn over. Plus there is PM cost. But if you have more than 1.5% rent ratio, there is room for that and still cash flow to the extent I need. And I have a good PM, without which it would not work.

    We also have two houses in the Bay Area that are both rented for >3K/month each. They pay down mortgage on 30 years and deliver a small positive cash flow. But I expect at least 5% per year appreciation over a 5-10 year period. The tenants are all professional (example Apple engineer), maintenance cost is negligible as a percent of rent, vacancy is minimal (I got the tenant within one week of listing), rents rise annually and I can self manage so no PM costs. Rent is never late, always auto deposited into my bank account.

    So quite different scenarios. I dont know if I would buy a home today in the Bay Area just for investment because it would be negative cash flow from the get go and I am not too comfortable with that. But with homes bought earlier at lower prices, I am willing to hold for future appreciation and let someone else pay my mortgage for me.

    3Reply
  • Kimberly T.
    Investor · Colorado Springs CO · Member since 2014 · 535 posts · 253 votes
    11y
    Originally posted by @Ruben Parra:

    @Kimberly T.

    Great post! That's exactly the type of feedback I'm looking for. You mentioned advantages and disadvantages in your own experience. This allows me to weigh each one in my personal situation and gives me a great starting point. You make a very good point in the overall market research. Things like landlord friendly states, micro-economy in the region, property taxes, ROI, vacancy rates, are all things I'm starting to look at. That type of research and analysis is actually something I quite enjoy (coming from an Engineering background).

    I love SoCal and would not trade it for the world. I plant to ultimately buy a place here in OC or San Diego when the time is right. I like CO  as well and is great place to visit. Maybe I can start looking at investment markets there.

    My husband and I are engineers too (structural), so I know what you mean.  Made myself some spreadsheets so I can compare numbers easily. :)

    Sounds like you're doing things right, those are some of the things you need to research when deciding where to invest.  Good luck!

    0Reply
  • Orion Walker
    Investor · Ukiah, CA · Member since 2014 · 196 posts · 83 votes
    11y

    Age old question, but interesting thread/comments. So far I've chosen to stay local, because I've been able to find decent deals in my area and being just 2 hours north of San Francisco I figure I've got some good appreciation potential. But interesting comment on not trying to do both. I guess I think that's something interesting about my area that I can do both. But on the other hand, maybe instead of settling for 1% territory here I should be looking for 2% somewhere else. I think eventually I'll try some of both.

    @Jay Hinrichs, you know the northern north bay area well and we've chatted a bit about the pros and cons. Any particular thoughts on this area versus out of state?  

    And good luck to you @Ruben Parra, I think my main advice to you would be to jump in and give something a try as soon as you can. Catch the low interest rates, learn by doing...

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  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    11y

    @Orion Walker 

    Good Question Orion.. two schools of thought being your in Ukiah ( my son was born there) ... you defiantly have 1% and great options.. That being only a 30 minute drive over to Lake county.. you could be looking at older farm style houses in Upper Lake.. smaller homes in Nice and Lucerne.. And of course there is a lot of mobile homes there. they make pretty decent cash flow rentals.  If Hillside Honda is still there,, WE built the subdivision adjacent to it in the day.. Plus owned all the land across the street down to the lake another 80 some acres.

    I did a quick search in Lake county recently and you can buy many homes for under 75k that would rent for 700 to 1000... NP  Now hidden valley lake and the Riverias will of course be more money. but might have some capital growth opportunities.

    Not sure how the big subdivision Brooktrails in Willits is doing ...

    And then when else fails we can just go out to Pillsbury Pines buy a slice of heaven and call it a day... I still own a few parcels there I love it there!!!

    JLH

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  • Pitterson Cody
    Idaho Falls, ID · Member since 2015 · 2 posts · 0 votes
    11y

    We invest in locally ! There have been its ups and down moments! Sill now I can't understand what will best

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  • Account Closed
    Investor · Singapore · Member since 2013 · 1k+ posts · 3k+ votes
    11y

    @Orion Walker Why do you think 2 hours from SF makes land in Ukiah valuable? Its not exactly commute distance nor is land in Far Northern CA that limited? Its pretty up there for sure though. Are you thinking secondary home market for Bay Area? I'm not challenging the statement because I don't know, but I am curious if there is a 1% market in CA that actually has appreciation potential.

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  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    11y

    @Account Closed 

      Mendocino county has appreciation potential.. its not bay area of course were things can rise 30% in a year.. But over time values do definatly increase in Northern CA. At least that part.. And land is limited by the mountainous nature of the area... There are many acreage properties that one can buy but they are valuable .. Along with vineyard land.. and of course CA. number one cash crop Weed...

    Take for instance Hidden Valley Lake in southern Lake co.. its an Old Boise Cascade development one of 27 they built in CA in the 60s... you could buy a nice home there 20 years ago for 125k and under.. Well it is commute distance to Santa Rosa and Napa so values have climbed progressively there I have not looked lately but I bet the values have doubled in the last 20 years maybe more.  As has most of N. CA.. I stopped selling RE there in 1992 ... But I still own some property in Lake Co.

    And people will commute from Ukiah to N. Sonoma county and Santa Rosa as well.  YOu have the same situation  as you have say in Grass Valley and Nevada city area.. Many Many Bay Area folks will sell their Silicon valley properties and move to these areas to retire or semi retire... Ukiah has a great airport, shopping, hospitals and such. And with all the ag there a strong blue colar rental population.

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  • Martin Scherer
    Rental Property Investor · Liberty Hill, TX · Member since 2014 · 285 posts · 166 votes
    11y

    All of my rentals are out of state, but I am kicking myself now for not buying some here in Santa Rosa.  I just couldn't find anything that could remotely cash flow so I went North.  I got great cash flow there but I just sold one of those rentals  that had cashflow from day one but after 12 years had increased in value $5000.  Was it worth the choice probably not but I learned how to purchase long distance and my other rentals in CdA all were better choices than that first.  Although no money down and a check in my pocket on purchase was nice.

    I still haven't found any great deals in Santa Rosa but I am more likely to stay home on my next purchase. The appreciation is just much more likely than out of state.

    I have listed and sold several properties in Lake county especially in Clearlake and HVL.  Some of the lots that were selling in 06 and 07 for 30,000 are now sitting on the market for 10,000 in HVL.  Many are not buildable. You can get cashflow on properties up there but I am not certain about appreciation.  

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  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    11y

    @Martin Scherer 

      Lots in Lake county really roller coaster.. I use to buy lots at HVL for a couple grand at tax sale.. then resell at 10 to 15k ... In the day  when Boise Cascade was doing the 27  HVL like projects through the state.. they could record the subdivisions of say 2 to 5 thousand lots but only required to put in the infrastructure for the first 500 or so homes to be built.. Of course you could never do that in today's development environment.. this is why you have so many un buildable lots in many parts of CA... They won't perk.. I own two out in Jenner by the sea that are like that.   how about little cabins in Rio Nido or Monte Rio or that area.. any deals there ? there were some pretty good deals over in Yuba city a few years ago not sure if they have flushed out and risen in value.. AT least with your rentals in CdA  when you go there your going to one of the prettiest spots in the entire US...

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