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?

[Jay Hinrichs]

@Ryan Mullin   When Nick Virtucci was up in Detroit  ( prior to him coming to Indy and partnering up with Aaron) and I was funding his deals back in 04,05, I would make my inspection trips a few times a year... His GC was also PM.. they were on the front end of TK business . But to your point about the GC... Even back then before Detroit really had its issues.  when I would go to a home that was under rehab.. they had a retired cop there for a few hours each day he would go from house's to houses and the subs and their workers had to check in show ID and sign the clip board.. WHY because they determined many times it was the subs and or their workers that would put the items in during the day and come back at night and steal them... I mean they new what was there what the lock codes were and what exactly they could take.

As well as I have of course experienced the non payment of subs and the sub comes right back into the house and takes what ever they installed out... be it the roof windows HVAC other appliances.  In Oregon they just file Liens.. out there they just skip over the lien laws and take what is theirs and leave the home  in worse shape then they found it and the poor owner is really fubarred. 

[Karen Margrave]

@Ali Boone What bothers me about what you do, is that you set yourself up as an authority on real estate investing and the various markets across the country, then try to steer people that live here in California, and are just starting out in investing, to other states, not knowing anything about who they are, their experience, etc. (I'm not concerned about seasoned investors)

Buying a property just because it is cheap doesn't make it a good deal. The reality is, a property is only as good as the area in which it sits. In fact the first rule of real estate is Location, Location, Location.  A property in an area that has high demand and little supply, a strong broad based economy, low unemployment, and all the things that many parts of southern California has to offer (as well as many other areas of the country such as parts of Texas, New York, North Carolina, Oregon, San Francisco bay area, etc) is a much better investment long term. Many times, the appreciation over the years will easily outweigh the cash flow realized on the cheap properties in less desirable locations, and be much easier to sell in the future, (and yes, you can bank on appreciation based on the historical data of an area).

Most new investors may not know a lot about real estate, but they do know what they pay for rent, where things are in their local area, which neighborhoods or parts of the city are good areas without a lot of problems, etc. Going out of state to invest they are dependent upon the opinion of someone else, that has a financial stake in their decision, telling them a property is a good deal as most of them cannot afford to fly around and check out the properties themselves. Maybe in California they cannot buy as big a house, on as large a lot as they might someplace else, but, they may be able to buy a condo, close to the beach, or a university, etc., and there are still a lot of opportunities in California. Also, every California city isn't in the same boat as the coastal areas of southern California with high prices, California is a huge state. 

No offense Ali, though your education in engineering is very impressive, you don't have the experience in real estate to be an authority on all the markets in the country, and you haven't been through enough of the cycles to know how each area can be affected by various events. In fact, I don't know anyone that knows all of that. As they say, "all real estate is local", and that's why it's very important for investors to do their own due diligence on whatever market they intend to invest in. 

[Matt R.]

Sidebar Logan. 

If you hold for let's say 10 years. The OC property will have appreciated perhaps $1000 a month would be a very conservative guess. Now that is 120k and a cash flow home typically won't kick out that much in just flow alone...or we know it won't. That does not account for the rents going up in OC.  Be sure to compare math to cash flow areas in the big picture scheme of things because the difference could be like night and day especially if OC is in the equation. It is like a rare diamond that way. Thanks 

[Jay Hinrichs]

@Martin Yung   I will be in Singapore  ( for a wedding) later in the year maybe you could come to my hotel and I would buy you a coffee and we could discuss in depth what someone like you or the young man who posted this originally needs to take into consideration prior to making an investment half way around the world and or for our LA based first time investors all the way across the country... 

@Logan Allec   And I happen to Agree with Karen that one when starting out is best served trying to buy as close to where they live as possible.. it mitigates the learning curve.  Whether you live in Memphis  then you should buy in Memphis not  Southern CA.

Or you live in Chicago then invest in Chicago.. If the deals are so fabulous in Philly then why are the locals not snapping them all up why are these Philly TK guys having to market in CA. and use front people like Ali to do this.. Simple answer CA. investors will Pay MORE for the exact same asset as a local will.. its just reality and capitalism at work

There is a significant poster on this site who I think did a podcast his name is @?davidkurlac or close to that.. He has a lot of experience I think in Philly or Baltimore you may want to colleague him and get his opinion on the deals that are marketed in LA by folks like Ms. Boone... I think Mr. Kurlac will give you a better perspective on that particular market as opposed to someone who lives in LA.. just seems logical to me.

[Jay Hinrichs]

@Logan Allec the other thing that gets into advanced investing is that when you buy on one of the top markets in the country were you can actually sell an asset for true value on the open market, and sales through a marketing person in LA is not true market.. true market is off of the MLS in any given city..

So with west coast investing  or the other  markets that are not relying on TK companies to sell a large % of the rental homes.. Like CA.. Like a Denver Like a Austin  Like a Charleston  Like Oregon and Washington  etc etc. you set yourself up for the chance for nice appreciation which you can roll tax deffered in a 1031.

I see all the time on this site those wanted to know how others rolled up and are now owning lots of units or nice big multi family.

Let me share one of my friends investing history here in Portland.

bought a 4 plex sold i 2 years later and made some gain rolled that into an 8 unit sold 8 unit and bought a 20 ( realize each transaction was a 1031 so no tax paid and each transaction was market driven for cash) sold the 20 and leveraged into a 51 unit just out of Salem Oregon.. now she has a 2.9 mil dollar asset.. ( now here is her only stumble and I advised her not to do it) she sold that within 18 months for a 500k profit and 1031 into a 300 unit in Oaklahoma city... well short story there within a year of not knowing what she did not know and only having knowledge of Portland renters who pay rent with no games . the Oak property just about broker here.. bad tenants bad management theives etc. she ended up having to move there and run the property herself.. was there a little over 4 years and last year as we had a heated up Multi market as we know she sold got her principal back which that only happened because she lived there and her and her daughter ran the property no PM... anyway she did another exchange so she could roll her equity out tax deferred and bought a nice 30 unit in North Portland for a 5 cap which is money she can take to the bank with no mid west drama.. And she spends half her time in Maui now at least thats were I see al her face book pictures... But here is a investor who started small and now has cash flow in multi by rolling up her west coast properties your not going to do that buying SFRs one at a time in most cases and especially those in the inner big cities were everyone says there is only CASH flow there is NO appreciation you need appreciation to make RE investing worthwhile in my mind.. If you want cash flow with no appreciation unless you have a clear cut way to own 50 to 100 of these low end SFR's over a fairly short time span the I just don't see the point... risk is far to great at least in my mind.

[Matt R.]

Geez Jay, it is like having an Ace in the hole with your sage advice. I could not imagine going against it. The whole exit part you mention is nearly reason alone to consider location more fundamentally. thanks for sharing. 

[Logan Allec]

Thanks, all.  This has all been very eye-opening for me.  I wish I had known about BP two years ago when I was seriously considering buying multi-family in SoCal.

After reading and re-reading every single post on this thread, my tentative plan is to pursue both of the options I originally laid for myself, but making the priority finding and putting 3.5% down on an Orange County or San Diego plex and living in it for a year.  If I'm still kicking $###/month out the door every month, oh well--I'll still have extra cash flow each month to save/invest as long as I hold onto my day job--but passing up 96.5% leverage on potentially tens of thousands of appreciation potential in my own backyard seems foolish to me.  Thanks to @Jay Hinrichs @Karen Margrave @Matt R. -- any pointers in how I could get started since you all seem knowledgeable of the multi-family market in SoCal?  I can qualify for up to 800k based on receiving 4,800 in rental income from three units (assuming I live in one of the units of a four-plex).

[Matt R.]

Cool Logan, it is so easy to fall into the cash flow trap on paper when you compare to SoCal. The greatest part about bp is get you get to check yourself before you wreck yourself:) Keep us posted. Thanks, Matt

[Matt R.]

Can you do Long Beach, Whittier, Downey Inglewood, North Hollywood or even Van Nuys?

[Jay Hinrichs]

@Logan Allec   good luck let us know how you do... can you go up into the foothills a little and get a better price point ?  Temecula type area ?  just curious

[Kevin E.]

@Jay Hinrichs 

I love reading your posts on here as they always tend to keep my focus grounded and local.  Anytime I find my mind wandering afar for the out of state properties I find one of your posts that straighten me out.  I need to get used to the idea of building equity to invest in the right place rather than use what little I have right now for the wrong place that I could lose my shirt on.

[Karen Margrave]

@Logan Allec I hope you make it to the next meetup. Also, if you message me, I'll set you up with a MLS feed for multi units if you'd like. And in the spirit of full disclosure, I am a licensed agent and general contractor. However; thus far we have we have never actively sought out buyers/sellers, but use our licenses for us to purchase land, and market our own properties. Though we aren't opposed to working with BP members, that's not why I'm here.

[Brett Synicky]

@Logan Allec ,

Look in older areas of LA that have lots of character and are under a bit of a revitalization. For example Westchester (near LAX), is full of 2-4 units. Most of the homes were built in the 40's but there are some that have been completely rehabbed and a ton that are dying for it. There are also some older ones that have been kept up very well. You should have a Realtor set you up on an auto email that feeds directly from the MLS based on your criteria. Affiliate websites like Redfin, Zillow, and Trulia are not always accurate and don't always update in a timely manner. With the mls feed you could receive an email the second a property goes live.

Awesome that you've made some decisions about how to invest.  

Good luck!

[Matt R.]

Just thinking out loud Logan.....Is there anything in HB,CM, Garden Grove or Santa Ana?  Anahiem?. Maybe hook up with an OC wholesaler at Karens meet up too. Thanks 

[Jay Hinrichs]

@Kevin E.   Grass is not always greener unless your in the northwest  :)

it really depends on were your at in your investing.. and of course were you live you can invest within 30 miles of your home and hit the same numbers as you would buying from most TK companies... 

its not always like that though of course.. our area is a kind of a tweener when it comes to price to rent ratios... but we have one of the strongest rental markets in the entire country 

you do not need section 8 and all that comes with that.. your market rents will perform I have 2 rentals in WA left and I even forget I own them many times because the ease of running them  :)

[Matt R.]

Keep in mind also you can to upto 4 of these low down deals. You live in one for a year then get the next one...this accumulation strategy seems ideal in SoCal if you don't have kids in school.

[Matt R.]

I don't think that Escondido duplex example is avaliable now. But I do see good deals pop up there about once a month.....A couple months ago there was two out of date homes on a small hillside acre for 250k that fell out of escrow and was snagged in 24 hours. That had an arv of 500kish. 

[Logan Allec]

@Matt R. Temecula--yes.

My days when I can just up and move are numbered, so I might as well take advantage of them while I can.  I'd be more than willing to live anywhere within 1 hour (without traffic) from downtown LA, Irvine, or La Jolla (my company's offices), for 1 year (or 4, as Matt has pointed out), if it means a better life in the long-run.

[Matt R.]

Ok sweet Logan, I will keep an eye out personally in SFV. There is a 4 plex in Sherman Oaks going for 1.2 mil and the owner bought it for 12k in 1972 ...must have been right after the 71 quake...He will reap a whopping 100 fold appreciation rate for that move. That's you now!

[Albert Bui]

Originally posted by @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?

 From a lending point of view Logan you can qualify for about:

- Conventional: 575k loan assuming basic tax and insurance costs in OC and no mello roo taxes and HOA dues and no rental income offset

- FHA: approx 680k based on the above in conventional

If you have rental income the amount you can qualify for increases rapidly because the rental income adds to your ability to qualify. In an example with a 4plex where you live in one unit and rent the other 3, the other 3 units add income that aids you in qualification from a residential 1-4 units point of view.

The advice thats best for you depends always starts with what your goal and risk tolerances are because no one can get an in depth idea on these two areas from a blog article.

[Albert Bui]

Originally posted by @Matt R.:

Just thinking out loud Logan.....Is there anything in HB,CM, Garden Grove or Santa Ana?  Anahiem?. Maybe hook up with an OC wholesaler at Karens meet up too. Thanks 

 The cost to borrow right now is around 50 basis points per month assuming 30 year fixed 1-4 unit financing so about 500 dollars a month for every 100k. The problem with buy and hold would be that a 1.2M 4 plex even with 25% or 300k down would leave a loan of 900k X 50 bps per month = 4500 dollars + tax/insurance/utilities/repairs/vacancy/capEx might be a daunting task for a cash flow investment.

Do you know what the gross rents on those 4 units are? 

My guess would be 1700 each or 6800 gross income per month depending on unit bd/ba mix?

He might just break even or make a few hundred dollars a month.

Thoughts?

[Logan Allec]

Thanks, @Albert Bui , for reaching out. I think Matt's example was just to show the appreciation possible on a multi-plex in the right area rather than to let me know about a property I could seriously consider at the moment. But after we connect I'll be sure to run any FHA multi-unit financing questions by you.

@Matt R. -- really appreciate a set of good eyes out in SFV!  I actually like that area.  I will private message you my e-mail and phone.  Have a great weekend!

[Matt R.]

Originally posted by @Albert Bui:

Originally posted by @Matt R.:

Just thinking out loud Logan.....Is there anything in HB,CM, Garden Grove or Santa Ana?  Anahiem?. Maybe hook up with an OC wholesaler at Karens meet up too. Thanks 

 The cost to borrow right now is around 50 basis points per month assuming 30 year fixed 1-4 unit financing so about 500 dollars a month for every 100k. The problem with buy and hold would be that a 1.2M 4 plex even with 25% or 300k down would leave a loan of 900k X 50 bps per month = 4500 dollars + tax/insurance/utilities/repairs/vacancy/capEx might be a daunting task for a cash flow investment.

Do you know what the gross rents on those 4 units are? 

My guess would be 1700 each or 6800 gross income per month depending on unit bd/ba mix?

He might just break even or make a few hundred dollars a month.

Thoughts?

 That quad in Sherman Oaks is out of cash flow whack no doubt....I was just pointing out an absolute fantasy best case long run scenario. Now if you were thinking of a future tear down project for ten new $800k condos one day that is another story. Where I live just a few blocks away they just approved to build 24 condos on 3 lots with 14 apts. Currently those new condos would go for 600k+ ish. The guy bought the property for 500k in the mid 90s.

[Jay Hinrichs]

@Albert Bui   3.5 Down and break even in the CA market is a win in my book... much better than 3oo a month on an asset you probably can never sell for what you pay for it.

[Albert Bui]

@Jay Hinrichs  well everyone has their own book but from a financial planning perspective break even is high risk from a cash flow perspective any disability, capital expense, or emergencies could put a person in major risk of losing the property with out adequate reserves.

If an investor cannot sell the property for what they bought it at or higher then they bought it at the wrong fundamentals or didnt buy it right.