Is it better to invest in California or Florida for better cashflow?

[Mohan Indugula]

Hi,

Thanks in advance.  I live near Tracy. I feel better to invest in California where I can drive easily like Fresno, Sacramento, etc., I see few of my colleagues are investing in Florida. I would like to get your feedback. 

[Eric Fernwood]

Hello Mohan,

You are wise to focus on the investment location. The location determines all the long-term income characteristics including:

• Whether rents will keep pace with inflation
• How long your income stream will last
• How reliable your income stream will be
• How much of your rental income is lost to overhead
• Whether you or the government control your property.

You want to invest in the city which is best for long-term investment. Fortunately, there is a straightforward process for selecting a city that provides the best combination of characteristics to provide a reliable passive income.

You don’t have infinite time to explore every possible location so below is the process I followed to select the city where I set up my investor services business.

I started with metro areas with A population greater than 1M**.** Small towns may rely too much on a single business or market segment. Wikipedia

I then eliminated any city that failed any of the following metrics.

• Both state and metro populations are increasing. Do not buy anywhere if the state or metro populations are static or decreasing. Wikipedia

• Low crime - High crime and long-term appreciation and rent growth are mutually exclusive. Do not invest in any city on Neighborhood Scouts’ list of the 100 most dangerous US cities.

• Low operating cost - High operating costs can turn what appears to be a profitable property into a money pit. The three most apparent costs are income taxes, property taxes, and insurance. Insurance - ValuePenguin, Metro Property Taxes - LendingTree, State Property Tax Rates - Rocket Mortgage

  Below is an overhead cost comparison between California, Texas, Florida, and Nevada..

  

  To put the above costs into perspective, below is the annual overhead cost for a $400,000 investment. To keep things simple, I will ignore California's state income tax.

  

  These numbers do not include all operating costs. For example, rent control in California may prevent you from increasing rent rapidly enough to keep pace with inflation. So, while rent control is not a direct cost, rent control can cost you a lot of money. So, you have to look beyond just the numbers, but the numbers are a good indicator of overhead costs. For example, a property in Florida will have to generate a $2,223 higher cash flow per year to have the same cash flow as a property in Nevada due to the higher overhead cost.

• Low disaster risk - Natural disasters, such as tornadoes, can destroy entire communities, including jobs, shopping, and housing. If a tenant loses their home, they will immediately move to a new location with jobs and a place to live, instead of waiting one year or more for the property to be rebuilt. Even if your insurance covers the cost of rebuilding, it may be difficult to find new tenants because people have already moved away. Communities hit by natural disasters may take years or never fully recover. Meanwhile, your expenses, such as mortgage, taxes, insurance, and maintenance, will continue. To avoid this, choose a location with low-cost homeowners' insurance, which indicates a lower risk of natural disasters. Insurance - ValuePenguin

• Rent control - Some states and metro areas have implemented various kinds of rent control. Rent control may prevent you from increasing the rent fast enough to keep pace with inflation. It may limit your property manager's ability to select the best tenant. It may make evictions of non-performing tenants difficult or impossible. Never invest in any location with rent control.

• Inflation compensating - Every time you go to the store, the same basket of goods costs more and more dollars. In order to have the additional dollars needed to pay inflated prices, rents must rise faster than inflation. Therefore, a critical location selection metric is that rents and prices are rising faster than inflation. Rents tend to lag behind prices, so you can use the appreciation rate if you do not have historical rental data. Zillow Research

Once you apply all the elimination filters to the initial list of cities, you will have only a few remaining for additional consideration.

Another important consideration when selecting a city is whether you can find an experienced investment team in the area that interests you. While podcasts, books, seminars, and websites provide general information, only an experienced local investment team can offer the necessary local resources, processes, and expertise to help you make a sound investment decision.

If you want a process for finding and qualifying a local investment team, let me know.

There is a straightforward process for determining what type of property to buy. You should elect the property based on financial objectives, rather than an opinion from someone who may be on the other side of the country. Always beware of blanket advice, as one size does not fit all in real estate.

The goal of real estate investing is a reliable income that you will not outlive. To have a reliable income, you need the property continuously occupied by what I call a reliable tenant. A reliable tenant is someone who stays many years, always pays the rent on schedule, and takes care of the property.

Reliable tenants are the exception, not the norm. However, there is typically a single segment with the highest percentage of reliable tenants, which can be identified through property manager interviews. Once this segment is identified, determine where they currently rent and what they rent. Then, purchase similar properties.

This method can be applied in any location. Essentially, you should identify the tenant segment that is most likely to provide reliable income and buy the type of property that they are willing and able to rent. By letting the segment decide the property type and other factors, you can maximize your cash flow and income reliability. Moreover, by doing so, you eliminate opinions and luck from your investment decisions.