investing long distance or close to home?

Question

Hello all...I am in the southern California area...Los Angeles to be exact. I am a newbie with real estate investing actually I am starting over after making novice mistakes landed me in bankruptcy court with a ruined credit profile...most of my purchases were out of the state. I am wondering about where I should start my investing, I went through some mentoring thing and when I asked my mentor where I should start he said "anywhere you like"...kind of a vague answer to give to a novice...I have heard it said that beginning investors should stick close to home where they can go see, touch and feel the property...he told me this is not necessary as there are deals everywhere...I have been told that CA is not a good place to invest because property values are too high and the cap rates are too low to make a profit...with that said CA is where I live and if there aren't deals here what can I do to get started? My goal is longterm hold for monthly income and cash flow. I am a former educator laid off by CA rounds of teacher lay offs and I have determined to take control of my financial future. My short term goal is to get my passive income up to what my monthly take home was... I am interested in the long term holding and I would like to invest in multifamily/apt/MHP. any thoughts would be great and helpful...also I am desirous of joining an REI club in L A and have only found one....are there others?

Arthur Garcia · Answer

Phillip,

The key here is making your numbers work.

If you want to buy and hold for cash flow then you need to examine your options - locally and out of state. Take a look at the 50% rule and the 2% rule here on BP. I'm not saying the 50% rule is the only way to measure a return, but it is a great place to start. LA is a tough market for Buy and Holds. Generally the RV (rent to value) ratio is terrible. To make your numbers work, you're going to have to look outside of LA. There are places within CA that work, but you'll have to drive several hours. In the end, you may be better off going out of state.

If you are looking to buy rentals and you have a limited income, my advice would be to make sure you have sufficient reserves. Rentals are more expense than most new investors realize - things come up, believe me!

In order to make buy and holds replace your day income, you need to have a sizable number of units. You may want consider wholesaling or Flipping to generate day to day income and twice a year buying a rental. I know one investor who flips three keeps one. That is probably the model I would go with, if I was full time.

That being said, if you are strictly looking for property out of state, I know several investor's who've purchased "turn-key" properties (out of state) and have very happy with the results (they actually use Chris Clothier company).

I hope that helps!

AG

Jay Neaves · Answer

I think it's a personal choice but you have to take on board the pros and cons of each. Out of state is more of a challenge and you need to have a strong team on the ground in the area. Finding the right team you can rely on and trust is the issue. That said, I've heard it said many times that you invest where the numbers stake up. That might not be in your local area.

Kevin Amolsch · Answer

I invest where I live and out of state and can tell you from a cash on cash return view, out of state has been better. That is even with a mangaement company and increased maintenance costs. It took some work, some trips, and staying on top of the managment company but it is working really well for me.

With that said if I can find the returns I want where I live I would choose that everytime.

Mark Updegraff · Answer

Buying out of the area that you live in makes things a lot more expensive. If you enjoy traveling to that place it can be fun and exciting, so the expense can be somewhat written off. If you have friends or family in a better investing location and they don't mind helping you out a bit, that can take some of the strain out of the finances.

Given your track record it may also make sense to partner with a more experienced investor. You could be the money partner for an equity split. Be that cash flow or lump sum at resale. By doing that you can talk with the experienced investor and figure out what he's doing that works so well for him. That kind of knowledge somewhat location specific and also priceless.

Strategies do overlap from location to location so as you get more versed in real estate investing techniques, you'll be able to find deals in your neck of the woods more easily I would imagine.

I hope this helps! Mark

Chris Clothier · Answer

I disagree that investing close to home makes it inherently easier to protect capital or even insure success. Regardless of where you invest, there are steps you can take to reduce risk. Make that - steps that you must take.

From reading Phillip Hubler's post, it sounds like there is a lot of advice, coupled with a lot of investigation on his part and when combined it leads to a lot of confusion on which steps to take first and where to go. Investing out of area is not necessarily the answer, but for long-term buy & hold strategists, they will tell you that Southern California is tough. That doesn't mean you have to go halfway around the world. You could check out a market like Phoenix that is close enough to drive to and may have numbers that make sense. But, first things first, you definitely have some work to do to make sure you are pointed in the right direction.

Tahani Aburaneh · Answer

Hello Philip. I agree 100% with Mike specialy for your first few deals until you understand the process. When I was in Denver, I have met 3 guys that invest in California and the numbers work.. I one is Called Wil and his partner Chris and the third guy was in the cap with me going to airport.. they are amazing guys and you can learn lots from them. remember..the grass look greener on the other side always.. so stick to your area until you become a savvy investor and then more to other areas if you wish to..good luck

Nathan Emmert · Answer

Distances makes everything exponentially harder. The question is, do the greater returns justify that increased risk and complexity? Only you can answer that.

I am accepting "okay" returns at home. Here in Utah I can generate 15% pretty regularly by cherry picking the MLS. I'm fine with that rate of return as I learn and mature. At some point though, with increased knowledge and confidence, I'll likely move to some of the hotter areas. Right now though I'd rather make smaller mistakes and having things close minimizes the mistakes versus amplifying them at a distance.

Mike Jakobczak · Answer

I would stay as close to your where you live as possible. This will allow you to visit the properties as much as you want and get a good understanding of the area.

I found that I learned more when I was in person at the inspections, repairs, etc. This is hard sometimes when you invest out of state, unless you can be away from your home for a few days sometimes weeks at a time. Not too mention the extra expenses that come with out of state, travel expenses, hotels, property managers, etc.

investing long distance or close to home?

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