Always Invest Outside of Los Angeles as a Newbie?

42 Replies

It seems that most of the time when I'm reading about new investors in Los Angeles, they are doing deals outside of the area. I understand it's very expensive to do deals in LA, but are there any other reasons aside from cost? Is this a good rule to follow as a new investor in LA - or should you just follow your connections/leads/opportunities and see what works whether it's in the area or not.

With all due respect to the other investors on this site, I think investing far from your home, particularly as a newbie, is insane.

The key advantage that any starting person has over everyone else, particularly big money private equity firms, is local area knowledge. For example, I bet you could tell me which parts of North Hollywood read "Arts District" even if they're not exactly in it (and therefore command higher rents than outsiders would expect).

By going out of state, you're throwing away your most valuable advantage over everyone else.

Separately: The yields in LA are lower, but the risk is a lot lower, too. Here, any habitable unit priced reasonably will rent almost instantly, even when times are bad economically. In many other markets, particularly the cheaper markets in the interior of the country, when the economy gets bad, you end up with vacant units.

Hope this helps!

Location is primary and fundamental. 15% of the US lives in Calif and 1/3 of that live in LA county. If you choose to leave that behind just make sure it can come as close as possible to those known fundamentals. Many invest outside of LA successfully and many wish they never did looking back. Timing is not the greatest for LA right now but longer term that part  normally diminishes. Keep in mind you can rent two parking spaces in LA and make as much cash flow as you could in other lessor areas. 

A lot of these choices depend on your goals and expectations. When you kids ask where did you invest in real estate...what location do you think they hoped you picked? 

I think that you need to define what type of investing you are talking about. If you are talking about rehabbing/reselling homes I completely disagree with you. I think that LA is a GREAT market for that (same amount of work, higher yield potential). I've done all of mine in the LA area (1 Riverside, 1 OC, the rest LA County).

If you are talking about buy and holds, the answer is a bit different. If you buy a turnkey house with a tenant (and sometimes a guarantee of renters) it is an easy and safer way to start being a landlord out of state. If you are wanting to oversee the rehab yourself, it can be a nightmare. The upside is that the CAP rates are MUCH better out of the area than in LA. You can get much more return for the same amount of money.

If it were me, I'd start with turnkey properties until you get comfortable being a landlord. Talk with Ali Boone or Sensei Gilliland about this. They are both experts in the area of turnkey properties and both here on BP.

That is great insight @MosesKagan

I have always imagined local familiarity to be a huge asset as well. I would think it very helpful to be in a position of involvement and availability provided by close proximity.

@Serj Kalfayan  

I'm going to assume by LA you mean the glamorous parts of the city?

Depends what part of LA. My father successfully invested in the "ghetto" of LA for 30+ years & still does. He never lost money on a deal because he was willing to go where no one wanted to be. South central, Compton, Carson, Inglewood, etc. There's opportunity all throughout these neighborhoods I promise you. 

Everyone wants to be near the lime light. They get caught up in the LA image. If you think about it, you flip a home in the ghetto for less money & get roughly the same ROI as you would in a neighborhood like Culver City or Santa Monica.

This is all in reference to fix/flips. The buy/hold strategy is much harder to implement

 @Moses Kagan :

That is great insight

I have always imagined local familiarity to be a huge asset as well. I would think it very helpful to be in a position of involvement and availability provided by close proximity.

Originally posted by @Matt R. :

A lot of these choices depend on your goals and expectations. When you kids ask where did you invest in real estate...what location do you think they hoped you picked? 

 That's a great question to ask. Thanks for that!

@Serj Kalfayan   -- Welcome to BiggerPockets.

Yes, there are other reasons to be investing in better markets outside of Los Angeles (and most parts of coastal California).

Aside from the overpriced (i.e. inflated) property prices, you will have low and undesirable rates of return.  The fact is the rent-to-value ratios are very low and therefore your cash-flow and more specifically your rates of return will suffer.   Even if you leverage your purchase, you will still have low cash-on-cash returns.

Another disadvantage is the high down-payment requirements because of the higher prices.  Using the same amount of capital for one property in those overpriced markets, you can purchase two to five properties in other markets where the returns are better and risk is lower.

Over-priced ("bubble") markets are also higher risk because of the over-valued land costs in such markets.  When there is a hiccup or downturn, the land values will start to drop quickly and sometimes tremendously.

This about this logically and pencil out the numbers.  I've been investing out of state for 11 years and it's not 'rocket science'.  ;-)

Continued success!

Medium norada real estate investmentsMarco Santarelli, Norada Real Estate Investments | (800) 611‑3060 | http://www.NoradaRealEstate.com

Originally posted by @Matt R. :

Location is primary and fundamental. 15% of the US lives in Calif and 1/3 of that live in LA county. If you choose to leave that behind just make sure it can come as close as possible to those known fundamentals. Many invest outside of LA successfully and many wish they never did looking back. Timing is not the greatest for LA right now but longer term that part  normally diminishes. Keep in mind you can rent two parking spaces in LA and make as much cash flow as you could in other lessor areas. 

A lot of these choices depend on your goals and expectations.  When you kids ask where did you invest in real estate...what location do you think they hoped you picked? 

What do kids know about markets, economics, housing cycles, etc? What if your kids hoped you picked Compton, Detroit, Compton, or a nice area like Beverly Hills where CoC returns may be as little as 2%.

Location is a function of the local market economics and fundamentals, not proximity to you.  Do stock market investors buy stocks of companies in their backyard?  Timing is everything and that determines what a good and bad location is.

Medium norada real estate investmentsMarco Santarelli, Norada Real Estate Investments | (800) 611‑3060 | http://www.NoradaRealEstate.com

Originally posted by @Marco Santarelli :
Originally posted by @Matt Rosas:

Location is primary and fundamental. 15% of the US lives in Calif and 1/3 of that live in LA county. If you choose to leave that behind just make sure it can come as close as possible to those known fundamentals. Many invest outside of LA successfully and many wish they never did looking back. Timing is not the greatest for LA right now but longer term that part  normally diminishes. Keep in mind you can rent two parking spaces in LA and make as much cash flow as you could in other lessor areas. 

A lot of these choices depend on your goals and expectations.  When you kids ask where did you invest in real estate...what location do you think they hoped you picked? 

What do kids know about markets, economics, housing cycles, etc? What if your kids hoped you picked Compton, Detroit, Compton, or a nice area like Beverly Hills where CoC returns may be as little as 2%.

Location is a function of the local market economics and fundamentals, not proximity to you.  Do stock market investors buy stocks of companies in their backyard?  Timing is everything and that determines what a good and bad loc

Thats funny. Stocks, well that is an entirely different animal but even there many invest in companies they have the most familiarity with. 

What areas are you seeing having the best timing now? 

Originally posted by @Marco Santarelli : Do stock market investors buy stocks of companies in their backyard? 

They (hopefully) invest in companies operating in industries and markets they know very well and are well researched around the numbers for that stock. Similarly, investing locally has an inherent advantage in terms of being able to truly understand that market or sub-market and the local intricacies like the back of your hand. There are big opportunities and pitfalls between the lines, and being local allows you to know and leverage those. That doesn't mean investing out of state is always bad, but you are at a disadvantage and are potentially open to additional risk simply because you aren't there to know the sub market trends.

Totally agree with your response about where your kids wanted you to invest. Doesn't matter what others want, it matters where and how you perform.

@Matt R.   -- I thought the stocks example was a little funny too.  But most people invest blindly, often though mutual and pension funds.  Scary!!

There are over 400 markets int he U.S., and we stay on top of them to help us determine what markets offer good opportunities for investors.  Of course there are many factors, but jobs, migration and population rates play a key role.  For example, Texas markets like Dallas, Houston, and San Antonio are "hot", and have been for years.

Other markets are very stable with slow but steady growth and offer stronger cash-flow and COC returns. A few examples are Kansas City, Indianapolis, and Birmingham.

Continued success!

Medium norada real estate investmentsMarco Santarelli, Norada Real Estate Investments | (800) 611‑3060 | http://www.NoradaRealEstate.com

Gentlemen, I don't think asking your kids where to invest is what I mean literally. I am speaking in the long term sense. If you are a buy and hold type that is the point of the question. You might not even have kids...but you still get it...the kid part is optional.

Right on Marco. I am sure those areas are worthy too. Recently, I did a comparison on 400k in Texas vs Cali in regards to property taxes alone. It was huge. Overtime six figures huge comparing backwards and fowards. That could change one day but talk about a cash flow killer. I think many Cali investors overlook property taxes out of state...this never goes away and eventually could be like the mortgage payment in some locations hot or not.

Hey @Matt R. -- yes, we knew what you meant.  It was funny.  I just had to take it and run with it.  You opened the door for me!

Medium norada real estate investmentsMarco Santarelli, Norada Real Estate Investments | (800) 611‑3060 | http://www.NoradaRealEstate.com

Hey @Matt R. -- yes, we knew what you meant.  It was funny.  I just had to take it and run with it.  You opened the door for me!

Medium norada real estate investmentsMarco Santarelli, Norada Real Estate Investments | (800) 611‑3060 | http://www.NoradaRealEstate.com

Originally posted by @Matt R. :

Right on Marco. I am sure those areas are worthy too. Recently, I did a comparison on 400k in Texas vs Cali in regards to property taxes alone. It was huge. Overtime six figures huge comparing backwards and fowards. That could change one day but talk about a cash flow killer. I think many Cali investors overlook property taxes out of state...this never goes away and eventually could be like the mortgage payment in some locations hot or not.

. . . . .

Hey Matt,

I know what you're saying BUT, that would only be a negative factor IF all else was equal.  That means, the same rental income, same other expenses, same purchase price, same market factors, etc.

This is like staring at a tree while standing in the forest. It ignores the bigger picture, or in this case, the bottom line. The cash-flow, and more specifically the cash-on-cash return and total ROI is the best measure. And that's where "investors" looking at property in these overpriced markets lose the argument, and the better deals.

Continued success!

Medium norada real estate investmentsMarco Santarelli, Norada Real Estate Investments | (800) 611‑3060 | http://www.NoradaRealEstate.com

The problem with doing a straight comparison between yields in LA vs out-of-state is that it assumes present rental trends will continue. 

But we had an example, as recently as 2007-9, of what happens when the economy gets bad: LA's vacancy rate stayed in the 5% range, while many of the out of state markets were in the 20-30% range.

Risk and reward are usually (though, obviously, not always) correlated. If you are seeing huge yields somewhere, you need to question why those yields are so high.

It totally depends on what you are wanting to do, and what investing method you are trying to get into. If you want to flip, and have a good bit of capital to do it, LA is a great place. If you want to buy rental properties in hopes of appreciation, LA is a great place. But if you want to buy rental properties for cash flow, LA is horrible. And the latter is what a lot of newbies (and more experienced as well, including myself) want to do. 

Medium hipsterinvestment logo black300dpiAli Boone, Hipster Investments | [email protected] | 310‑957‑2101 | https://goo.gl/x52ZKJ

Originally posted by @Marco Santarelli :
Originally posted by @Matt Rosas:

Right on Marco. I am sure those areas are worthy too. Recently, I did a comparison on 400k in Texas vs Cali in regards to property taxes alone. It was huge. Overtime six figures huge comparing backwards and fowards. That could change one day but talk about a cash flow killer. I think many Cali investors overlook property taxes out of state...this never goes away and eventually could be like the mortgage payment in some locations hot or not.

. . . . .

Hey Matt,

I know what you're saying BUT, that would only be a negative factor IF all else was equal.  That means, the same rental income, same other expenses, same purchase price, same market factors, etc.

This is like staring at a tree while standing in the forest. It ignores the bigger picture, or in this case, the bottom line. The cash-flow, and more specifically the cash-on-cash return and total ROI is the best measure. And that's where "investors" looking at property in these overpriced markets lose the argument, and the better deals.

Continued success!

 Hmmm, you kind of lost me Marco...I was only comparing property taxes. Those other comparisons you mentioned could be made but I have not done those to the detailed level like I did with the property taxes. Taxes are part of the big picture but not whole enchilada of course. I am not ignoring the bigger picture...I think if investigated further there could be factors even greater than the six figure tax part if one cares to look deeper. I am not assuming all else is equal by any means...in fact it is far from equal to be fair.

@Serj Kalfayan  

  as most of these threads go with regard to turn key.. one just needs factor in all aspects when going out of state. as many out of state markets are just not what your used to in LA or west coast for that matter... And everyone on here will agree its all about team work and picking the right team to start with.. And your investment if you choose to go out of state will end up  solely dependent  on PM.. All of us in the industry once you buy the home most have been paid ... so its you and the PM and that is the person who will make or break an out of state investment. You may want to look at dual purpose as well. IE invest in an area that maybe you want to retire.. let the tenant pay off your home.. In that sceneio cash flow just needs to be neutral or a little negative and you still have huge benefits. Just a thought.. I know many Canadians think this way and invest in the southwest.. and many Europians invest in Florida

Medium ksqoekox 400x400Jay Hinrichs, TurnKey-Reviews.com | Podcast Guest on Show #222

Hey @Matt R. ,

I think another way to explain the "high" property taxes is to look at it this way:

The property taxes make up a portion of the overall operating expenses of the property.  But regardless of whether one thinks they are "high" or "low" (subjective and relative), the most important numbers one needs to consider are the cash-flow, cap rate, cash-on-cash return, and the total return on investment.

Consider that one property can have higher property taxes than another property while still producing higher cash-flow and/or rates of return.

If investors based their decisions on property tax rates alone, they'd miss out on some of the best markets over the last 3+ years such as Dallas, Houston, and San Antonio.  Those have been very popular markets with our investor clients.

Medium norada real estate investmentsMarco Santarelli, Norada Real Estate Investments | (800) 611‑3060 | http://www.NoradaRealEstate.com

Understood Marco. I am with ya. Now to be fair the appreciation in LA during those same 36 months, would have blown away the TX cash flow buy hundreds of thousands of dollars. Let say it was not even close that way. I am sure you are aware of this but a new guy might not be. The taxes are a longterm consideration but not a make or break by themselves I agree. 

Yes, you are right when you factor in the unrealized gains from appreciation as part of the overall return on investment.  And although we all love appreciation (when we can get it), I don't base my investment decisions around it.  In other words, I don't start my decision making process with it.

I always suggest to our clients to invest in real estate that makes sense the day they buy it.  Many investors in years past have "invested" by buying properties in rapidly appreciating markets and calling it "investing".  I call that speculating.  If one invests in the right markets then you can gain all the benefits that real estate has to offer, while minimizing the downside risk of inflated land values.

Thanks Matt!

Medium norada real estate investmentsMarco Santarelli, Norada Real Estate Investments | (800) 611‑3060 | http://www.NoradaRealEstate.com

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