What would the experienced investor do? CA and out of state

Question

Hello BP,

I'm curious what the experienced investor would do in my situation. All opinions and advise are appreciated!

My situation:

I'm getting ready to move out of my first purchase in Sacramento, CA. The property was purchased with 5% down as a primary residence, and I've house hacked to keep my holding costs relatively low.

A good amount of equity has been built through the rehab process, and a bit of luck due to increased housing prices in Sacramento. The supply of housing is down in the Sacramento market, and we've seen large increases in both the prices of homes and rent. My understanding from online research, and reading the BP forums, is that Sacramento should see continued increases in rent, and likely appreciation as well.

If I were to rent my current property, I'm expecting to net $100-200 a month (after PM takes over) depending on the rental price. I've had three PM companies walk the property, and they estimate the rent would range from $1600-1800/month. My PITI will be covered if it rents anywhere in that range, but there is a possibility that I don't net money each month. The variables in this case are landlord insurance which I've only had quoted from my current provider, and potentially the cost of a gardener (if it is not included in the rent somehow).

I am fully aware that I'll incur both short-term and long-term capital expenditures. Which, would be a burden to cover with little to no cash flow.

However, I would have a rental property in CA, with an estimated ARV of 315K (this is a conservative number) -350K on the high end. The amount owed on the property will be about 239K when I move out. So, my estimated equity in the property is 76-111K in current market conditions.

*I've had two successful realtors in my area provide me with estimated ARVs, but only one walked the property. Regardless, I feel pretty good about the numbers.

If I were to sell my current property, I'm estimating I'd net 15-30K profit. This is after rehab costs, holding costs, real estate fees and capital gains tax. I'm basing this of a Seller's Net Profit sheet that an agent mocked up for me, at a sales price of 329K.

My Options:

A) I could rent my current property out, move in with family, and save my monthly salary as I watch the market for 6 months or so. This would allow me to save enough funds to purchase another primary residence in Sacramento, for 250-300K should I choose. The issue is, there isn't a lot on the market, but there are still houses to be purchased if you really look.

I would then have a primary residence, and a rental. Which, would give me the tax benefits of both. Also, a relatively large amount of equity (to me anyway) in my rental, and the opportunity to build more equity in my new primary residence. I would repeat the process of buy, add-value, house hack and then determine to sell, rent or hold based on the numbers.

B) I could stay in my current property, with my built equity, and not fight to find another deal in my current market. Then, use cash, or a combination of borrowed equity/cash to put a down payment on an out of sate rental that is far less expensive, and would cash flow. I have never purchased a property out of state, and I do not have a target market.

My Question:

Given the information and options above, what would the seasoned investor do in my situation? Please keep in mind that I'm a young investor, with minimal capital in the Sacramento, CA market. I'm also conscious that our market could be reaching a peak soon, and that the US economy is likely in for a shake-up.

Thank you in advance for any advice/opinions!

Amit M. · Answer

I agree with what Account Closed said. You don't need a PM for a SFH near you!  On the contrary, you should learn to manage properties yourself. If I were you I'd try hard to stay in your area. CA properties have much better future value potential than most other states. You'll get to know your local market well too. Maybe consider 2-4 units as your next move. Should cash flow better than SFH. You can live in the smallest unit and rent out the rest. Focus on finding a great value add deal. Take your time. You can always wait and buy later if no good deals come your way in 2017. And don't sweat the tenant friendly laws of CA. You think Sac is bad?  Try San Fran!  You'll get used to it, and learn how to select good tenants that you can get along with and manage effectively. You're on the right path in your local market imo.

Account Closed · Answer

Anyplace there is a deal! Ha. But ideally, I'm looking for a property in Oak Park but so is everyone else.

Account Closed · Answer

What's your ultimate goal? Do you want to build up a stable of properties in Sacramento? Interested in only a couple of rentals? Answering your "why" would lead you to your preferred path.

In order to invest without a ton of capital, you have to hustle. So if I were you, I would move in with my parents, rent my property, and manage it myself. I would also write into the lease that the tenants are responsible for lawn care. That solves the cash flow problem and allows me save like crazy for the next opportunity. I say that, because my goal is to acquire as many units as I can in Sacramento before it turns into San Jose!

Account Closed · Answer

@Eric Upchurch if you don't mind me asking, where are you buying out of state to build your portfolio? You definitely have the right mindset Eric. $20,000 per month net passive income is a hell of a goal, but it sounds like you're committed and putting yourself in a position to achieve that.

Account Closed · Answer

@Eric Upchurch Thanks for the advice and sharing your experience/situation! Ideally, the scenario you painted is exactly how I should proceed with this property. I've said it to myself over and over again. However, I'm getting that analysis paralysis of an inexperienced investor, and a case of the "what ifs."

For example, I don't really have a lot of relatives or friends out of state, or people who could check on my properties. I know there are turn-key companies and PMs, but we've all heard the horror stories. A lot can be prevented with due diligence, but I'm still apprehensive.

Also, I have no plans to leave Sacramento anytime soon. What if the inventory remains low, interest rates go up, rents continue to rise, and I start to become priced out of my own market. That's my biggest concern, honestly. Especially since people from the Bay Area seem to be migrating this direction, with higher incomes and far more cash than I can compete with using traditional lending.

Eric Upchurch · Answer

Yes, you do have to commit. Analysis paralysis will kill any investor's success. I know what you mean about pricing yourself out. We are about to sell our small ranch in Danville for $1.2M so we can cash out our chips from the past three hacks. Yes, that is crazy. The Bay is crazy. And it's a hell of a commitment from us to take our proceeds, rent locally (we have two little kids), so we can start building our investment portfolio. I'm not planning on getting priced out (though it's a risk I have to take) because I'm counting on success and making MORE passive income than I would have otherwise. So, like I said, I'll buy a house for myself again once my tenants are making me enough dough to pay for my mortgage. I'm also planning to rent a place that is nice, so that I don't feel like I'm taking a step back to my college days living in a dilapidated garage. My initial goal: $20,000 monthly net passive income. And I'm going to do it. FYI, all our friends think we are crazy and don't know why we keep moving. Answer: we have a plan they don't understand. We aren't running the rat race.

What would the experienced investor do? CA and out of state

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