“I Live in a High-Priced U.S. City. Can I Still Invest in My Local Market?”

by | BiggerPockets.com

“I’ll be right over to take some photos,” my agent said to the woman on the phone, who was calling to list her property for sale while I sat in my agent’s office, “and I’m actually sitting here with one of my biggest clients. Do you mind if I bring him over to look at your property?”

I followed my agent to the woman’s house. I knew the location well, because I owned another house on the street already. I was actively looking for a house to flip, and this neighborhood could work well.

After my agent signed a couple of documents with the woman, the property owner gave us both a tour of the home. “I just need to get out of this town,” she complained. “My family has all recently moved to California, and this house is keeping me here. I just don’t have the money to repair it.”

I made her an offer that day, which she readily accepted: $16,000. Yes, that’s right: $16,000. The house wasn’t in terrible shape, but it did need a good deal of work to get it up to rentable standards. But for many of you reading this book right now, you are thinking, “Just $16,000 for a house? That’s insane.”

Yes, it is. That was the lowest-priced home I have ever purchased. To brag a little more, my 24-unit apartment complex only cost me $565,000. Also crazy, right? I mean, in some areas of the country, you can barely buy the lowest-end home for what I paid for my apartment complex. So is that the secret to my success? I’m just “lucky” enough to live in an area where prices are cheap?

It’s a perfectly valid question. Sure, I am located in a very low-priced area, and I know that there are some areas where prices are astronomically high. Many major metropolitan areas, such as New York, Los Angeles, Denver, Seattle, and Washington, DC, have prices well above the national average. If you live in such an area, this article is for you. I want to share a few thoughts I have concerning high-priced locations and how you can still invest while living in such a place.

Are You Looking for Homes on Sale?

How much do you pay for a gallon of milk? Three dollars? Four dollars? Five dollars? These are all prices I see when I shop for milk, but I never spend more than $2.50. How is it possible that I can get milk for $2.50 a gallon while others are paying up to double that?

It’s because I’m actively looking for a deal. My $2.50 a gallon for milk is not normal; it’s a sale.

In the same way, the property prices I talk about are not normal. No one lists a home for $16,000 like the one I mentioned earlier, even in my area. Often, seasoned investors like me talk about the cheap prices we are getting to make a point (as I’m doing in this very section of this book), but remember that those prices are not retail prices. That home was actually listed at over $30,000 (still a low price, I know), but I knew the seller was motivated, and I could solve her problem quickly.

Are you actively seeking a deal?

When you pull up your list of nearby homes for sale, are you simply looking at the average sale price and trying to compare that with the $16,000 deal I got? If so, you will be very disappointed. The average price for a home in my area is more than ten times as expensive than what I offered. I’ve seen only a few properties that cheap, and most have major problems. The $16,000 deal was a special deal. The apartment complex for half a million dollars was also special. I only buy special deals. They are not once-in-a-lifetime opportunities, but they are also not everyday deals.



Related: How the “Second Wave of Suburbanization” Will Change Housing Markets as We Know Them

I forget now where I heard it (probably the BiggerPockets Forums), but to find a good deal, you should look at 100 homes, offer on 10 and get only one offer accepted. This means that just 1% of the deals that look promising actually are.

What does this mean for your business?

It means you need to look at a lot of properties. You can speed up the time by having very defined standards that you follow, but in the end, you are simply going to need to look at a lot of properties and try to find a great deal!

Next, let’s talk about relativity. And no, we’re not going to talk about Einstein.

Is the Price Relative?

Let’s go back to that analogy about milk. I have a bit of a riddle for you: When would it be the same for my budget to pay $5.00 for milk as it would to pay $2.50?

The answer, of course, is if I made twice as much money. In other words, if I suddenly made double my income but spent double the amount on milk, the percentage of my income I’m spending on milk wouldn’t change.

This is also true in real estate. A home that sells for $100,000 in one area may produce $1,000 per month in rent. However, that same style house in another area may sell for $300,000, but the rent may be $3,000 per month.

It’s all relative! So before you instantly assume you live in an area that is too expensive to invest in, decide first whether the math still works. Many times, it will!

Often, certain investments are working in your town, but they are just not working at your financial level. In other words, the numbers work, but they are so high that the barrier to entry is keeping you out. If so, there are creative methods you can use to get involved. For example, forming a partnership, raising private money, or engaging in real estate wholesaling can allow you to still be involved. There are also a lot of creative ways you can invest in properties that require far less money, which I talk about in my book, The Book on Investing in Real Estate with No (and Low) Money Down.

I understand, of course, that in some areas, a home selling for $300,000 still may only rent for $1,000 per month. I understand that in some areas, the relativity between rent and price is out of whack. Sometimes, properties are just not worth buying.

What then?

Related: 3 Reasons I’m Still a Buyer in Today’s Real Estate Market

What Is Working in Your Area?

Perhaps your goal is to buy and hold single-family homes in Manhattan. I’m sorry, but that’s probably not going to work out real well for you. Each location is optimal at certain things, but not at everything. If the math doesn’t seem to work on a certain type of investment in your area, perhaps it’s time to consider what is working.

  • Would wholesaling commercial properties be a better use of your time?
  • What about multifamily properties?
  • How about condo conversions?
  • What about fast food triple-net leases?
  • Have you considered subsidized low-income housing?

Before blacklisting your entire town, make sure you take time to investigate exactly what your town is good at. Perhaps you’ll discover a highly profitable investing strategy that your “expensive town” is excellent at.

There are dozens of different ways to invest in rental properties; you might just need to find the right niche.

To find what is working in your town, simply connect with investors who are actively engaged in your market. What are they investing in? How are they making a profit? Discover the secret to their success, and you’ll find the path to yours.

find-deals-hot-market

Have You Checked the Outskirts?

How much do Starbucks’ employees make in downtown New York City?

My guess is not a whole lot more than they make in my small rural town. My point is this: the large percentage of society who make less than $15 an hour and work in expensive cities still need to live somewhere near their place of work. Baristas are not making six figures, yet they still manage to work in expensive areas. How?

In nearly every expensive city, there are pockets of low-priced properties. Don’t get me wrong, I’m not advocating slumlording or investing in a dangerous ghetto. Those areas have problems and extra expenses of their own. Location is still key in any real estate investment. I’m referring to the middle-class neighborhoods on the outskirts and in the suburbs. Generally, these areas are found 20 to 40 miles outside the city center, in smaller towns and communities. Speak with a good real estate agent about these areas or
get on BiggerPockets and connect with some local successful investors and see where they are investing. Find the best location with the lowest prices, and focus your efforts there.

If still you find that there are no decent locations nearby that you can invest in, perhaps it’s time to look outside your area and consider long-distance investing.

Do you live in a high-priced market? Are you finding creative ways to invest, or are you looking at out-of-state properties?

Comment below!

About Author

Brandon Turner

Brandon Turner (G+ | Twitter) spends a lot of time on BiggerPockets.com. Like… seriously… a lot. Oh, and he is also an active real estate investor, entrepreneur, traveler, third-person speaker, husband, and author of “The Book on Investing in Real Estate with No (and Low) Money Down“, and “The Book on Rental Property Investing” which you should probably read if you want to do more deals.

20 Comments

  1. Andrew Hoelzel

    I liked the article! Word to the wise, however, is that if you want to use the BP calculators, and if you want the numers to adhere to the much blessed and hyped results, you need to steal a property! What do I mean? Buy an inexpensive home, steal it on price, luck out with higher than normal tenant rents, and even ask your agent buddy to list it at 4-5% instead of the typical 6% etc. I guess that is the game.

  2. Sure, if you have the bankroll for …

    1. Higher acquisition price
    2. More expensive rehab
    3. More expensive hard money if needed
    4. More expensive holding costs
    4. More expensive buying and selling costs

    But, a much bigger payoff, very possibly in the hundreds of thousands.

    The odds of you being dealt a winning hand at Las Vegas are no different whether you are at $10 or $100 betting table.

  3. Michelle Moore

    At what point does the cap ex and time required make a lower ratio property the better deal though? I am also investing in a lower priced area where I live, but am realizing that the time required to manage 24 units worth half a million dollars is much higher than a few units worth half a million dollars in a more expensive area. Also, the 24 units have 24 furnaces to be replaced, 24 water heaters, 24 air conditioning units and a whole lot of walls to paint and floors to maintain. I have to keep employees to keep up with my 42 units, but I could easily self-manage if I had fewer units.

    I would like to transition to fewer units in a higher rent area, but I am sitting tight since prices are pretty high right now. (My local real estate market typically goes down 15% during a recession, not 50% like some of the more expensive markets.) I have also considered new construction since prices are so high in some areas. Has anyone done a 1031 exchange for a new construction property? I am wondering how that would work, given the tight timing constraints. If I contract with someone to build the house, would that be any different than closing on an already constructed house so long as we close within the allowable time limits? Also, is there any way to make this work if I have a house built on land that I already own?

  4. You admit that at $30,000, it was a low price for the house, but you offered $16,000 which she readily accepted, (but probably not happily). I don’t agree with taking advantage of a person’s desperation. I would have paid a fairer price.

    • Curtis Bidwell

      Would the price be “fair” if the home needed $14,000 of rehab to make it worth $30k? Nobody coerced her to sell it for that price. She had the option of accepting the price, negotiating the price, or declining and wait for another potential offer. Remember the actual value is what a willing seller and a willing buyer agree on. What Brandon did was simply acknowledge her need to move quickly and his ability to facilitate her need. No need to feel guilty unless you didn’t disclose something or otherwise dealt deceptively.

      • Clearly you do not understand the factors that limit choice and can lead to a kind of coercion. If all goes well in your life, maybe you will never find out. Ask Brandon how much it cost to get it to “rentable” standards. Actual value is not what a willing seller and willing buyer agree on. If that were true, there would never have been a housing bubble. The word “willing” covers a lot of ground. Fair market value is considered to be the amount the two parties under no kind of coercion agree on with both parties in perfect knowledge of the goods or services. I can tell you that most retail homebuyers do not have perfect knowledge. Sellers only provide the minimum disclosure they can get away with. I even had one seller tell me that she didn’t know anything about her own house because she had always been an absentee landlord. Yeah, right.

        I faced a similar issue once many years ago when I had to sell a car because I was moving out of state and I could only drive one of my vehicles. I listed it for a very fair price, even somewhat less because I was in a hurry to sell with a moving deadline. My first naive mistake was my honesty in listing it at a fair price. My second naive mistake was my honesty in answer the question of why I wanted to sell it. Every buyer wanted a steep discount. I finally had to accept an offer that was too low. so I was “willing” but resentful.

        I refuse to do that to other people. If the list price at over $30,000 was low as Brandon says, $16,000 is probably exploitative. Justifying it as “facilitating her need,” is dreadful.

        • Brandon Turner

          Hey Katie, I totally understand the point. Keep in mind, however, this property needed about $40,000 worth of work and the value (and that’s with ME doing 100% of the labor to fix it up. $100,000 for a contractor to do it. And 100% fixed up – was no more than $80,000. So… how much would YOU have paid, really? $30,000… really? Then you would have spent 3 months rehabbing the property – every day on your hands and knees remodeling, painting, plumbing, cleaning … and you’d be into the whole thing for $70,000. Then what? You’d sell it for $80,000 and pay $15,000 in closing costs – meaning you would have LOST $5,000. Or you’d hold it as a rental and break-even each month.

          I made her an offer of $16,000 because it was worth that- or so I thought. Looking back – I shouldn’t have paid more than $6,000 for it. Had I passed on it – I highly doubt ANY other investor in the area would have paid more than what I did, unless they didn’t know what they were doing – and no homeowner could have purchased it due to the condition.

          Furthermore- no joke – this seller called us up after closing – thanking me for the quick close and easy sale. She was ecstatic to be free of it.

          So don’t be quick to judge someone’s intentions (mine or the seller’s) and assume that price is all that matters to people. You might only care about money, but some people have other concerns far more important. For her – it was moving out of state and not being required to fix up the home. And as Curt said – the price of anything is what someone is willing to take for it. There is no Kelly Blue Book for homes. She took my offer after the home was sitting on the market for a whopping 30 minutes. If she wanted more … she could have waited for a better offer.

          You might have paid full price for the home… but following that principle with most properties – you’d also either be out of the investing business or bankrupt.

        • I never claimed you should have paid list price. If typical, the list price was based on comps for condition in the area. However, you were crowing about how cheaply you got the house, even though it was already listed at what you called a low price. Now you are saying you paid too much. So which is it?

        • warren currier

          Katie said:

          “I faced a similar issue once many years ago when I had to sell a car because I was moving out of state and I could only drive one of my vehicles”

          And then you paid for you dearly for your lack of coming up with a better solution than selling it for a low price, eg, having a friend (or stranger) drive the other car, having it shipped by a professional car hauler, finding someone in YOUR city who needed to get some things to the OTHER city. Even if you had started the selling process sooner you would have not been as disadvantaged as you were.

          You could have stayed in your city a few weeks longer seeking to sell the car for a better price but you did not do that. You sold it for a price that was agreed upon given all of the circumstances, and then you moved on.

        • All those solutions cost more than what I lost on the sale of the car. I could not stay longer because I had a contract for a new job. My “city” at the time had a population of $5000. The time between the sudden layoff from the old job and the start date of the new job was about a week. You don’t know what you are talking about. You don’t know me,but people who do know that I am remarkably resourceful at managing problems. My list price for the car was more than reasonable. Surrounding circumstances should not matter.

  5. Nina Grayson

    Great guidance and advice Brandon

    in regards to the low PP on your first property, It sounds like you did the Owner/Seller a favor.

    I do not see low offers to distressed owners or for their distressed properties as harming the Owner/Seller. There is a great benefit to them.

    *If it’s a NOD or NTS, they might not qualify to refinance even though they have some or even a nice amount of equity.
    *If they sell before the TS, their credit won’t be affected by the foreclosure.
    *They may also need more proceeds than the default amount and mortgage balance to move forward.
    *Selling fast is in their interest because they may need to relocate for a job they got in another state or area after being out of a job for several months, which caused them to default in the first place.
    *They may need to pay for medical bills, or other debts, and even secondary liens.
    *They may simply be done and don’t want to do the needed repairs and don’t have enough equity to do them, so they will simply move forward.

    Whatever their situation is, the option to sell fast for a reasonable price is not only attractive, it means they can achieve their goal – Sell Now!

    Now, I said “reasonable price.” I do believe in giving them a fair price for their property. That means I calculate the potential deal, specifically focusing on ROI, either using BP’s calcs or my Investor/Buyer’s calcs because they have specific criteria. If the deal meets my Investor/Buyer’s minimum ROI, and if their price is reasonable in that the Owner/Seller will walk away with what they need, then great!

    In some NOD and NTS cases, the Owner/Seller may be willing to walk away with enough to cover the default, mortgage, and any other liens, and only have a small amount left over. But it still is in their best interest to move forward and get a fresh start. If my Investor/Buyer’s offer price is an extremely low offer, I let them know that the Owner/Seller may refuse it, and ask them “how high are you willing to go?” If that’s their max offer, I tell them I’ll present it, but it most-likely won’t be accepted. However, I will negotiate further with the Owner/Seller to see how the offer might still meet their needs.

    Investing can be and should be at the least, a win-win for all!

  6. John Barnette

    I live in and invest in arguably the most expensive market and do quite well. Both cash flow and appreciation. It can be done. And everything MLS sourced. I am a real estate agent and thus basically always in the market and looking at properties. Was looking nearly all 2017 before acquiring a good buy on a SFR in a working class town/burb about 15 miles from downtown SF. A bank owned house poorly listed. Had broken glass on sliding door, broken furnace not working at all, no appliances. Listed pretty fairly at 479k. Though not lendable for traditional financing due to above relatively easy items to cure. Still thought it would go quickly. But didn’t. Bank dropped to 429k the week before Thanksgiving. Per knowledge gained from BP, I believed the asset manager actually dealing with the house had authority to accept an offer within about 3% of asking. And also probably wanted it off the books and behind them. Had hard money for about half lined up. Made offer at 415k cash no finance contingency and 7 days for inspection. Has taken longer to be rent ready. Partly me as not sure if I wanted to flip or keep and thus steer repair and remodel work. Keeping. Looks to rent section 8 family for about $2900 and maybe more. Could flip it for about 585k. Redo financing into a 10 yr arm at 3.7% as I have too many properties to go conventional. Have great equity position to secure great cash flow going forward. Oh and the work put in is less than 10k . BUT it took nearly a year of looking and then jumping immediately when one made sense. A motivated seller too. It CAN be done. Even in SF Bay area. 3109 Andrade, Richmond CA. 94804 if people are interested in seeing the before. Just Google and the listing photos are still up. Your basic 40’s rancher in an improving working class area. Bonus for being affordable SFR starter home…always in demand especially with aging millennials.

  7. Eric Bilderback

    Brandon’s a pretty cool dude and is a bonified real estate stallion. I humbly would add buy properties you should be able to hold for the long run meaning through a down cycle if need be. More likely then not you are going to be happy you did. My guess is if you do it for 10 years it will change you life.

  8. Kim Kaiser

    I am still baffled by the math that a 2 to 2.25 a month duplex is capable of sale for 400k plus, is possible without very large DP.. 4% 20 yr at 320k after DP is 2k a month,, and that is if you can get that,, after ins and tax, you have no Cash flow,,and certainly nothing on your 80k DP,,, unless you are going to sit on it and hope for a big payoff end the end.. if you pu the 80k in some kind of very conservative Market vehicle, and got 4 percent,, and sate on it for 10 years,, you would have to over come at least 32k not annualized or compounded,, for example,,
    https://bsc.mlsmatrix.com/Matrix/Public/Portal.aspx?k=30908X0c5c&p=AE-3757-877&L=1&rk=3016650

  9. John Murray

    To make money in real estate investment you have to find your wheelhouse. Become an expert in that sector and increase your knowledge and investment of money and time. Once you have mastered the expertise you have one stream of income. Now the trick is to master other forms of revenue streams that pass through to others and play the IRS shell game. Now you are a multimillionaire and pay very little taxes. Master 3-4 revenue streams (not the evil earned income W-2) now you have truly mastered what is known as the entrepreneur. Most make the mistake of a very narrow skill set band. You must develop multiple skill sets just like revenue streams. This is not about endless math calculations it is about skill sets and revenue streams.

    • John Barnette

      I agree for sure. Very well said. But math is truly the backdrop and language to it all. Otherwise you don’t even know if you are in the black or the red. Or in then red to manipulate and hide some of what is in the black. Or just understanding basic flows of money and taxes. Like I am stunned and love that I can invest in a class C semi crappy starter house for $500,000 (Bay area), done well and will cash flow with 30
      % down. Depreciate 75% of the 500k asset as building value per my tax accountant. All the while there are no entry level sfr’s being built within 100 miles. Leveraged at 3.6% fixed for 10 yrs. Leveraged appreciation most likely in next 10 years though with realization there will likely be a correction of some fair magnitude. So say my leveraged equity doubles in next 7-10 yrs. Then Sell and 1031 exchange a tax depreciated asset that is hypothetically equity appreciated and trade up (tax deferred until I die) to a cash cow in the Southeast or something. All while earning rent cash flow practically tax free because of depreciation. Understand the math, appropriately way the risks for yourself and financial and mental stability, and just take the leap. Sorry for my rant. I love your post. Analysis poralisis is going to kill some…but you gotta understand the math.

  10. Lisa Phillips

    Glad to see BiggerPockets is starting to follow the working class train I’ve been teaching for the last 4 years. There is a bit more nuance, as even 20-40 miles out doesnt really work anymore, or the return on investment is so low. However, there are ways around all of that.

    Starting out 4 years when I started coaching people one on one in this, it was that easy. The landscape has changed in 4 years since everyone started jumping on this bandwagon, so we are smarter and more strategic when going for our lower priced properties. I get emails with horror stories no one wants to talk about, and I also have clients who are singing their ways to the bank because it was sooo easy. It was easy because they had help, but definitely, this has been lucrative for my audience.

    I will continue to browse BP and see what other articles that I spearheaded are now starting to appear. If you want to see the beginning of these articles, you can check out the BP posts I wrote under Lisa Phillips and my Pro Page will link to the BP articles, when I first introduced this strategy to the BP world. Its fun to see so many people talking about it, and I’m glad to have helped start this movement into the mainstream. My videos are on youtube as well. There is also a 4500+ community of sub30k investors who are killing it – let me know if you want in.

  11. i just wonder if all these stories, websites, courses along with current media shows on flipping i.e hgtv etc have not played a significant roll in pumping up the bubble and reducing inventories? When thousands learn the secrets by reading and watching “how to” instead of developing their strategy on their own thru trial and error or staying out of the game altogether i think there are problems. Now toss in the hedge funds and private equity throwing billions into single family residential…….and wait for it….. airbnb , vrbo chumming up the waters and you get a real pile of poop.

    I’m selling out all RE holdings because i think we are on the cusp of an even more serious problem than the last recession. Wait, I forgot money is more loose than pre 2007 (3% down) and we have had two katrina level events in the past 5 months i.e. Houston and PR. I saw katrina first hand and knew all those empty shells of houses were not getting the mortgages paid. I thought it would assist in the collapse of Chase. However, little did i know that all those homes and more were rolled up into junk bonds. We saw some of those Wall st banks holding get pummeled.

    But by all means let’s keep the waters chummed with promises of real estate riches so the rich dad poor dad set keeps filling the buyer pool pushing the bubble yet higher. It’s irresponsible as well as destroying an industry turning into a hobby and dreams of instant RE riches (altho highly leveraged)……

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