Real Estate Investing in CA v.s. cheaper hometown
Hi all, I hope that there are plenty of folks in similar situations, that way responses to this post are valuable to many.
My spouse and I are in the Bay Area, and our net income will soon be 170K - 200K.
Would it be feasible to live well below our means and begin investing in real estate locally, or would it be wiser to use this money to invest at a distance in cheaper cities?
In my case, I have parents who live in an area with median home prices around ~250K (Phoenix Valley in AZ), which is far more manageable. They also have relationships with local agents and CPAs. I'm afraid that, with our income, there's a very high barrier to entry in the Bay. But yet again, 'landlording' at a distance has its challenges.
Go easy on me since I'm still learning!
Thanks in advance.
You can enter the Bay Area market with 5% down. Don’t let the “barrier to entry” stop you. Buy a duplex/triplex with a low down payment, live in one unit. Make some sacrifices now and learn the landlord business. Rinse and repeat every few years. You have gold right in front of you.
@Saj S.
I've done both. I live in the Los Angeles area and have a few rentals here. I also purchased a few rentals in my husbands' small hometown in Texas. Based solely on time, effort, and profit (TEP) I was far more successful with my Los Angeles properties. Being an absentee owner was VERY difficult. I lacked the knowledge on how to be an absentee owner properly (yes, that is something that needs to be learned) and I learned it the hard way. Feel free to reach out to me, and Ill shared all the knowledge I gained in both scenarios. Hope this was helpful.
@Ricardo Peterson
The unfortunate answer is 'it depends.'
- SF: Will it remain in a growth cycle post-covid? With the WFH trends increasing, will the market meteoric rise subsidize/level off? Pros- inflation on a 1M house raises value far faster than a 100k home in a smaller home even at 3%
Your broker commissions on a 1M house will also eat away much of that inflationary gain if you sell off soon.
- Small Town: Your experience will all depend on a) quality of property you buy b) quality of tenants c) quality of property manager. As long as you don't buy a wreck, I think "C" is most important. Interview extensively.
There is no wrong answer, and with all things considered, nothing wrong with waiting a few months/end of the year to see where the markets line up post-covid.
Good luck!
hi Ricado,
Would you consider multi-units as your first time home + investment? I have a seminar about multi-units tomorrow night. I will run some numbers of multi-units in Silicon Valley. Here is the registration link:
It completely depends on your investment goals and the strength of the long-distance team you put in place. Phoenix is very popular with Cali investors (both because of the lower entry point and the close distance). If you get a team you trust in place, it doesn't have to be overwhelming or risky to invest long distance. Happy to answer any questions I can about the Phoenix area!
Originally posted by @Pamela Sandberg:It completely depends on your investment goals and the strength of the long-distance team you put in place. Phoenix is very popular with Cali investors (both because of the lower entry point and the close distance). If you get a team you trust in place, it doesn't have to be overwhelming or risky to invest long distance. Happy to answer any questions I can about the Phoenix area!
Thank you very much Pamela! I'll keep you in mind if I have any questions, I appreciate it.
@Niecola Roberts
Thank you for your input. Another factor here is the rapid growth rate of the Phoenix area, coupled with the fact that I'm willing to travel there multiple times a year (after all, having my entire family there makes this easier). I will need to continue educating myself, since at the moment I am not compelled to purchase a home in the Bay Area with this income. I'm not sure how it's like in LA, but 750K is about the cost of a small condo in the cheapest areas of the Bay. Add to that PMI, HOA, property taxes, maintenance, etc... For now I'm mostly compelled to continue saving for a down payment. I'm in my late 20s and still have time =)
Originally posted by @Layne T.:@Ricardo Peterson
The unfortunate answer is 'it depends.'
- SF: Will it remain in a growth cycle post-covid? With the WFH trends increasing, will the market meteoric rise subsidize/level off? Pros- inflation on a 1M house raises value far faster than a 100k home in a smaller home even at 3%
Your broker commissions on a 1M house will also eat away much of that inflationary gain if you sell off soon.
- Small Town: Your experience will all depend on a) quality of property you buy b) quality of tenants c) quality of property manager. As long as you don't buy a wreck, I think "C" is most important. Interview extensively.
There is no wrong answer, and with all things considered, nothing wrong with waiting a few months/end of the year to see where the markets line up post-covid.
Good luck!
Thank you Layne!
Worth noting that the Phoenix Valley isn't exactly a small town (though I got what you meant). I mention this because my position isn't exactly the same as one considering investing in rural Kentucky, for example. Phoenix is expanding significantly, which can make this investment option more attractive (ofc. factoring my ties to AZ, many cities in the US are expanding rapidly but I wouldn't consider anywhere else for now).
Also, any thoughts about mortgage interest rates for the coming months? My guess is that they'll continue to drop, but by how much is unclear to me.
Do both! Purchase a duplex to live in one side or large home (with a few rooms to rent out) in the East Bay where it is a bit more affordable, get someone else paying the majority of your mortgage, then buy a cheaper property out of state as well.
I live in the East Bay Area and made the choice to invest out of state since we already had a full house and could not start with a house hack. We have found great success in TN and just started in VA. Once you find a good team of people it gets easier with each rental!
Hey Ricardo -
Congratulations on that combined Net Income of 170K - 200K (that's really after taxes?)
You have a lot of choices for where you could invest, and what you could do. Having that financial flexibility is good, especially for something like Real Estate.
If I were you - I would look into investing in out-of-state long-term, multi-family rental properties. It's hard to believe (I'm based in Northern California too), but there are actually areas in and around the country where a decent house can go for $80k-$100k. I think if you and your wife really dug into the research, you guys would be able to find a property at that price point where even with a Property Manager, or rehab/renovation/repairs etc; the additional costs would be minimal, considering you guys make a decent chunk of cash to weather it all.
That would be your best way to reduce risk, in my opinion. I think asking to purchase property in SF/Silicon Valley at this point, isn't worth it, for how cash-strapped you can be on your mortgage, not including any repairs or maintenance costs you might run into.
Aside from long-term - I've heard there are pockets of opportunities in Southern California where the market isn't as intense as it is here - I've heard short-term rental properties close to Joshua Tree have been good investments for people there, with properties considerably much lower in purchase price.
Hope this helps, man.
People tend to scare themselves off about the market before they get educated so good thing you are here! There are plenty of options for you and if you plan to stay in the Bay Area for the next few years, it's a generally good idea to leverage many first time buyer programs and then decide to buy a 2nd home in the Bay Area or elsewhere depending on your goal. The strategy and calculations are all very different just like picking stocks. There is no right or wrong approach as people generate wealth in various different ways.
@Ricardo Peterson
Start local with low down payment option and house hack a 2-4 unit and then decide if you want to buy more or go to AZ for next investment. I would absolutely choose to do local first. Easy decision.
Best of luck!
@Ricardo Peterson wow thats great! I live in SoCal and invest out of state. So much bang for tour buck. If prices drop 30-40% than I miiight invest in Ca.
One thing that really helped me was Amanda Hans Bigger Pockets book on tax strategies. It can help shelter those nice earnings.
I have also pivoted my focus to Multifamily. We have a virtual meetup if interested.
https://alphageekcapital.com/?page_id=179
Hard facts are that people who have invested in the Bay Area over the past 20 years have outperformed returns of those who invested in other (non coastal) markets by a massive margin. I have been buying since 1999 when I was in my 20’s. Glad I did. Took sacrifice of course and yes past trends don’t predict the future but odds are they could. So you ought to make the decision and see where you want to put your cash. My advice is you focus on buying a home in the Bay Area and see how that plays out.
Ricardo -
I would suggest starting out by investing locally. Even with a reputable property management company and visiting your parents often (using that time to also check on your investments), it may cause more headaches than needed when first starting out.
That being said, relationships can make or break you in real estate especially when it is not something you do full time. A good CPA and Agent can usually point you in the right direction regardless of how far away you are from your project and if price point is important begin reaching out to those contacts in Phoenix so everyone can be on the same page.
Good luck!
@Nicole Hunt where are you investing in TN?
@Brian G. Clarksville :) it's about 30 miles North of Nashville and close to Fort Campbell.
@Ricardo Peterson - great question and lots of good responses. I live in SD and have invested solely out of state. However, I run a private money lending company and PREFER to lend in CA. There are pros and cons to both obviously. But in my opinion, it depends more so on your TIME COMMITMENT. If you are both working full time for that income and plan to continue working full time, then I would suggest investing locally. House hacking with a duplex - 4 plex would be the best bet for your first investment in such an expensive market. If you are jumping in RE full time, then I Would suggest out of state.
Numbers don't lie. If you can leverage your money across numerous assets, that is better for a magnitude of reasons (mainly downside protection in the event of a decline, which, we all don't know the effects of yet). Therefore, if you have the time and this is purely an investment/financial decision, I would pick an out of state market with strong growth and absorption rates, no singular industry job markets, and most importantly - boots on the ground you can trust.
Good news is that both options are great! Even if all the tech boom companies move and people migrate to less densely packed cities, SF can still be a solid investment - as long as you can hold onto it long term. Remember, no matter where you buy, the money is made on the purchase. Good luck!
Ricardo, no need in fearing the distance to Phoenix. You just need to put a team together, that's probably more importatnt than looking for a property, if you don't have a team then you don't need a property, don't do it the other way around. I can tell you from experience, a large percentage of my clients are in Cali and they rarely ever come over here hjust to look at their
@Ricardo Peterson I’m from SoCal and have properties in Houston, Atlanta, Memphis, Little Rock and one here locally that I purchased many years ago. The rent to value ratio is low in CA and it’s very landlord unfriendly. I like markets with better cash flow that are landlord friendly. Phoenix would be better than CA for sure, but still may not cash flow as well as many other markets. You can self manage or hire a property manager. Don’t let distance discourage you. It can definitely been done remotely. You need a great team. Happy Investing!
I’m more leaning towards Arizona. Its a good market for rental. Plus you already have the connection there. It’s nerve racking at first to do the first deal out of state but there’re plenty of investors do that for the better cash flow.
Fellow Bay Area resident here. My significant other and I rent in SF but invest exclusively in Phoenix, AZ. The downpayment, even 5%, was such a big opportunity cost so we figured our money was better spent out of state. Love phoenix though - quick flight so I visit about 4-6 times a year.
You all have given me fantastic advice, I may reach out to a few of you soon!
I have a lot of thinking to do. Cheers
