San Diego Realtor

20 Replies

Interested in purchasing buy and hold properties in other states. Mainly because Southern California has low CAP (3-5) and is not a landlord friendly state. I'm not into flipping, though a lot of investors I work with are...

I understand from others that I should only invest in areas that I'm familiar with. Since I am unfamiliar with every where I thought that the closest landlord friendly state is Arizona. A couple of years ago a 10+ CAP was easy...now they are around 6-7.

Bottom line, I'm looking for a state where I can have excellent property management (not me) and CAPs of 10+ and low maintenance multi-family 2-4 unit properties. Resale is not as vital as cash flow because I'm in it for the long haul. 

Yet, if I end up with a property that is not what I thought it was, then resale will play a vital role.  If I do enough research and stick with my plan then I shouldn't have to sell anything before I'm ready.

Originally posted by @Gloria R. :

I understand from others that I should only invest in areas that I'm familiar with. Since I am unfamiliar with every where I thought that the closest landlord friendly state is Arizona. A couple of years ago a 10+ CAP was easy...now they are around 6-7.

Bottom line, I'm looking for a state where I can have excellent property management (not me) and CAPs of 10+ and low maintenance multi-family 2-4 unit properties. Resale is not as vital as cash flow because I'm in it for the long haul. 

Yet, if I end up with a property that is not what I thought it was, then resale will play a vital role.  If I do enough research and stick with my plan then I shouldn't have to sell anything before I'm ready.

Why on earth would you target 10+ cap rates?  Also, what makes you think Arizona is more landlord friendly than CA?

Bob, obviously I'm new here. So rather than blast me with a 'why would you ever' question you should be more conversational about it. I think AZ is more friendly because my in-laws have no problem getting rid of their tenants within days and it took me 4 months and an attorney to evict mine. 

Hi Gloria,

I would agree that Arizona is a "landlord-friendly" state. Typical eviction time is around 45 days. However, the CAP rates here are low, 6-7 may even be a stretch. Investing in greater-Phoenix is more about appreciation than cash flow.

RealtyTrac.com has a lot of great, free info about the best places to invest for CAP rate. I recently wrote a guide for our website and used a lot of their information. Here's a link.

RealtyTrac.com Info

You can also find lots of free information about specific markets from local MLS services. They're usually more accurate than RealtyTrac. From my research the midwest offers the best of both cash flow and appreciation.

Good luck!

Thanks Marty,

Yes, agree with the 6-7 CAP as I was just researching them this past week.

Midwest has amazing returns. Yet, I know nothing about cities that far away. That is partially why I joined this site. There is a lot of education going on, except for people like Bob who just want to act like a know it all and blast people. 

I appreciate your insight and caring approach.

All the best,

Gloria

Originally posted by @Gloria R. :

Bob, obviously I'm new here. So rather than blast me with a 'why would you ever' question you should be more conversational about it. I think AZ is more friendly because my in-laws have no problem getting rid of their tenants within days and it took me 4 months and an attorney to evict mine. 

Didn't mean to "blast" you.  I'm just shocked when someone purposely searches for higher risk investments when they are investing from a distance. Distance + risky metrics usually equals failure.   Why would you do that?

And are you really rating landlord friendly states based on one incident in each state?

Originally posted by @Gloria R. :

Thanks Marty,

Yes, agree with the 6-7 CAP as I was just researching them this past week.

Midwest has amazing returns. 

Gloria

Gloria, would you please share  your research that shows the "amazing returns" in the Midwest?   

Bob,

Thanks for being more conversational. I appreciate it.

It's not one incident...I realize that is what I said (just to keep it short simple but I guess that doesn't work around here -I've been called out by you on every thing I've said so far). As a realtor, past landlord and just being around investors I learn about all of the drawn out drama and huge expense and long duration's to get tenants out when they don't pay in CA. I've had good luck too...but the risk out weighs the reward for me.  A couple of my in laws have several rentals that they've owned and rented out for over a decade in AZ. They have, unfortunately, a lot of turn over. Each turn over is quick and painless...the pain is getting their places back in order and rent-able again.

As far as the Midwest, I did not keep all charts of everything I've read and each CAP I've calculated...I should have said 'had' because when I was looking in the Midwest it was about a year ago. I'm sure it's changed a little, but probably not as drastic as we've seen it here or over in parts of AZ.

Being inexperienced in this arena...I guess I don't see a 10+ CAP as risky. Please explain why that is by itself considered a risk to avoid? I appreciate it.

Hi Gloria,

Welcome to Biggerpockets. Bob is a straight shooter. Too straight in fact. Once you get to know him, I'm sure you'll love him.  :>)

I've been through an eviction once, and that was my first tennant. She contested it, and it took 7 weeks to get her out. My investment partner inherited 2 bad tenants. It took 5 weeks to evict them as they didn't contest. My biz partner and her client evicted two tenants. Both took 7 weeks to get the tenants out as they contested it. The court system in Santa Clara County (SCC) works. So it takes about the same time to evict here in SCC as some city in AZ as Marty stated above. Don't give up on CA too early. 

Why the heck do I want to go to AZ to invest in some stretched 6-7 cap rate when I can accomplish the same thing in my San Jose market, which is just as tough as your market I believe.  

3-5 caps are great compared to 10 cap IMO. As they say in investing, higher risk, higher return. Why do you think those Midwest markets offer 10+ cap while San Diego and San Jose can only command a 4 cap? Lower risk, lower return? 

Not necessarily. It's kind of ironically that it's reversed in real estate. It seems like higher cap rate (higher risk) comes with a lower return while lower cap rate (lower risk) comes with a higher return. How is that even possible? It all comes down to perception. Once you understand how your SD market operates as I do in my SJ market, you will likely not going to invest elsewhere. 

You're going through a learning curve now. I just hope it's not going to be an expensive lesson. Here's the trivial question. Why does a lower cap rate tend to give a higher IRR?

Best of luck.

@Gloria R. Welcome to the BP forum community.

Hope you find what you're looking for.  

One of the aspects of being new in any community is that we're sensitive to how we're received. If you're going to fully benefit from membership recognize that most people will communicate with you online as if you've been a member for some time and just put their opinions out there, in the raw. 

As an agent you've been trained in sales and understand their are lots of personalities. I encourage you to focus on the objective, not how the message is delivered, nor the messenger. 

If your current objective is to explore other markets for possible investments, I suggest you get methodical about it. Create a matrix of potential markets that you envision suitable for your strategy. 

I get rental CAP rates that meet your numerical goals even in the LA basin. How is this possible? One is that I stopped listening to what others assured me was true decades ago and focused on what made sense. Primary answer: seller financing.

Second: sellers with big problems that they cannot or are unwilling to solve. Many but not all have been probates.

I'll stay away from the debate about investing in other states vs local because I found what I want in my own backyard.

@Account Closed   

Yes, one can buy a house in San Diego for less than market value (use $450k as an example), pay to improve it and flip it for a profit ($535 maybe) or keep it as a rental ($2300 plus or minus). Or one can buy a place in Arizona ($250k) no improvements necessary and rent it out ($1-1.5k).  The resale would be the same for a longer time than in So. California but if I'm looking for the best cash flow the latter scenario appears to be the way to go.

I guess I just don't know what I don't know.

@Gloria R. are you going to employ a leveraging strategy? I have zero experience buying outside of a personal home that became a rental, but with the numbers you provided from AZ the rents could leave little cash flow with a conventional 30 yr 20% down loan and management fees. Seems you could get the same numbers in Temecula and its outlying cities.

Originally posted by @Gloria R. :

I understand from others that I should only invest in areas that I'm familiar with. Since I am unfamiliar with every where I thought that the closest landlord friendly state is Arizona. A couple of years ago a 10+ CAP was easy...now they are around 6-7.

Bottom line, I'm looking for a state where I can have excellent property management (not me) and CAPs of 10+ and low maintenance multi-family 2-4 unit properties. Resale is not as vital as cash flow because I'm in it for the long haul. 

Yet, if I end up with a property that is not what I thought it was, then resale will play a vital role.  If I do enough research and stick with my plan then I shouldn't have to sell anything before I'm ready.

Arizona is VERY landlord friendly. I evicted a non paying tenant in two weeks. bye bye. You cannot do that in CA. They favor the blood suckers over the hard workers and homeowners. I am sure there are some slumlords but ultimately, who is creating a home and business and economy? The ones taking the risk, the homeowners/investors and in AZ we have laws to protect them. The constable will be at their door and give them 5 minutes to vacate! Thank goodness! If you want to make investments outside of your area of familiarity make sure your work with someone who cares that is in the industry and can show you the pockets and trends in that area. In other words there is documentation showing what they say whether it is from the MLS past sales history or reports from a trusted unbiased site like Crompton, RPR.....

@Gloria R. You're lucky to have already attracted comments from some of the most capable folks on BP to this thread.  I commend you for asking questions and trying to identify what you don't know.

What @Account Closed ","user_avatar":{"medium":{"url":"https://biggerpockets.s3.amazonaws.com/assets/avatar/no_avatar.svg"}}}" href="/users/Minh">@Account Closed are getting at is that many new folks see CAP rate and think "That's the return I'll get on my investment." So, of course it makes sense to purchase a property with a higher advertised CAP rate. It's not illogical to think that way, but it's ... an immature way to look at valuing an investment opportunity.

Think of CAP rate the same way you might think of bonds: a treasury bond (the safest investment out there) might give you a "CAP rate" of 3.5%. A junk bond (backed by a risky company with few durable assets) might give you a "CAP rate" of 7%. Now, which one is a better investment? Which one will you make more money on in 1 year / 5 years / 30 years? There's a reason the junk bond pays 7% - analysis says the risk adjusted returns on it is actually closer to 3.5%. That 3.5% - taking into account all of the income and all the expenses that are most likely to happen - that's what we call the Internal Rate of Return (IRR).

Real estate isn't that different, with one BIG exception: the bond market is very efficient at allocating capital ... real estate is not.  The trick is to find and exploit those inefficiencies to make money.  Decide which level of risk you're willing to take (based on your cash position, your personality, your confidence in your analytic skills, and your life goals), then compare properties until you find one with a risk-adjusted return that's HIGHER than your alternative investment options.  Buy it, then hope your analysis was right.  :)

The reason we go around and around on BP on this topic is that my calculated risk-adjusted return on a property will be different from your calculated risk-adjusted return on the same property.  Maybe I have experience dealing with code compliance issues, but you don't - my calculated risk-adjusted return for that potential investment will be higher than yours.  We go around and around having fun arguing about it.

Long story short, 10 CAP properties have a 10 CAP for a reason ... and it's not because they're necessarily a better investment.

@Lisa Schofield and @Justin R. I appreciate your involvement 

Saying my CAP view is immature is accurate, but it's all I really know that is black and white. To watch unemployment, appreciation and rental trends are other tools that seem to be highly used by those with experience...I would think that because so many people do this for a living that they would have that kind of information readily available to people like me...aside from the ones who want to sell a class, a book or their own properties.

The one thing I see running through this thread is that I'll be beginning 'trial by fire'. That is not in my nature.  But that is what everyone seems to be saying is going to happen because everyone's risk tolerance and knowledge are different.

What other tools should I be using to make the decision as to whether or not a property is a good investment?

Thanks Mark,

I'm pretty much an expert residential realtor with a lot to learn about buying investment properties. I appreciate your welcome. 

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