Where and how to invest?

[Logan Allec]

What to do?  I know nothing.  I don't even know my strategy.  I'm looking for wisdom, stream of consciousness, whatever--any suggestions that wouldn't require me to step away from my current employment.  I have a growing pot of disposable income to invest as I'm single, living like a bum, and keeping steady at a decently-paying job.  I want to make the smartest moves I can financially before settling down, getting married, buying my own home, etc., and I'm willing to live like a pauper in order to do so.

I've been seriously considering buying turnkey property out-of-state (I have been thinking in Austin for appreciation [that's what the turnkey companies tell me--though some reports I've found online claim that Austin is wayyyyyy overpriced right now] or Indianapolis for cash flow [ditto]), but given my age and station in life I feel like I can be a bit more "risky" than merely paying retail (or more) for a property to get a few thousands a year in cash flow just to sit on it and wait until the mortgage is paid off.  Or is that just youthful naivety talking?  Does this rather boring approach actually pan out if I start now and acquire 5ish properties by the time I'm 30 and 10ish by the time I'm 35?

And this probably sounds silly, but recently I got the illustrious and romantic idea to purchase a 4-plex using FHA financing in San Diego (read: expensive and won't cash flow, but vacancies would be low [very desirable city], and although prices have increased substantially in the past few years, I have to think there's still some room to grow, especially if I'm in it for the long-haul, though I know that multis don't appreciate as much as singles). Is there any redeeming value to this idea? I figure I am going to buy a personal residence in the next five years anyway, so might as well take advantage of the FHA program. Or is this stupid and should I just keep my expenses crazy low like they are right now and invest invest invest somewhere else? My gut tells me the latter.

Any words of wisdom?  Were you ever in my shoes?  If you weren't, what would you do if you could turn back the clock?

[Matt R.]

Yes Logan, I was supporting your fha idea starting with the plex or sfh. The fha would be the lowest out of pocket option most likely. You can repeat the process if it works out is the theory. I agree with you on the immediate cash flow part....no bueno.

The vacation rental option might work better for cash flow in OC is my thinking.

thanks,

matt

[Jay Hinrichs]

@Ali Boone  disagree with you on buying a primary residence in CA only after you buy rentals elsewhere.. with rates were they are at right now.. you can buy and have a mortgage at or below rental rates in some areas and or just above.. then you have the tax savings of writing off your interest.

I just built my new home in Portlandia and refied at 3% my mortgage payment is Half of what it would cost to rent this home... So I guess I could rent it out if I had to with massive positive cash flow and no cash into the deal... these can happen on the west coast and they are much better than taking risks going out of state when you really have never owned anything before.

What happens when some one goes out of state and they end up with a bummer which defiantly happens and they lose money now they can't buy in CA.. if they buy in CA first and buy a bummer out of state at least they still have their primary in CA.

I have seen MANY LA investors totally fubar themselves buying out of state getting a mortgage on the out of state house then losing it to foreclosure and totally screwing up their lives .... 

So yes i disagree with you like you thought some would this guy should buy a home in CA first or a plex even better and live in one side he would be living for rent free which is better than 200 a month positive cash flow from some mid west or east coast investment that has the possibility of not performing at all.

[Phil Zofrea]

My recommendation is to first start investing locally, learn and then reassess, adapt and continually improve. 

[Logan Allec]

Hi, @Jay Hinrichs - thanks for your recommendation. However, I am not sure how I could get the numbers to work such that I live rent free with a plex living in a decent neighborhood in Orange County or San Diego, which are my only two options, since I will have to use FHA financing since I do not have the capital to put 25% down on a decent plex.

And unless I live in the ghetto, it seems that I would still be kicking cash out the door unless I can find an EXCELLENT deal, but unfortunately I'm not sure I have the experience to do so.  So in my view, I'm only paying $300/month right now, but if I bought a plex using FHA, I would be kicking $1,000+ out the door every month on the property, so I'm a bit turned off by the plex idea and gravitate more toward what @Ali Boone and others above have said encouraging me to invest out-of-state.  Thoughts?

[David DuCille]

i'm a little confused on the 4plex math here. Finding it hard to believe you couldnt find a way to make that math work. Hell, it might mean you rent out 3 units and a bedroom in the unit you live in but I just don't see how you can't make it cash flow or at least be pretty damn close to it. if you only put 3.5% down then yeah, maybe you won't cash flow but your only putting 30k of the 100k that you have to spend. Because of the high PMI costs associated with FHA loans and the fact that its for the life of the loan, I wouldn't go FHA, I'd go conventional and bump the downpayment up to 5%. Remember that even if you aren't cashflowing, every month you are paying down that principal so it's still like you are paying into a bank account. I wish I knew more about the san diego market but the other option is buying something super beat up and fix it up to force appreciation as well as command higher rents. the only problem is that 203k loans are a pain in the *** so if it won't qualify for conventional financing.

Last option.  IF you are only paying $300 a month rent now, why not stay living where you are living and buy the 4 plex and rent all 4 units?  surely that would cash flow?

[Jay Hinrichs]

@Logan Allec   your choice... of course.... good luck with it.

i wrote an e book on the do's and don'ts of out of state investing you may want to give it a read.. I have owned 350 + homes in the mid west and loaned on more than 2,000 of them over the course of the last 20 years.. so I have a little experience at it.

All I can say is buying in CA is one of the reasons I was able to do what I have done in RE.  bought my first home in the bay area.. and 40 years later and 7 different bay area homes from Palo Alto to Napa CA.. I figure I made about 2 million in tax free  and that is  real cash in the pocket.. Can't do that buying low level rentals in the mid west... And that is just on my personal residence's.... 

But its your call at the end of the day

[Hattie Dizmond]

@Scott Hearne 

I never bet on appreciation. I view it the same way I do a bonus in my 9-to job...a bonus. I don't consider it, when constructing my budget. As I mentioned, for me, a deal is a deal or not at closing.

We aren't guaranteed tomorrow. We certainly aren't guaranteed investment performance. 

That said...cash flow is my deciding factor, when evaluating a buy & hold property, because passive income is my goal.  Because we have chosen to focus on high end school districts, DFW isn't a great buy & hold market right now, but there are still some deals to be had. You just have to look harder and move quicker.  

[Matt R.]

https://www.redfin.com/CA/Escondido/Undisclosed-ad...

This duplex for example would be a start. After taxes you would pay more than you pay now to own it yes..but less than market rent at least. OC homes have increased in value 8 fold since 1976. You are now on the OC REI train for 3% -5% down.

Historically what beats the OC REI train?

Turns out ...not much. Competitors are London, Paris, NYC, SF, LA.

Ps that example is in north SD county I know...but you get the point.

[Karen Margrave]

@Logan Allec Welcome to BP! We are here in Orange County too!  It's great you're disciplined enough to have saved up the money to invest and are willing to sacrifice for your future.  As for where to invest, I can only say that when the market crashed, we were in an area that was hard hit. Being builders that had been through recessions before we knew the crash was different. We decided to relocate. We considered many other areas, such as Texas and North Carolina, etc. However; we decided on Orange County, CA, and are currently building a house in San Clemente, which we will sell to an owner user or investor for a VR or long term rental, another in the works in Capo Beach, and 2 condos in planning stage in San Clemente that will be bought for vacation rentals, or someone wanting to be close to the beach. Why Orange County? 

Orange County has perfect year round weather, which draws business and leisure travelers all year long, which generates huge business for vacation rentals, etc. We have amusement parks, sports teams, cultural offerings, shopping, and the Pacific Ocean. 

On top of those things, the economy is always very strong, there's a low unemployment rate, high wage earners, top notch universities and medical care. Plus high median wage earners, meaning a huge pool of qualified renters and buyers. It's perfect for our business. 

For your purposes, I think staying close to home would be a wise decision. You're just getting started, and there's less risk, and less of a learning curve for you here. Though others frown on going for appreciation, historically, appreciation has been very good to many of the areas (especially coastal areas) here, because it's all about supply and demand. As long as there is demand, and limited supply, value rises. 

We have an Orange County Meetup on the 3rd Wednesday of the month, at 7 p.m. It's at the Round Table Pizza in Lake Forest, on Lambert and Lake Forest Drive. Come meet everyone. My son, that is a partner in our business is 26 years old, and he'll be there too, as will some other young people. It's a great way to have questions answered, meet others in the local area, etc. 

[Adam West]

@Logan Allec 

WOW Logan! 

What an exciting opportunity! When I was in my mid-20s I played poker for a living and was fortunate to do pretty well for myself. I had a "bank-roll" nearly the size of yours and a nice annual income. Although I didn't have the great credit that you have, I had a tremendous opportunity to make some wise long-term decisions that I wish I could go back and make again. 

Congratulations on recognizing the opportunity that you have in front of you. You've made a much more financially intelligent decision than I did. I'm not qualified to give you any specific advise, but there are tons of people on Bigger Pockets that are. You've come to the right place to get started! 

Best of luck! 

Adam

[Tarek Saad]

Hi Logan,

Congrats on all your accomplishments at such a young age!  You are so far past most people your age.  And it's awesome that you are planning for ya'lls future!

All I can say is Oklahoma is a great to place to invest and secure some cheap rentals. Oklahoma Rent rates are one of the highest per cost in the US (do a search in BP about a few articles in OKC).  All my clients and myself cashflow on our properties.  Typical deal is between $35k-$50k, rent typical between $750/month-$925/month.

[Crystal Smith]

Love reading this thread. I have nothing more to add other than find a REI group that plays the Robert Kiyosaki cash flow game on a regular basis. In a safe environment you'll start to learn the real objective of this business; i.e. build a passive cash flow that from real estate, paying down debt, buying businesses...... Play the game on the board then come play it for real. In town, out of town. Use the forums on BP & other sources to analyze the opportunities then dive in.

[Karen Margrave]

I'm with @Jay Hinrichs  on this. I've heard many stories from investors in California being swayed by turn key enthusiasts, and now they are regretting it. The supposed renters turned into duds, the property cannot be sold because it was overvalued, and they're stuck with payments that suck up their savings.  In my opinion, you're better to stay where you are familiar with the territory, and leave the out of state investing to those that can afford to take the risk.

Though you can't bank on appreciation as @Hattie Dizmond notes, in reality, nothing is certain,  including cash flow. The only thing you can base your decisions on is historical data, as none of us can predict the future. Orange County has historically had areas with high appreciation, due to the high demand for the limited supply of properties. In addition, areas such as the coastal cities, have homeowners that either use their properties 100% as vacation rentals, or rent them for high demand months, enabling them to completely pay their mortgages the rest of the year, or come close to that. 

The point is, no matter where you invest, there are opportunities, and risks, and you want to put your money where you are comfortable. 

[Ewa Reza]

@David DuCille you can buy SFR with 5% down conventional but not multi unit.

@Jay Hinrichs where can we find your eBook?

@Logan Allec I'm all for investing out of state for cash flow. But I'd advise you against it as it is your first investment. There is just to much to learn that you won't be able to simply by reading BP forums or even networking at REI clubs. Get your feet wet close to home. FHA is the best way to go. I specialize in finding my clients 2-4 units in LA. It takes time to find the right property. Sometimes you get lucky and find it right away and sometimes 6 months and longer to actually get your offer accepted. Majority of time it will not cash flow immediately. It doesn't really matter. The outcome when you sell is what matters. The appreciation and tax laws are the key to investing here in SoCal. Many people would disagree but they would probably be out of state :) For a first investment multi-unit is your best choice hands down. I can write about it on and on really... But to keep it short... This is what I would do myself:

1. Get a 3-4 unit with FHA

2. Rent out all units but one. 75% of rents will be used to qualify you for financing.

3. The one unit that you would keep as your primary residence if you'd like to put more time and effort into it would be a great short term vacation rental. This way you can keep your current accommodation and actually make this investment cash flow with relatively little effort and lots of learning potential.

4.Think about it as 2 year plan. SD prices are not going anywhere. Yes, the appreciation will be half of what it was in 2013 and 2014 but with some capital improvements you can still sell your property with nice profit in 2 years. Why 2 years? Because of tax breaks!  

[Ali Boone]

@Account Closed

I'm fine taking a hit on cash flow for better appreciation potential (and I usually will), as long as there is still positive cash flow. That's the difference. The majority of properties in Austin are likely to give you negative cash flow, which is the hold up there. Because appreciation can never be counted on, so you need to have something working for you while you hope for the appreciation. Basically, you still want to make a profit if the appreciation never happens. So hit on cash flow, fine, but make sure it's still positive.

@Jay Hinrichs

This would be more of a debate of whether someone should own a primary home or invest in rental properties. It's not so much a debate that is location-specific. I mean it could be, for sure, but the points you bring up are more based on buying your own home versus an investment property first.

I also disagree with you that out-of-states will inevitably fail. I don't think they are any more likely to fail than local properties. Certainly a lot of those people who failed buying out-of-state are because they weren't smart when they bought. That's far from an accurate generalization about everyone who buys out-of-state. And to another point, yes rates and such are great but still why buy in SD just to take advantage of those if you are still going to lose money on the deal? Which you will unless appreciation does something ridiculously impressive. The SD property will not provide income to buy investment properties with. Investment properties can provide income to buy a SD house with.

[Jay Hinrichs]

@Ewa Reza   send me a pm and i will send you my e book on the do's and don'ts an insiders view of buying TK properties in the mid west and east... 

[Jay Hinrichs]

@Ali Boone   I know its a generalization and I know you make a living selling TK properties out of state so of course you have your opinion slanted that way.

And I make a significant portion of my income out of state as well. However I have a lot of experience.  And those that have no experience in the rental game and go out of state for their first deal take on some pretty good risks  I mean I foreclosed on 200 plus LA based investors in every metro area talked about on this site.. from Memphis to Indy to Chicago to Philly Detroit atlanta etc. 99% were buying their first rental property and just were not equipped to deal with the issues as other have stated about out of state investing.. 

There are others that do great no doubt... But the post here is about a young man with money and NO experience.  

[Eric Tait]

I would rethink the using the excess cash you make to go to principle reduction, that will be dead equity that could be used to help you acquire more assets.  If you bank on $300-$500 a month per asset after all expenses, then you just determine how much you need to make a month to cover your living expenses and see if buying one a year gets you there, if not accelerate the pace. Then factor in can you stomach managing that many different assets.  If you can, go for it.  

[Martin Yung]

@Jay Hinrichs 

You are a great source of info with your vast amount of experience. You have seen more failures than success in out of state turnkey investment, that's a great source for us newbie too. Most people will ask and focus on how to success, let's focus on why they fail? So that we can avoid those mistakes. 

From the 200+ foreclosure that you have help, let's dig deeper into why they end up with that? 

A few possibilities I can think of: 

1. They buy because it's cheap, here I mean the area is cheap, bad neighborhood, not that they have found a great deal at great area. 

Solution: Location is the fundamental in RE investment. I think is best to aim something above $100k in good neighborhood.

2. They are underfunded. They do not prepare and expect big tickets repair, for example, after a few months collecting rent passively, the roof collapse, the boiler stop functioning and they do not have the money to repair it, so the tenant leaves and they are stuck with the fixed cost of holding properties and they just want out. 

Solution: Have extra emergency funds before jumping in. Use the strictest inspector, buy newer build homes, say after year 2000. 

3. The property managers couldn't deliver. 

Solution: Make sure there are a lot reputable PM that are willing to manage your property before buying, interview them. If your PM fails you, switch to another one. 

4. They perform eraser math and believe in the pro forma provided by the sellers. 

Solution: I prefer for the deal to survive the 50% rule. 

Anything else Jay? 

[Jay Hinrichs]

@Martin Yung   you got the high lights. the other major issue.. Is house goes vacant and within  a week is broken into and stripped of all appliances  Hvac copper condenser unit. Hot water heater.  then a few walls kicked in and front door kicked in.

Just look at the areas your investing in if you see bars then you need to be careful.

Is the condenser units caged ?  stealing those is a sport out there in the mid west north east and deep south.

But other than that I think you got the idea

[Jay Hinrichs]

@Martin Yung   Plus this is not Singapore they don't cane people in fact they rarely catch those who strip these houses... 

I have an AU client that has a house in Indianapolis that has been stripped 3 times in 24 months.. I personally have had probably 20 of mine stripped over the years.. Its a real issue.  Never did get anyone arrested..  a lot of the times it the neighbors... they know when its vacant they steal everything sell it .... and your stuck...

So if you get up into the higher priced properties you can mitigate this and or eliminate.. Low end rentals in those areas and this is very common.. it really is whether those who sell them want to admit it or not... 

[Ryan Mullin]

Originally posted by @Jay Hinrichs:

@Martin Yung   Plus this is not Singapore they don't cane people in fact they rarely catch those who strip these houses... 

I have an AU client that has a house in Indianapolis that has been stripped 3 times in 24 months.. I personally have had probably 20 of mine stripped over the years.. Its a real issue.  Never did get anyone arrested..  a lot of the times it the neighbors... they know when its vacant they steal everything sell it .... and your stuck...

So if you get up into the higher priced properties you can mitigate this and or eliminate.. Low end rentals in those areas and this is very common.. it really is whether those who sell them want to admit it or not... 

3 times in 24 months...    thats horrible..  I'd be interested to know where it is, just out of curiosity.   The other thing I would bring up is a bad GC.  If you have a GC that doesn't pay his/her sub contractors you can kiss everything in your house good buy.  Usually when I have seen repeat offenses like this its an "inside job".  and Jay is right...   they never get caught.   and even if they do get caught in the act its pretty easy to tell the cops "I'm the owner or Im the contractor...   cops never check paperwork and they never follow up on crimes like this.  

[Ali Boone]

@Jay Hinrichs

You don't know how I make a living. I do refer for turnkey companies, definitely. But that's because I think they can be great opportunities for people.

I don't recommend out-of-state properties because I can make money from promoting them. I promote them because I believe in them. And I don't promote the majority of them, only the ones that I think are really high-quality and worth the investment, and ones that are safest for anyone with little to no experience.

You have the chicken and the egg backwards on this one.

[Karen Margrave]

@Ali Boone Don't you think it would be a little better if when making your posts you disclosed that you make money from selling, or referring to others to sell, turn key properties?  I assume you aren't a licensed broker, and are able to get around the laws on disclosure that many of us are required to adhere to, but it seems by not being upfront on that issue, you may be opening yourself to a lot of liability. Just an observation.

[Jay Hinrichs]

@Ali Boone   pardone  I have seen your kind come and go for the last 20 years I know exactly what you are and what you do.. Its no big deal to just pop on your website and see .. Your a hired gun selling properties for who ever will pay you.. End of story there. Nothing wrong with that other than you only give one spin and your post are frankly exactly the same each time anyone mentions turn key.. I can quote your posts 

" I live in LA were I choose to live but I only invest out of state because there is no cash flow in southern CA." you send the exact same message on almost 95% of your posts your posts do not do anything other than promote your business which again is your right on this site.  But those that read often will no doubt see through the smoke screen you put up.

@Karen Margrave   makes a great point when I asked you if you were licensed you said you were a Licensed CA agent.. But when one looks at your website there is no disclosure that you are an agent.. As an agent its against the law to put up a website without naming your brokerage and the fact that your an agent.. So to be fair to BP nation why don't you tell us why you don't disclose that your an agent and or show us on your website where you disclose it.. and if you are an agent why don't you disclose it on BP.

Now there are many that do what you do no doubt this whole thing about license and no license has been bandied about on BP .. I am not the license police.. but again your credibility gets shot when you make these kind of statements and the way you post, like your some friend of the BP members who just Happen to steer them to ONLY the people that pay you.. thats the reality of who you are and what you do at least from your public on line persona..