A Couple of newbie questions

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A Couple of newbie questions

Max McNally
Investor · San Jose, CA · Member since 2014 · 40 posts · 19 votes

I'm a new REI looking to buy a multifamily property for rental income. I've read the Ultimate Beginners guide, as well as Investing in Real Estate by Gary Eldred and I have a couple questions.

1. What are the pitfalls of investing in out of your area (or state) real estate markets? I live in the Bay Area of California, and I can't make the numbers work on anything near me. I could afford a place like Atlanta or Ohio. Does it make sense to buy there and get a property manager? How do I find agents/financing/contractors? How often would I need to travel? 

2. The 2% rule seems really unrealistic to me. Maybe it comes from living in an expensive area, but I've never seen a property that is worth $100k rent for $2k a month. Does this actually happen ever? 

3. I've been using this spreadsheet to analyze property listings. Does this seem accurate? I've been able to find some craigslist with great returns using this tool, I just want to make sure the model is accurate before I jump into anything. (Let me know if you are able to see the formulas in the link)

I know these questions are probably pretty basic, so thanks in advance for reading and any advice you can give me

Max

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David Faulkner
Investor · Orange County, CA · Member since 2015 · 2k+ posts · 3k+ votes
10y

Oh boy, here we go ... this topic has been asked and debated over and over and over again on BP ... I'd suggest doing some searches or just watching the boards and you'll see some. I'm with @Account Closed in that local is best. I've done both actually, and have come to this conclusion by way of experience. The main reasons are:

1)Most people, my self included, underestimate just how difficult it is for a small to find a good team on the ground in the location you want to invest. This team, especially the property management, will make or break your investment ... it doesn't matter how good the numbers look on paper, without a good team in place, you will never see those numbers. This business will make you very synical in one respect, you will be amazed at just how many theives, con artists, BSers, and incompetents there are in this business that prey on new investors ... and without any experience in investing under your belt, or way to validate out of state that you are getting what you paid for, you will surely come across more than a few, and each time it will cost you money (but at least you'll learn something). Just because they are on BP, doesn't mean their one of the good guys either.

2)There is absolutely no reason to. There are literally millions to be made in your own backyard. You just need to learn how to operate in your unique REI environment ... the strategies that the Mid-West and Deep South folks employ and preach on BP, just won't work in your market. Likewise, the things I do in SoCal would not be appropriate for them. Different markets, different strategies. And no it is not just pure speculation to invest in CA real estate ... there is a science to it and done properly it is highly repeatable. Cash flow is an important thing, but it is not the only thing. There are different flavors of appreciation, and not all of them are speculative. Buy and hold is possible, and even highly profitable in your market if you know how to operate. You are surrounded by many great investors up there ... find one, figure out how you can add value to what they are doing, learn, and thrive!

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  • Silviano Olivares
    Imperial Beach, CA · Member since 2015 · 29 posts · 3 votes
    10y

    Looking to do the same but moving out of state, I had the same question.

    0Reply
  • Logan AllecBusiness Member
    Accountant · Los Angeles, CA · Member since 2014 · 1k+ posts · 980 votes
    10y

    I asked the same question  not too long ago and got great responses from both sides.  After much soul-searching, I decided that investing locally for now was right for me.  Good luck!

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    WebsiteView Page
    1Reply
  • David Faulkner
    Investor · Orange County, CA · Member since 2015 · 2k+ posts · 3k+ votes
    10y

    Oh boy, here we go ... this topic has been asked and debated over and over and over again on BP ... I'd suggest doing some searches or just watching the boards and you'll see some. I'm with @Account Closed in that local is best. I've done both actually, and have come to this conclusion by way of experience. The main reasons are:

    1)Most people, my self included, underestimate just how difficult it is for a small to find a good team on the ground in the location you want to invest. This team, especially the property management, will make or break your investment ... it doesn't matter how good the numbers look on paper, without a good team in place, you will never see those numbers. This business will make you very synical in one respect, you will be amazed at just how many theives, con artists, BSers, and incompetents there are in this business that prey on new investors ... and without any experience in investing under your belt, or way to validate out of state that you are getting what you paid for, you will surely come across more than a few, and each time it will cost you money (but at least you'll learn something). Just because they are on BP, doesn't mean their one of the good guys either.

    2)There is absolutely no reason to. There are literally millions to be made in your own backyard. You just need to learn how to operate in your unique REI environment ... the strategies that the Mid-West and Deep South folks employ and preach on BP, just won't work in your market. Likewise, the things I do in SoCal would not be appropriate for them. Different markets, different strategies. And no it is not just pure speculation to invest in CA real estate ... there is a science to it and done properly it is highly repeatable. Cash flow is an important thing, but it is not the only thing. There are different flavors of appreciation, and not all of them are speculative. Buy and hold is possible, and even highly profitable in your market if you know how to operate. You are surrounded by many great investors up there ... find one, figure out how you can add value to what they are doing, learn, and thrive!

    3Reply
  • Chris MasonPro Member
    Moderator
    Lender · CA · Member since 2015 · 9k+ posts · 10k+ votes
    10y
    Originally posted by @Max McNally:

    2. The 2% rule seems really unrealistic to me. Maybe it comes from living in an expensive area, but I've never seen a property that is worth $100k rent for $2k a month. Does this actually happen ever? 

     Local to us folks often use 1% combined with the knowledge that Prop 13 keeps one significant expense close to fixed relative to how much higher rent will go over time, which most other states don't have going for them. 

    So 1% will turn into 2% over time, as rental income goes up but TAXED property value holds relatively constant. In other states, home/rent value going up means your property taxes also go up in proportion, so if it's not 2% on day one than it'll never be 2%, because rents going up 10% might mean prop taxes also go up 10% (or maybe it'll go up 15% because the elected tax assessor is anti-landlord, who knows).

    Here, people will often buy using 1% and just chill while Prop 13 does its magic. Your prop tax bill can only go up 2% regardless of how high your rents go over time. Your mortgage is a 30 year fixed, and homeowner's insurance you can re-shop for every year with little cost to keep that down.

    0Reply
  • Max McNally
    OP
    Investor · San Jose, CA · Member since 2014 · 40 posts · 19 votes
    10y

    Thanks for the answers guys!

    @Chris Mason - My strategy and goals are to get immediate cash flow. While I think it's very possible to do in California, the upfront costs are so much higher that I would have to save for a couple of more years to get started.  I just don't see any way to make any immediate money in CA without a large (> $100k) investment, where I could get started in a smaller market immediately. Am I looking at this the wrong way? My strategy is to buy multifamily rentable properties that make immediate (or near immediate) cash flow and hold. Any advice is appreciated!

    0Reply
  • David Faulkner
    Investor · Orange County, CA · Member since 2015 · 2k+ posts · 3k+ votes
    10y
    Originally posted by @Max McNally:

    Thanks for the answers guys!

    @Chris Mason - My strategy and goals are to get immediate cash flow. While I think it's very possible to do in California, the upfront costs are so much higher that I would have to save for a couple of more years to get started.  I just don't see any way to make any immediate money in CA without a large (> $100k) investment, where I could get started in a smaller market immediately. Am I looking at this the wrong way? My strategy is to buy multifamily rentable properties that make immediate (or near immediate) cash flow and hold. Any advice is appreciated!

    It is normally a trade off between immediate cash flow and appreciation. High cash flow markets tend to not appreciate as quickly (or at all), the opposite also tends to be true for low cash flow markets like the one you are in. You can check out long term historical price trends for different cities to confirm this. The reason is simply supply and demand ... if there an abundance of high paying jobs and it is generally a desirable place to live, then many wealthy people will pay a premium to live there, and they will generally prefer to live there long term and favor owning over renting ... this is reflected in the market pricing. You can make money in either market, true enough, it is just REALLY difficult for an inexperienced small scale investor to do it from afar. So, if you really want to invest in a high cash flow market, then my advice would be to move to one, but understand that you will likely be giving up appreciation for that cash flow. Also, just because something cost less does not mean it is a better investment ... in any market, one should focus on value, not price; quality over quantity.

    Second, there are ways to make a quick return in a high appreciation area, but it is through forced appreciation rather than cash flow. In the extreme case, this would be flipping. You can still use similar techniques for quick gains on buy and holds, though. In fact, I love doing this for buy and holds ... I can prick up the quick nickel (forced appreciation) and the slow dime (passive cash flow, appreciation) both, AND avoid the high taxes that flippers pay. Done properly, this forced appreciation is NOT based on speculation, it comes from buying properties right and fixing them right.

    Finally, it has been my observation and experience that wealth in Real Estate happens over decades, not in the short term. Whether you are in it for the cash flow or appreciation, compounded growth takes awhile to get rolling ...

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