Advice for Investor in High Priced Market

[Andrew Kewley]

BP,

I live in the San Diego area and I'm looking to invest in cash-flowing rental properties. However, in San Diego, it seems nearly impossible to find a property that will cash-flow without a huge percentage down, and even then, the ROI won't be very good (if I'm missing something here, please let me know). Since San Diego doesn't look like a good investment market for me, I've been researching out-of-state investing (which I understand comes with it's own challenges), and specifically have been considering turnkey investing.

Please let me know what you think about this strategy for someone in an area where cash-flowing properties are very hard to come by, and please let me know any advice you have.

Thanks so much!

[David Faulkner]

If you cannot afford to buy in SD, that is one thing ... however, you should not go out of state because you think it will be more profitable, because it is highly unlikely that it will be in my opinion and experience as an investor both in state and out of state over the last 15 years.

The first thing to ask yourself is why is SD so expensive and other markets so much cheaper? Is it because all Californians are stupid and crazy as many others on BP would often seem to imply? Or is there something more to it? Could it be that the supply and demand fundamentals are stronger in CA because more people want to live here then there are properties to house them? If so, what impacts do you think it will have over your long term profitability investing in markets with weaker demand and greater supply relative to that demand? Do you think that markets like this will likely be more or less profitable in the long term? Why? If your tenants could buy a place for much, much less money than they could rent one from you, and yet they are still renting from you, then why would they do that and what does that tell you about them?

The second thing is to realize what advantages you have investing locally that you will be giving up by going out of state, and what giving up those benefits will do to your costs and risks. Locally you are more familiar with the market. Locally you can learn hands on. Locally you can start with much more favorable financing terms by house hacking your primary residence. Locally you can self-manage ... or even if you immediately or eventually choose not to self manage, at least you can keep a close eye on your contractors, PMs etc. to validate that they are doing a good job at what you are paying them to do. If something goes wrong locally, you can spot it more quickly and more easily step in to fix it. Locally you can find better deals below retail market. Locally you can more easily complete a remodel to force some appreciation. I could go on and on, but hopefully you get the idea ... 

Out of state you are putting all your money in a market you are not familiar with, where you will give up almost complete control over your investment, and will be 100% reliant on the kindness of strangers to keep your best financial interests at heart and make or break your investment for you. And why do you do this, because it is cheaper ... but does cheaper mean it will be a better investment?