Buy local or buy at location with higher return?

Question

Hi, everyone,

I live in Northern Virginia, the house prices here isn't low. I estimate the return on investment property is about 5-7% (assuming you buy house using cash at a fair market value and consider no vacancy and assume house doesn't appreciate). I do not think it is impressive. I am thinking buying somewhere else that can offer higher return, but the big question is "WHERE???". I don't mind let property management company takes 7-10% of rental as long as it can offer more attractive return. Any thoughts?

Thank you for your input.

Jerry Padilla · Answer

@James Wise  Cleveland Ohio attracts a lot of out of state investors for the high returns.

@Kevin L.  have you thought of investing in Cleveland?

Joe Villeneuve · Answer

Buying local works if the local market works.  If the local market doesn't work, it's like trying to "force" a roundpeg in a square hole.  You can only make it fit if you shave the peg.  Guess what you're shaving off?

Kevin L. · Answer

I was once told that "buy properties within riding distance", riding bicycle. :-)

Elizabeth Colegrove · Answer

My husband is active duty so local is all in prospective to our current orders. Therefore we self manage all over the country!

That being said, I am a huge belieber of buyig close to home. There are a many costs to owning out of state. We have turned our situation into lemonade.

That being said, I like putting all my expenses into a tangible asset. So I would rather buy a most expensive home closer to where I love them a less expensive but have higher costs. Than being said, everyone has their own "opinion".

Shyreeta Cress · Answer

@Sean Ploskina I've been told it's pretty tight in Hampton Roads as well. I've sent a few direct mail campaigns and got nothing but tire kickers. Just asking around, I was told there's a lot of investors out here so even though there may be deals, you've got to be quick. Any suggestions for me since you're in the area?

Account Closed · Answer

I buy only owner financed properties in my town and make 10-15% cap rates. I like investing in TX :).

Zach Davis · Answer

I only buy local properties because I know how most property management companies work and I don't trust them. Take a listen to show 100 of the BP podcast and you can hear Josh Dorkin railing against the idea that a new investor can buy low cost properties in another area and actually make money in the long run. He's been bit by it and I've been in the same boat. I bet if you look around you can find a market within 2 hours of yourself that you can make a better return on. I invest around Portland, OR which has mediocre returns at best but, within a couple of hours of the Portland Metro Area there are better deals. You may have to drive occasionally but that still beats a plane ride.

FYI, both of my properties were purchased from out of state investors that were looking for better returns. The first one had dealt with 3 management companies in 4 years, the last of which rented one unit to a sex offender who was molesting a 14 year old girl in the apartment. He got caught again and the unit was a crime scene for 2 months and thus collecting no rent. When the owners contacted us to see if we would buy it they had fired the management company, again, and were flying up from California to show the unit to prospective renters after the police released it. The other one I purchased for $40k under what he had paid for it because he didn't know the area when he bought and his management company ran it into the ground. I also just put an offer in on another one with a similar Out Of Area story...

There are obviously many people who make money at long distance investing but its almost always the seasoned investors with an established network that they can rely on and its rarely their only property. Not a husband wife buying class a C property in Texas or Ohio when they live in New York. Obviously I'm generalizing but I think the statistics would back me up. Again, listen to the Podcast, almost every episode the person being interviewed talks about the most difficult part of investing being finding a manager, contractor, handy man, agent, etc. that they can count on.

Kevin L. · Answer

Yes, just for the sake of calculation. If house here appreciates 3%/yr, I consider it good. However, you are just offseting the inflation with entire equity locked in the real estate.

Which to me, is not a great investment.

Joe Villeneuve · Answer

Are you renting or flipping?  I want a stable market when I hold.  Inflation means I need to sell down the road since it means higher taxes...lower cash flow.

Equity looks good on paper if I'm flipping.  It has little value if I'm holding.  Then again, I'm holding in markets where I get all may cash out before the end of the first year.

CK Hwang · Answer

I'm curious to know why you say no appreciation in your original post? Is it just for the sake of calculations? Generally I find that 5% CoC rental returns is a sign of being in an area with relatively high capital gains. Likewise being in an area with 10% rental returns generally signal low capital gains.

Now if you're looking purely for returns without capital gains I would understand, but personally, I would never consider rental properties based solely on rental returns without regarding capital gains and more importantly liquidity.