$100k to start investing into real estate, in California. Stay, or go out of state?

[Harry Dhaliwal]

Hi guys,

I have about $100k saved up with the sole purpose of investing. My goal right now is to get to $5k in monthly cashflow as soon as I can, to accomplish this as soon as possible I get the feeling investing out of CA is going to be my best bet. I've heard that for cashflow specifically, the midwest is one of the best places to invest. I have an agent friend in Chicago Illinois who has a few rentals and helps out a lot of investors there that I have been speaking with. The numbers sound great, but I just got done doing some research on Chicago and two things concern me. 1) Crime, it's no secret that crime is for sure an issue there. 2.) Property taxes are high. 

So my question is, being a young guy should I play the slow game and make do with the deals that I come across locally in California (MCOL, about 300-400k per single family home where I live) or do I take my money out of state and invest in a market with better cashflow and where my 100k will stretch a lot further? If out of state is the best bet to hit my cashflow goals, then which markets should I look into? Ideally I'd like to not worry about crime and be in a market that is growing and economically healthy and sound so that 5-10 years from now I'd have a good amount of equity in the investments I made to buy more deals. What do you guys think I should do? 

[Randall Alan]

@Harry Dhaliwal

I guess my first question is: Do you think the $100k is going to get you anywhere close to $5,000/ month in cash flow? A really good return on a $100,000 SFH is probably $300-400/month after Principle, interest, taxes, insurance and say a $100 maintenance reserve.. That house is going to cost you about $25,000 to leverage into. So you will likely get 4 houses (if lucky) out of your $100,000 if buying $100,000 homes. That's $1,200 - $1,600/ month in income. But as soon as you say "Out of state" you just stepped into property management, which costs about 10% of gross income. So if each of your rentals rented for $1,000, that is $400 less in profit you will make per month. So now you are looking at $800 - $1,200 / month net. You would probably need another $300,000 in investments to get to your $5,000/month target.

I'm personally not a fan of property management... but living in a really high expense area, it still will get you there faster than buying one home in California I would imagine?  You really gain a much better understanding (get smarter) as a landlord when you manage your own properties.  (We self manage 37).  So a big part of me wants to tell you to do that.  But the finance side of me says you will make more profit with 4 homes where it is cheaper.  In the end, I would run some real numbers for what you see in your home state versus Maybe Florida, or Ohio?  Zoom into the details.  Pick a house in your target city and run real numbers and compare it to real numbers in your local area.  That should be your guide.

I truly think you biggest challenge is going to be the interest rates right now.  My saying is "NOTHING is cash flowing at 7.x% interest."  Which is obviously an exaggeration... but where I'm at, it is not!  All the profit is getting eaten up in the interest payment.  Some properties  will cash flow - a little... but very few will cash flow where you can make say $300/month where it seems worthwhile to make the investment and take the risk.  Having bought the majority of our units 3-4 years ago, we have a cash flow that is closer to $600/month.  So it is hard to pull the trigger on expensive real estate (both house & interest rate) knowing what I have paid in the recent past.

One thing to keep in mind is that you can get 5% on your money right now just by putting it into a CD.  If you are only cash-flowing $150/month/unit - that is $1,800 per year.  And if it cost you $25,000 to make that $1,800 - your cash on cash return is 7.2%. I'm not sure the extra 2.2% is worth the effort right now.  If you can net $300 / month / unit- now your return is over 14% and it seems like a better deal.  

All the best!

Randy