CA resident trying to decide on rental property investment location

[Lei Li]

Hi BP experts, I’m a busy professional in the Bay Area, trying to get into property investment. I don’t have time for all the house flipping or maintenance, so most likely just want to get a rental property to provide another stream of income. If there’s appreciation that would be great too. I was looking between OH, TX, FL and some cheaper areas in CA. What do you recommend for someone like me? I have a budget of less than 500k. 

[Timothy Howdeshell]

@Lei Li I'm no expert, but I'll throw my 2 cents in regardless :-)

I invest out of state in Kansas City and live in Fresno, CA so I have a bit of perspective for what you're looking to do. as @Ryan Muska noted, tenant/landlord laws can have a big impact on the success and headaches of rentals. I haven't focused on California property for this reason in part. Evictions take much longer and there are more defined squatter's rights in CA than in Missouri where I invest. 

Price to rent ratios are another thing to consider. Given that you can buy in cash in most cities in the US with $500k, cash flow is easier to find than when considering financing. It is important to consider your return on equity however as well as downside risk. 

What this means is that if you rent a 500k property for $2,500/mo then you'll make 30k/yr on 500k investment. This is a 6% cash on cash return (not really as there are other costs, but keeping things simple). If instead you buy a $200k property that rents for $1,600/mo you have a 9.6% return on your equity. 

Given that high yield savings accounts are paying upwards of 5% FDIC insured, not sure if low yield real estate makes sense. You'll be basically speculating on appreciation.

Down side risk, I'm referring to vacancy. If you buy 1 $500k property, and it goes vacant, you have 100% vacancy and no revenue in your business. If you buy 2 200k properties and 1 goes vacant, you only have 50% vacancy and are still making money. Plus you have $100k left over for reserves. 

My vote is obviously to search for somewhere that has better yield on your equity than CA. Good luck!