Better to buy out of state and rent it out or buy a place for me?

Question

I’m trying to decide if it’s better for me to buy something out of state and rent it out or is it better to buy a place for me to live in. I live in California and the rent goes up $100/a year for my 2 bedroom apartment. I’ve heard that’s quite conservative for my area. Been at my current place for 2 years and really don’t want to stick around for another $100 rent increase coming in March 2019.

Bryan Zuetel · Answer

@Nancy Lucca, If you're a nurse at a hospital in an area where nurses would like to live, I would suggest that you buy a condo or house with extra bedrooms and rent out the rooms to fellow nurses.  There will always be a demand by nurses for housing close to that hospital or facility.  For example, I am working with a nurse at Hoag Hospital in Newport Beach to find a condo in the area that she can live in and rent out a bedroom to another nurse.  It will certainly beat paying that monthly rent payment in Orange County.

Tony Kim · Answer

This is exactly the same reason why I bought a condo in mid-Wilshire back in 2010. I knew prices were low, so I wanted to lock in a monthly mortgage payment that wouldn't change for 30 years. I purchased the property with no expectation of appreciation (real estate fell out of vogue at that time). I lived in the property for two years and then rented it out.....little did I know it would increase in value almost 3-fold while providing me with very nice cash flow.

Of course, at this stage in the current real estate cycle, I'm not sure if this is still a good strategy. If you truly want to lock in a set monthly payment with very minimal increases in taxes and HOA dues, then I say go for it.  This is an extreme example, but in 15 years, your rent might be almost double what it is now, but your monthly mortgage payment will be the same.

If you decide to purchase out of state, really spend some time researching what you are getting yourself into...specifically, look into what kinds of exit strategies are available. You have to view properties in the Midwest with a different mind-set than when buying a home or condo in CA. All I'm gonna say about that is that given how strong our current real estate cycle is this time around, it is the perfect, rare opportunity to sell any properties that fit the Roofstock or HomeUnion profile.

Ali Boone · Answer

I'm always in favor of renting where you live and buying investment properties elsewhere, versus buying something for you to live in.

https://www.biggerpockets.com/renewsblog/2014/01/1...

It shouldn't be about the $100 increase, it should be about how much you're paying in total as compared to what the other options would be.

Rob D. · Answer

Property taxes in California are protected under Prop 13 which limits the amount to 1% a year. You may have mello Roos or some bond measure but the basic is 1%of the purchase price. It’s best to get the lowest price possible. I don’t do rent increases yearly but I’m starting to simply because i am falling behind on prices and my costs are going up too.

What I do is round off the payment to the nearest hundred bucks and make one additional payment per year in January.  That  will kill well over 7/8 years of payments off a 30 year mortgage.

If you’re financially savvy I would pay the property taxes yourself and not have them impounded. If you’re not great with money have the taxes impounded.

Nancy Lucca · Answer

the first year I had my apartment the rent was $1810/month. The second year it was $1890/month so it went up 4.23%. The third year it went up to $1975/month so another 4.31% increase. The last time the property taxes went up in Orange County was 2%. And they don’t go up every year. So the rent already increased 8.35% in 2 and a half years.

Nancy Lucca · Answer

I like the way u think. Yeah I definitely don’t want to be priced out of California. Or more specifically OC/LA area for that matter. And I almost have the down payment needed on a 3 bed 2 bath condo. and so sick of the rent increases, I just want to be locked in with 1 payment. What about property taxes? I hear those go up too but by how much? Nowhere near ($1200 a year/$100 a month) which is what the rent increases are doing.

Rob D. · Answer

Imo unless something absolutely offvthe wall comes off,  a downturn in the next couple of years is unlikely. There may be a slowdown or correction but you’re not gonna see a 50% drop in prices. Those indicators that showed the crash last time are watched today. Personally I think you’re very optimistic if you think you’re gonna have big cash flow with out of state property rental. A lot of what would of been your profit will be eaten up by the PMC and repairs. You’re getting what’s left over. Sure you’ll get deductions but you’re not getting a lot of money. Most PMCs are a joke. They really are. Your job as a RN should bring in a pretty good amount of money and it’s basically recession proof. Everyone gets sick. And hospitals aren’t exactly turning nurses away.

You stated  the perfect reason why someone should purchase a house. Rent raises. Unless you invest your extra income in some cash flowing venues you will always be chasing the rent raises. Dont get me wrong, as a LL I’ll take a extra hundred bucks a month in my pocket. As a tenant I would hate to pay it.

Back when I purchased my first house in OC California rents were similar to buying except for the down payment. Back then there was no hocus pocus financing. As time went on rents surpassed my PITI payment where today the property is rented for about 2.5x what was my payment amount. So as long as you don’t go HELOC or Refi cash out my equity crazy eventually your mortgage will be outpaced  by the rents.

Buy your house and lock in your living expenses for 30 years. If you want to invest, do it after you secure your home. You can get roommates and not only get the experience of being a LL but get that extra income also. And you’re not sharing it with anyone.

Nancy Lucca · Answer

I’m not a musician. I’m an RN. But yeah no desire to move out of Cali. But trying to decide what’s the better choice initially for my first real estate purchase. Out of state with something that cash flows or something here and “house hacking it” for awhile. I just don’t want the rent increases to get to the point where I’m pushed out of living here. I’ve heard some investors on here saying “only invest in Cali, in a downturn” I wonder what’s the possibility of a downturn in Cali in the next couple years.

Nathan Gesner · Answer

I think the better option is to leave California but I understand you may have a different opinion.

Buying in California is really expensive. So you may avoid the $100 a year increase in rent, but what about increase in taxes, insurance, or the general cost of living? I don't think you can avoid it.

Buying a property in another market could give you $400 a month cash-flow, which would off-set your $100 a year increase.

On the other hand, California real estate tends to appreciate much faster.

On the other hand, California real estate tends to depreciate much faster.

Honestly, there's no easy answer because there are too many variables. You need to sit down and do the hard work by evaluating all the pros and cons of each decision.

I see you're a musician so you probably can't imagine leaving LA. I have a brother-in-law that's a singer/songwriter/musician/vocal coach in LA. Despite an enormous amount of talent and nearly 20 years of working his butt off, he's in the lower end of middle class. He could make a better living doing and have a better quality of life working in another state but insists on staying so he can be discovered and it's stifling his ability to get ahead in life.