Picking the right city for investment

General Landlording & Rental Properties
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Picking the right city for investment

Gandharv Kashinath
Albuquerque, NM · Member since 2017 · 7 posts · 1 vote

Hi Guys,

It's been a few weeks since I found out about BP and I'm loving all the information that's on here. I want to get started with REI and I have saved up some money for down payment and other expenses. Since this will be my first investment, my goal is to buy and hold and hopefully get a reasonable cash flow going by renting it out.

After doing some general research on good growth markets I have narrowed down my choices to Denver, Austin, Portland, Seattle and San Diego. I currently reside in Albuquerque and with this in mind I'd like to know how I can narrow down my city of choice. Here are a few points that I'm mulling over;

1) I intend to hire the services of a property management firm so this will automatically be factored in to the cash flow.

2) In the circumstance that I need to travel to any of these places, I have found that Austin and Portland would have higher travel expenses only because they are not travel hubs (airports) like Denver, Seattle or San Diego. This will obviously feature in the expenses and will end up impacting the cash flow.

3) Based on proximity, I'm leaning towards Denver with all else equal since it's the closest city to me.

I would appreciate any inputs from you guys. If someone can share how they picked the city for their REI, it would be great.

Thanks a lot!

- GK

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Most Popular Reply

Justin R.
Developer · San Diego, CA · Member since 2015 · 1k+ posts · 1k+ votes
9y

@Gandharv Kashinath I invest locally in SD, but only because I live here.  If you have the choice, there is *so much* learning and confidence that comes from buying and operating your first rental yourself - once you understand the business and intricacies, you can sell that one (or keep it) and you'll be 5 or 10 steps ahead of anyone who tries to startoff by investing "passively" out of town.  Go deep first, then go broad with confidence.

1001 POVs, but that's mine.

5Reply
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  • Christopher Blanco
    Real Estate Consultant · Cleveland, OH · Member since 2016 · 511 posts · 345 votes
    9y

    Why not start in Albuquerque before going out of state?

    3Reply
  • Gandharv Kashinath
    OP
    Albuquerque, NM · Member since 2017 · 7 posts · 1 vote
    9y

    Based on what I'm reading online, I'm seeing that the cities I named above have a better potential for growth compared to ABQ. Maybe I should do more research on ABQ itself before I eliminate it? I can cut down on expenses but maybe I'll lose out on the growth and renting opportunities that other cities offer.

    Also, I have been trying to move out of ABQ but nothing has materialized so far.

    0Reply
  • James Carlson
    Real Estate Agent · Colorado | stan.store/JamesCarlson · Member since 2014 · 2k+ posts · 2k+ votes
    9y

    Hi @Gandharv Kashinath. Welcome to BP! It's a great community. I certainly like investing at home to start. You don't know any area like you know your home town. That said, if you're looking for better long-term appreciation, then maybe branching out is what gets you to your goal.

    I'm completely biased, so take that into consideration, but I just love Denver and think it has great long-term potential. There are other forum discussions that present divergent views of the future of the Denver market, and I recommend you check them out. I personally see a lot of upsides to Denver, especially compared to more expensive "cool" cities. 

    But really, this is about your goals. You want some cash flow and good long-term appreciation potential. So find someone in those markets or do some research yourself on properties there and start running the numbers. 

    3Reply
  • Derrick LloydPro Member
    Investor · San Diego, CA · Member since 2017 · 38 posts · 33 votes
    9y

    In San Diego, it will be pretty tough to find a place with good positive cash flow.  I own a primary residence here and have been looking for a second property.  Property costs are high and the margins are mostly negative from the openings I look at.  I do not need to factor in travel either.

    The appreciation on my property has been phenominal though.  I bought it in 2015 for $265K and same time 2016 units were selling for $285k, about a 7.5% appreciation.

    1Reply
  • Christian Wathne
    Investor · San Jose, CA, Bellevue, WA · Member since 2016 · 327 posts · 257 votes
    9y

    @Gandharv Kashinath hey, just some anecdotal information from a resident of Seattle. Up in this area you'll be lucky to find a property that rents for 0.5=0.7%. Rent is good, but prices are very high. 

    I just closed on a steal of a deal sfh in Renton, wa  (just south of seattle) which will have an all in budget of about 270,000 after rehab and if I were renting it out, would rent for about $1,900; so that one will do about 0.7%. I own another property in the area which is closer to 0.5%. 

    1Reply
  • Adam Nishikawa
    San Diego, CA · Member since 2016 · 86 posts · 46 votes
    9y
    Welcome to BP!! Remember it's not always about the city but the deal! Reach out for any tax-deferral strategies.
    2Reply
  • Justin R.
    Developer · San Diego, CA · Member since 2015 · 1k+ posts · 1k+ votes
    9y

    @Gandharv Kashinath I invest locally in SD, but only because I live here.  If you have the choice, there is *so much* learning and confidence that comes from buying and operating your first rental yourself - once you understand the business and intricacies, you can sell that one (or keep it) and you'll be 5 or 10 steps ahead of anyone who tries to startoff by investing "passively" out of town.  Go deep first, then go broad with confidence.

    1001 POVs, but that's mine.

    5Reply
  • David Faulkner
    Investor · Orange County, CA · Member since 2015 · 2k+ posts · 3k+ votes
    9y

    I agree with others ... Albuquerque would be the best place for you to start. If you want to move out of Albuquerque sooner rather than later, that's fine ... then move to somewhere you personally would want to live (not counting the REI market there) first, then start investing there after you get the local lay of the land. I believe that a smart, skilled, hard working, experienced, local REI operator can make good money in any RE market, so I would focus on learning to become one of those rather than which out of state market to choose.

    3Reply
  • David Torres
    Full Time Investor · Albuquerque, NM · Member since 2013 · 320 posts · 154 votes
    9y

    @Gandharv Kashinath there is a lot of opportunity in your local market.  

    I own several SFRs in our market and have found it to be very profitable, if you can find the right deal and the right tenant.

    I would recommend attending a few of the local REIA's to network with local landlords. I have attached 2 links for the local REIAs.

    www.meetup.com/acrenm

    www.meetup.com/ABQREIA

    3Reply
  • Gandharv Kashinath
    OP
    Albuquerque, NM · Member since 2017 · 7 posts · 1 vote
    9y

    This is fantastic! Appreciate all the feedback.

    @David Torres I will be there!

    @Justin R. I agree with you. From all the reading I have been doing, it looks like there are certain skill sets that you acquire as you do more deals and searching locally gives me the flexibility to go and see a house, inspect a neighborhood, develop some relationships in the area and learn. By looking at markets outside I'm making the learning curve steeper.

    1Reply
  • Gandharv Kashinath
    OP
    Albuquerque, NM · Member since 2017 · 7 posts · 1 vote
    9y

    @David Faulkner Point well taken and totally makes sense to me. I was contemplating this but just the fact that other cities may have higher growth rates threw me off. Start from level 1! 

    0Reply
  • Mark B
    Investor · Albuquerque, NM · Member since 2009 · 118 posts · 43 votes
    9y

    ABQ's multi-family market is really strong. I've been very happy with the investments I've made here over the last 10 years. Maybe even more than other cities, I would say to really focus on LOCATION. Are you starting with a SFR or a 3 or 4-plex?

    2Reply
  • Sam Newell
    Real Estate Agent · Lehi, UT · Member since 2016 · 136 posts · 91 votes
    9y
    What are your cap rates in Albuquerque? We have 7.5% caps here in Utah and in Idaho. The "Silicone Slopes" have brought in 62,000 jobs in the last 5 years and that has been awesome for us but fortunately land prices haven't gotten ridiculous and we can still build for a decent price.
    1Reply
  • Gandharv Kashinath
    OP
    Albuquerque, NM · Member since 2017 · 7 posts · 1 vote
    9y

    @Mark B: I was thinking starting out with an SFR. I have started looking at some real estate data in ABQ to pick the right area. Do you have any multi-family units and how is their performance? PM me...

    @Sam Newell: ABQ is about 5.8% as on Q1 2013. So having a higher cap. Can you tell me how to understand cap rates?

    Thanks again!

    0Reply
  • Marc C.
    Buy-and-Hold Rental Investor · Santa Fe, NM · Member since 2015 · 438 posts · 352 votes
    9y

    Our cap rates in Albuquerque average 7.0% for large, Class A/B 50+ unit deals, according to the latest Berkadia report. http://www.apartmentupdate.com/index.cfm?fuseactio...

    "I have narrowed down my choices to Denver, Austin, Portland, Seattle and San Diego"

    Oh, just the most expensive markets in the west? Why not add San Francisco? That way, you could get a 4.5% cap rate. The reason I invest in ABQ is because the cap rates are far higher than other western markets, and I live here. 

    0Reply
  • Marc C.
    Buy-and-Hold Rental Investor · Santa Fe, NM · Member since 2015 · 438 posts · 352 votes
    9y

    We have TWO apartment investor REIA groups here in Albuquerque. Our Apartment Investor Breakfast Club meets next Friday. The speaker is the #1 apartment broker in NM, so he should be able to say the current cap rate for smaller properties.

    See http://www.biggerpockets.com/events . 

    0Reply
  • Marc C.
    Buy-and-Hold Rental Investor · Santa Fe, NM · Member since 2015 · 438 posts · 352 votes
    9y

    Here is even newer market info:

    http://www.apartmentupdate.com/index.cfm?fuseactio...

    Shows a 7.1% cap rate. Sales volume way down (little inventory). 

    0Reply
  • Gandharv Kashinath
    OP
    Albuquerque, NM · Member since 2017 · 7 posts · 1 vote
    9y

    @Marc C.: Precisely why I posted on this forum so you guys can help me make an informed decision. Thanks for your valuable input. What does the cap rate tell me? How can I get an invite to the Breakfast club?

    0Reply
  • Gandharv Kashinath
    OP
    Albuquerque, NM · Member since 2017 · 7 posts · 1 vote
    9y

    A cap rate is a number that allows you to compare the ratio of the Net Operating Income ( NOI ) and the property value or price. It gives you the number in a percentage. Cap Rate = NOI / value. The higher the NOI in comparison, the higher thecap rate.

    0Reply
  • Sam Newell
    Real Estate Agent · Lehi, UT · Member since 2016 · 136 posts · 91 votes
    9y

    @Gandharv Kashinath 

    Yup, a cap rate is just a comparison or ratio of your expenses, income, and purchase price.  Of course the higher the better.  Some people leave out imprtant expenses like management fees or monthly maintenence expenses that you should be saving even if you don't have repairs that month.  We are building brand new fourplexes in Utah, Texas, and Idaho from a 6.8% "true" cap rate to a 7.5% cap.  I say "true" because a lot of people under estimate expenses and therefore their cap rates come out looking a lot higher.  Hopefully that helps

    1Reply
  • Derrick Aragon
    Investor · Portland, OR · Member since 2016 · 213 posts · 60 votes
    9y

    i grew up in ABQ... I am currently living,developing and investing in Portlandi have property management and GC company.

    PM me some info like how much you want for cash flow and how much you have to invest..

    1Reply
  • David Faulkner
    Investor · Orange County, CA · Member since 2015 · 2k+ posts · 3k+ votes
    9y
    Originally posted by @Gandharv Kashinath:

    A cap rate is a number that allows you to compare the ratio of the Net Operating Income ( NOI ) and the property value or price. It gives you the number in a percentage. Cap Rate = NOI / value. The higher the NOI in comparison, the higher thecap rate.

    NO! The CAP rate is set by the market ... you do NOT increase the CAP rate by increasing NOI, you instead increase the value of the property Value = NOI/CAP ... CAP rate is not necessarily correlated to the profitability of the property either. You can make a boatload on a low CAP property/market, and you can lose a boatload on a high CAP property/market ... and visa versa and all points in between could be true too. CAP is simply telling you what that particular market is willing to pay for each and every dollar of NOI, much like how a SFR can be comped by price/sf.

    3Reply
  • Mark B
    Investor · Albuquerque, NM · Member since 2009 · 118 posts · 43 votes
    9y

    @Gandharv Kashinath

    I have a fourplex and it performs very well.  I spent some upfront money to make them nicer and I get a better tenant and very happy with cash flow.  Love 4 plexes.

    0Reply
  • Emmett McNulty
    Investor · Northshore MA · Member since 2015 · 29 posts · 16 votes
    9y

    I find this post interest on a couple of fronts. It appears your goal is to buy and hold, wich would indicate that you are looking for cash flow on your property. That said, the markets you are looking at over the past few years have been a heaven for appreciation. In my opinion when looking for a buy and hold market, the Most important factor is your CAP rate and/or rent multiplier, whichever you chose to use for evaluation of cash flow. For a buy and hold via rent strategy, I believe you may find that Albuquerque may actually have better potential, especially for a newer investor than the cities you are researching.

    Before you make your selection, I would make sure you spend some time researching the areas in these cities you would like to invest and compare your average rent vs home purchase price in these cities and in your home town.

    In my opinion, the cities you are looking at have a great deal of potential for flipping and long term appreciation.  That said, for cash flow, a smaller town such as Albuquerque tends to lend itself for cash flow better and you can reduce your management expenses if you manage the properties yourself.

    I must say I am biased as I have invested in both Large Cities (Denver, CO) and small towns (Columbia, MO) and really enjoy investing in the smaller towns more.

    1Reply
  • Bill S.Pro Member
    Moderator
    Rental Property Investor · Denver, CO · Member since 2013 · 4k+ posts · 2k+ votes
    9y

    @Emmett McNulty I'm not sure I would agree with your statement that buy and hold = cash flow. Leveraged buy and hold with appreciation creates massive wealth. Right now flipping, which you recommend for our market, is very challenging because there are so many buyers and so few properties. 

    0Reply
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