Looking for a less volatile market for my first investment property

[Saeed J.]

Hi all,

I'm planning to buy my first long term rental, a single family resident in the next 3-6 months. I'm in the Bay Area houses here are very expensive for me to start with. I have relatives in Houston, TX and did toured a few houses there last year. I feel like that's a good option with okish cash-flow. But when I checked some houses in Cincinnati, the deals are lot better with higher cash-flow. I'm confused now as to which market to focus on. Any help is appreciated!

[Becca F.]

Hi Saeed. Without knowing anything about your financial situation or what price ranges you're looking at, if you don't already own a primary residence in the Bay Area, I would house hack. If you're paying high rent here (e.g $2500 to $4000+ a month), I think it makes no sense to buy out of state and continue to pay high rent (unless you live with family or have some other type of very low rent situation). If you can buy within a 2 hour drive (maybe Sacramento area, which is what I'm considering), you have a lot more control as far as checking on the property than buying OOS. 

Since you have relatives in Houston, they could help keep an eye on the property and assuming you would visit there, that might be a possibility. With the properties in Cincinnati, did you visit in person? 

I invest in the Bay Area and Indianapolis. With 7% interest rates, it's difficult to cash flow in anywhere unless you go the STR or MTR route. Wealth in real estate is built on appreciation. I have long term rentals in Indianapolis and my cash flow is declining with increasing property taxes, 17% with the last assessment, but I'm keeping my Class A (nice suburb with great schools) because of appreciation (owned 11 years now). I bought Class C in Indy in 2023 and now my cash flow is non-existent from repairs called in by tenant (7 times in 9 months), capital expenses (stolen AC unit before tenant moved in). I lived in the Indy area so and now I know there areas down to more of a detailed level.

My suggestions: 

- don't buy in unknown markets despite whatever numbers someone is showing you or that it will cash flow X amount of dollars. 

- Do your own research (including finding out about property taxes and insurance) and talk to lots of people including property management companies - they know what rents are in different neighborhoods, tenant base, etc. Talk to contractors to get a sense of what renovations and repairs cost 

- Fly or drive to the area and get to know it really well. Network with local investors (someone unbiased, not an agent or anyone trying to sell you anything)

- pick a solid appreciating area (Class A or B) with good (or at least decent) schools. if you drive around the neighborhood, would you want to live there or would you feel safe walking around at night?  I wouldn't do Class C if I had to do things differently. 

- have lots of cash reserves. A house can pass inspection but once someone is living there it's being put under daily stress (faucets turned on/off, heat/AC on an off, etc) so be prepared for repair costs