Good question. I went through this back in the early 1980's when I started investing in real estate. It depends on a lot of factors. We lived in NYC, a high appreciation area.
1. Employment: Both my wife and I are highly paid professionals. I was involved in accounting, programming at the time, and my wife in finance. Recently Amazon is locating it HQ2 not far away from us with jobs at salaries of $150K/yr. Our dilemma is should we go to an area where job opportunities are less just to pursue RE.
2. Family finances: My father in law passed away soon after we married, my mom in law retired, and with life insurance, an insurance settlement, and super saving throughout their lives, she was sitting on a pile of cash, and anxious to get into real estate. After much discussions, it was decided that we join forces. She had a ton of cash, no W2,s we with excellent W2's, didn't have the cash to go into it in a big way. Combined, we were able to buy two triplexes within 2 years, investing 150K in them, something we couldn't do all by ourselves. We put down 35% on the 1st, and over 40% on the second, but got them at 25% below market after looking at close to 80 properties for each. Some people with cash to throw around don't look so diligently and run into cash flow issues.
3: Life style: We decided to downscale our lifestyle and even do away with our cars for a short while. The first triplex we got we lived in one unit. We decided to buy in an area served by subways and express buses. The 2nd triplex was 20 minutes away, and we can get there by bus. When we have to bring tools over for something major, we took taxis a few times.
4. Analyze: Did we consider cash flow areas? Yes! We took a year running to Philadelphia, where we wife attended the University of Pennsylvania, had lot of friends there, and familiar with the landscape. In fact, we stayed over a friend's home during our numerous research trips there. Duplexes costing $200K in NYC could be purchased for $40K in Philly at the time. My wife's friend at 28 years of age at the time bought a duplex with $25K from an inheritance, a $15K loan, not a mortgage because she couldn't get one, and then paid off the loan in 3 years, and bought another property soon after. She lived rent free from day one, so cash flow wise it was great.
5. Comparison: The first triplex we got a $150K, (ARV $200K at the time) in 1983, soared to $350K in 1986, when our next door neighbors going thru a divorce sold in at that price. Cash flow wise, with $50K down, we lived almost rent free. In Phiily, we could've bought 4 or 5 duplexes, have greater cash flow. But do I want to drive to Philly several times a month? So figure this, I made $200K in appreciation just sleeping in my apartment, but have to drive myself nuts to Philly, or have to deal with a PM. My 2nd triplex I got in 1984 for $180K also went up to $350K in 1986. We cash flowed well on the 2nd one because we put almost $100K in for a $180K property which I realize not many people can do.
Yes, the early 1980s was heady times for real estate. The market crashed in 1987, and it bottomed out in 1993. Fortunately, with the accident of perfect timing, we took a pause in 1985, ran out of cash, and didn't get back in the market till 1994. By then I was attending auctions, bought a nearly new duplex at one for around $200K, (ARV of $325K at the time). moved into it, using $20K from my HELOC, and it's currently $1.375 million. It's now mortgage free. With Amazon locating a few miles away, what effect it will have, it's hard to say. But politicians around here are now complaining it will cause real estate prices to soar and rents unaffordable for the middle class. Sad as it sounds, but then, it's not my problem is it?
And following discussions of the Amazon move, they are also not looking into "real estate cash flow areas" either, because people making $150K/year don't live there.
Just to add, my mom in law bought a triplex for $110K in 1981, all cash, and by 2006 was too old to handle it, sold it for $850K. She had a few hundred thousand to start in 1980, went into real estate with us and her other two kids, bought 6 to 7 properties in all. And she made it all back just selling the one after living there 25 years. All the properties were bought in NYC and San Francisco.
