Best Way To Start In a High-Cost Location

6 Replies

I've got a decent sum of money that I'd like to deploy into real estate. I've been listening to the BP Podcast and reading real estate books for a while, but I'm having a hard time figuring out what direction to go. Here's my situation:

  • I have a job, and I like it, so I'm not looking for a real estate investment that would take up as much time as another job. That leaves out wholesaling and flipping.
  • What I'd really like to do is buy-and-hold investing, but Los Angeles doesn't seem a good environment for that. There are some decent cap rates about a three hour drive from my house, but I'm not sure as a new landlord I should be taking on something that far away. (I've been looking at duplexes and triplexes on LoopNet.)
  • That leaves me with investing somewhere even further (Texas, Arizona, Nevada, etc.) but I don't think investing somewhere that far away, as a new landlord, is a good idea.
  • So buy-and-hold seems to be out. That leaves hard money lending. (Am I missing something?) But I haven't seen many posts or books about being a hard-money lender, and that seems like a field where ignorance could really cost you.

Any thoughts from anyone? Suggestions for where to look for further information? I'd love to hear stories from people who have been in my situation. I'm open to any suggestions for a niche to dive into -- commercial, residential, hard-money lending, etc.

@John Schofield  

There are other options besides wholesaling, flipping and buy-and-holds. One that I (and many other flippers) look for is someone like you who has "a decent sum of money" but doesn't have the time to flip houses. We partner with them to flip houses. I have had a couple of partners like this. What it basically boils down to is I do all the work, using money from a gap funder and a hard money lender, and then I split the profits with them. They are on contract, if they want to be, and approve any deal the is funded, of course.

What that allows is for those of us who don't have the money to gap for ourselves to do the flipping and allows the funder to put in a minimum amount of time. Win/win for both. Always vet your partner AND the project.

Club In Action has a Cash Flow game going this Wednesday night in Burbank. (http://www.meetup.com/Real-Estate-Club-In-Action-Burbank-CA/events/201136332/). Come on out and talk with others who are just getting in the game. Julie runs it and she is wonderful. I'll be there, as well.

@John Schofield  Hard money investing requires a lot of knowledge.   For example, do you need a license to lend money secured by real property in California (answer, yes, with some exceptions).  Also, if the loan is not mediated by a licensed broker, you are subject to usury and other restrictions.  These are among the many traps for the novices.   Due diligence, legal documents, finding borrowers, turning your capital, all of this can add up to as much time and trouble as wholesaling if you are doing it all on your own.

There is the partner route suggested by @Mark Mynhier  above.  This is a good idea.  But it does not answer the question of what strategy you should pursue, because you could as easily partner with a hard money lender as a wholesaler or fix/flip guy.

My advice is not to give up on buy and hold.  Personally, I am willing to trade cap rate for equity, meaning I would rather own the asset and have a lower cap rate than have no equity but a higher return (which is lending).    Are you better off with a 5% cap rate and equity, or a 10% cap rate with no equity?  There is no correct answer, since that depends on your view of future market appreciation, by definition uncertain.  But if you are thinking buy/hold, you are probably a believer the power of long term appreciation.  Also, if you are willing to use mortgage debt, buy/hold allows the power of leverage.  Again, something you can't easily get without owning the equity.

I buy mostly in the Inland Empire, which is closer to me in OC than it is to the Valley.  I was lucky to buy many of my assets in 2010/2011, which means I have been spoiled with a 10%+ unlevered return as well as excellent appreciation.  Those days are gone, of course, but I still manage to find deals with get a 5-8% return from time to time.  However, I am looking to move closer in and have been hunting through LA's neighborhoods myself in trying to decide where my next play is.

My thinking has been influenced by David Schumacher's book - Buy and Hold.  I believe in the future of Los Angeles and think that if you buy in a decent neighborhood (looking in parts of Hollywood, Echo Park, Mt Washington, USC adjacent, and other transforming areas of LA), get a tenant to pay the mortgage, then repeat as often as your capital allows, you will look up in 20 or 30 years and have both substantial income and massive asset base.   Personally, I am skeptical that the same will be true if you follow the advice of many here at BP about investing in distant markets (cough, Detroit).

Good luck.

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Originally posted by @Mark Mynhier:

Club In Action has a Cash Flow game going this Wednesday night in Burbank. (http://www.meetup.com/Real-Estate-Club-In-Action-Burbank-CA/events/201136332/). Come on out and talk with others who are just getting in the game. Julie runs it and she is wonderful. I'll be there, as well.

 Thanks very much, Mark. You've given me some food for thought. I have a prior commitment Wednesday night, but I've joined the Meetup group, and I'll be going to future meetups.

Originally posted by @Leonard L.:

@John Schofield Hard money investing requires a lot of knowledge.   For example, do you need a license to lend money secured by real property in California (answer, yes, with some exceptions).  Also, if the loan is not mediated by a licensed broker, you are subject to usury and other restrictions.  These are among the many traps for the novices.   Due diligence, legal documents, finding borrowers, turning your capital, all of this can add up to as much time and trouble as wholesaling if you are doing it all on your own.

Thanks very much, Leonard. This is great information -- exactly what I was hoping for when I posted the question.

I buy mostly in the Inland Empire, which is closer to me in OC than it is to the Valley.  I was lucky to buy many of my assets in 2010/2011, which means I have been spoiled with a 10%+ unlevered return as well as excellent appreciation.  Those days are gone, of course, but I still manage to find deals with get a 5-8% return from time to time.  However, I am looking to move closer in and have been hunting through LA's neighborhoods myself in trying to decide where my next play is.

This is interesting, Leonard. In addition to covering your mortgage, are you getting positive cash flow overall from these deals in the LA area?

@John Schofield     When you say "these deals in the LA area" I assume you mean the LA neighborhoods I have been looking into, as opposed to my Inland Empire deals.  I have not decided on neighborhood yet in LA, so have no deals there to tell you about.  

@John Schofield

It's nice to have work that you enjoy and provides you the opportunity for buy-and-hold investing. Are you currently renting or do you own your home? 

A.  If you do not own your own home, you will have a better idea of what you can get so you will have more information to make a more informed decision on how you want to begin. As you know, to do this, you need to get yourself pre-approved and start looking at possible places where you would want to live and crunch the numbers. Compare your ownership expenses and have your accountant help you with how much you are paying after your tax deductions. Compare this number  to the rental market in the areas you are considering. This will give you an idea of what you can get before ruling out buying your first home as a primary residence.

The advantages with this strategy inlcudes:

1. Getting the lowest possible historical interest rates (assuming excellent credit and 20% down for SFR and 25% down for condos).

2.  Mortgage interest and property tax write off.

3.  The ability to sell and take advantage of  $250,000 exclusion of gain for a signal person (IRC 121) if you live in it as your primary residence at least two of the last five years.

4.  Instead of fluctuating rents, there is now a predictable mortgage payment if a 30 year fixed rate loan is chosen.

5.  You can get an equity line of credit to purchase an investment property.

6.  No property management work.

6. There is the option to convert your primary residence to a rental and then buy another property.

If  a two to four unit multiplex is purchased and one of the units is used as your primary residence and the other units are rented out, 

The advantages of buying a multiplex (2 - 4 units) includes:

1. 30 year fixed rate loans are still available for 2-4 unit properties.

2. A slightly higher interest rate than a loan for a SFR.

3. IRC 121 can be applied for up to $250,000 tax exclusion for unit used for personal primary unit and capital gains from rental units can be deferred with IRC 1031 when exchanged with like properties. 

4. Additional expenses paid by you for the   rental portion of the mutiplex can be written off (i.e. garbage, utilities, water, garbage, repairs, maintenance, etc)

5. Can manage the property closely. (But some people don't want to live so close to their tenants.)

B. If you currently live in your home and have owned it for at least five years, look into how much it would rent for and consider buying another SFR or multiple (same strategy as above).

This is how I became an accidental investor. With time and a little luck, they appreciated and cash flow nicely. I love my work as well and this has allowed me to buy in nice stable neighborhoods with quality tenants which makes property management interesting and enjoyable. 

I am now venturing into other strategies, but buy and hold with a good interest rate and a payment you can control when the rents don't come in is powerful overtime. 

Hope this helps.

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