First Time Purchase - In or Out of State?

Question

Hey BP,

I currently live in Washington D.C. and i'm 23. I can't quite afford these $500,000 houses for a 2 or 3 bedroom so I've got to look at alternatives. My lease expires in April so I'd rather make moves before then.

Should I, invest in the cheaper areas in Maryland like Prince George's County or Montgomery county. I can afford a nice looking 2 or 3 bedroom home for $300,000 with 5% down. The catch is that those areas are significantly less nice than Arlington, Alexandria, West DC. Higher crime, and I'm not sure if they will appreciate as nicely. Also, after doing the math it seems properties in DC are AWFUL at cash flow. I haven't found a single property that cash flows at least $100 after I would move out. I may be able to sneak by if I find a really good foreclosure.

Or, buy an out of state property in somewhere like Oklahoma city with 20% down but for $100,000. I can't reasonably expect at least $200 cash flow investing there. However this will deplete all of my capital and I will have to continue to rent.

Any advice from anyone would be appreciated! Should I look for appreciation in the DC market or cash flow elsewhere?

Mark F. · Answer

Hi Jamal, I'm big believer that investing for appreciation is pseudo gambling. Unless you're the one driving the appreciation (such as buying a beat up property for an extremely aggressive price, fixing it up, and causing appreciation that way), you're leaving it to the whims of a market that could turn against you. Prices have seen such a run up in areas like DC the past few years, so what's the guarantee they'll continue to do that?

Personally, I invest for cash flow because that's what's going to allow me to be financially independent. Plus, I have more control over driving that cash flow. If you do invest out of state, I would advise getting a great management company. If you're a newbie, you probably don't want to be trying to manage remotely. Yes, management costs money, but I've found that a great manager is worth their weight in gold.

Jordan H. · Answer

@Jamal Atwell

I considered investing out of state, but it seemed like a difficult way to learn. Even though DC is expensive, I believe there are opportunities, depending on your priorities. You could buy a 2-3br in College Park and rent the other rooms to students. Or find a rowhouse in DC and finish the basement as a rental unit. Young and no kids? Live in the basement and rent the main floors. You could look for a duplex and live in one side and rent the other.

In any case, the most important goal is to buy low. In DC, this often means finding a property that needs some work. Fortunately, the area has plenty of older houses in various conditions.

Mark F. · Answer

@Elizabeth Colegrove

Personally, I'm really leery of maximum leverage. Leverage is a double-edged sword; it can greatly multiply your returns, but it can also really wreck you. I'm glad things are working well for you guys, but I definitely prefer to have a healthy equity position in a property.

Steve B. · Answer

If I was near Hanford I would definitely talk to you about it.  You seem very knowledgeable on the area.  I do like to go to Mineral King on occasion.

Elizabeth Colegrove · Answer

@Steve B.

We are less than 75% LTV because the houses we buy have great potential that others can/won't see.  So once we fix the issue, we have a great asset. We have bought very well, doing short sales predominately and one foreclosure. We have bought terrific rentals in great areas, that have huge growth projection. We own in 3 different states. Yes individually the cash flow on the houses are "small" but together we make over $1500 a month in cash flow.

Yes one could alway go bankrupt, but we are REALLY careful.  We don't do partnerships and I am very Type A. So yes we could, but honestly, I have a ton of "back up plans" for all kinds of contingencies. So I personally think while we might not "seem" solid, we really are when you look at the nitty gritty. Life can always happen and without risk there is no reward. On the other hand, I am alway up for some constructive feedback and second opine. I would be happy to talk to you about them one on one. If you are interested.

Steve B. · Answer

@Elizabeth  Colegrove

Aren't you worried about going bankrupt if your market takes a hit being that your so leveraged with such low cash flow as it is in a strong market?

Bogdan Cirlig · Answer

I have a friend of mine buying hot near Baltimore and she's rolling about 30 properties so far. I'm talking to her weekly to compare notes and she's complaining she is limited by the leverage she can have with the cash at hand to buy more of those.

I can hook you up she is a Realtor too licensed in MD/VA/DC.

PS: Buy local your first deal. You will learn a TON from the first one and there's no amount of books to teach you what your money on the line can teach. Also find a reliable property manager unless you want to be the Landlord there (nice idea for first one, but the novelty wears out quick after few run-ins with tenants).

Elizabeth Colegrove · Answer

@Jacob Elbe  and I agree and disagree!:)

While we both agree that "local" is a relative as my husband is active duty navy, we buy at every duty station possible :) I would kill to buy one of those house with a VA loan (only ours are used up) or even a 5% own. There are so many great possibility for house hacking and adding value through fixing up. Yes your returns might not be great, but are they truly not great?

You buy a 500k house you leverage 0% because its a duplex and you rent the above out and live in the basement apartment. What are your returns really. We make great returns on low cash flow because we totally leverage. Now we have an asset that is paying itself off.

Jacob Elbe · Answer

@Jamal Atwell

I have to agree with Mark regarding investing for appreciation.  Of course it's nice to have and you obviously don't want to invest where you see depreciation, but there's just no way to know what will happen in the long term.  So for me, cash flow is what it's all about.

I know there are folks that do it, but overall this is a tough area for buy and hold investing.  Prices are high and rent levels just make it hard to cash flow.  I actually rent here and buy in other markets because of this.  I'm active duty military too, so even if I did buy locally now, it's going to be an out of state investment at some point!  So I decided to buy where the numbers make sense and I can achieve strong positive cash flow.  It has required a down payment, but I'm getting a much better return on my money then I could locally.  And the lower prices allow me to purchase additional properties sooner.

Best of luck with whatever you choose to do, but let me know if I can answer any questions for you!  I'm still learning, but I enjoy talking with other like minded people!

Jacob

First Time Purchase - In or Out of State?

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