How to strategize and buy my first rental property

Question

Hi Bigger Pockets members,

I'm a newbie investor looking to purchase my first income property this year.  I live in SoCal and as everyone knows home prices are high.  I have about $140k to invest and am debating if I should buy out of state in a lower priced market where I can have more cash flow or buy a 3-4 unit property using my 140k as my 20% down.  (It's hard to find a 3-4 unit in a decent area in the 700k price range)  If you were in my shoes, what would you do?  Open to different strategies, methods, and suggestions.  Thanks!

Len Grosso · Answer

Hi Jenn.   I'd like to offer some thoughts.

If you buy locally:  Chances are you would be investing for future gain since cash flow is (I believe) rare to near impossible.  Future gain via appreciation can work but at this stage of the Real Estate cycle it's probably very risky.

If you allow for out of state investment:  You have the luxury of choosing positive cash flow or better appreciation prospects if the area (MSA) is at an earlier stage of the cycle.  It's also completely possible to get both given research and discipline.

Naturally an out of state Property Manager takes up a lot of your cash flow but for me it's essential.  Find the very best couple of PMs there are in your target area.

I Live in NorCal and owned houses in Tucson and Portland.  I was very lucky to have bought at the right stage in the cycles esp. since I knew little about it at the time.

If you want more info about cycles in areas let me know but that's important to get.

LG

Jenn Orio · Answer

@derek boykin Thanks so much for your input.  Your suggestion of making a list of my 10 favorite people outside of California is a great idea because my biggest hesitation of buying out of state is "what the heck I'm going to do if something happens to my house".

Ali Boone · Answer

Hey Jenn! I'm also in SoCal. I would say that the most important thing is that you don't sacrifice where you live just to buy an investment property in SoCal--if wherever you buy here is a sacrifice. For instance, I live in Venice and absolutely love it. If I were to move somewhere where I could buy a MFR for $700k (you're right about where those places would be...no where fantastic...), I would be sacrificing living somewhere I love just to buy a property, and not even one that cash-flows. Appreciation later, maybe, but you certainly won't be pocketing anything each month even when rented at full capacity. Sooo...

I rent my apartment in Venice because that way I can live exactly where I want and I use my funds to buy out-of-state. One could argue I'm throwing away money on rent each month, but in actuality what I pay in rent is less than I would be losing each month if I were to buy an MFR--whether here in Venice which I would definitely lose more than that each month (and be paying more than that in interest alone), or somewhere in a cheaper MFR.

Just my opinion for myself on it, food for thought!

Michael Boyer · Answer

I like positive cash flow rentals, so I would first run the numbers on the pricey (700K) 4 plex in your area with the large down.....

You know the real estate there better than anyone and can look after it, owner occupy (even self manage)....

But it may or may not get close to penciling out (guessing not). But not sure the rents there. And with still decent rates, long am period, big down and top notch units in the right area could help.

I would check out the book Buy and Hold by Schumacher, a clever appraiser that became a big SoCal real estate investor (and best selling author), catching the post war run up in SoCal home prices. His philosophy for your market in his time was more "buy (the right location) and just hang on"..

But what do you do in the meantime (if you are cash flow negative) is always my question.

Appreciation worked it out for him, but who knows the real estate cycle.

Out of state? If I invested remotely and never saw my property (or rarely), I would probably go with a really good manager or probably more likely look at a more liquid alternative investment (e.g., index fund, REIT, ETF, etc)....

Best of luck

Preston Schmidt · Answer

I'm a 50 state lender living in Minneapolis and I would have to agree with Derek. Buying an non owner occupied investment property in Minnesota is great Rental Revenue. Home values are going up too. Let me know if you have any financing related questions I can help answer.

Joseph Tramonte · Answer

Derek, I'm also from Minneapolis , Jenn makes some good points. The biggest item I feel to consider is when you own property out of state is you do not have the luxuary of driving by and doing even the small prevantitive maintenance items that will turn into costly repairs . Your management company is not going to do this. They are only going to send out a repairman after the item is broke . Good Luck

How to strategize and buy my first rental property

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