New member from Southern California looking for strategy advice

[Jeff Brys]

Hi BP!

I started listening to the podcast a few weeks ago and I have to say I'm hooked. The more I'm learning about REI, the more I think it's a good idea. But, I'm having trouble developing a strategy that makes the most sense to me. I think I'm interested in MFR as the rate of return seems much better. But, the MFR I can afford in LA are either in a warzone, or will require me to dump all my cash into it just to close the deal.

Here's some strategies I'm considering:

House hack a MFR in an up and coming neighborhood in NELA (Glassell Park, Highland Park, Cypress, Echo Park, etc) at a negative cash-flow (but still cost less than equivalent rent). Appreciation has been going bananas here the last few years, plus I've lived in these neighborhoods before and I like the vibe.

Invest in STR or Vacation Rentals. I was looking into Las Vegas as I have a friend who moved to LA and is successfully renting his 4bd home there. He has all kinds of contacts I could lean on to get me started and we could help each other out w/ management. However, new regulations look like a headache and it could be sitting vacant while I wait for approval from the city. I could possibly buy a condo all cash here so that may minimize vacancy expenses.

Purchase a MFR somewhere in the Inland Empire (looking at Corona or Riverside) or maybe even SFR or two to rent out. Only an hour and change drive to check on the place but may be too remote to manage ourselves. Paying a management company may eat up too much of the cash flow to make it worthwhile.

Invest out state. Maybe somewhere in the South or Midwest? Numbers seem attractive, but I've lived in So-cal all of my life so I really know nothing of other markets. Would definitely need a great remote ground team. Upside is I could likely afford several cash-flowing properties with the right financing. 

Looking for any and all input about the above. Also open to hearing about anything else I haven't yet considered.

[Ali Boone]

Hey Jeff! Just my two cents- (albeit I do out-of-state rentals myself, so my answers may be slightly biased, but the reason I do out-of-state stuff is because of my answers to the other ones)

House hack a MFR in an up and coming neighborhood in NELA 

I don't think these areas are as "up and coming" as you think. They are already extremely popular. I'd have to double-check, but I'm not positive the mortgage on them would be cheaper than renting. Yes, appreciation has boomed in the last few years, but that's actually a problem. It's put us closer to the top of the market with less room for potential. If we hit another crash, absolutely go for it. But we are far from the bottom right now so appreciation could be squeezed. You'd want to determine how much it would cost you to do this (don't forget to consider mortgage interest) vs how much you would need to see in appreciation for it to make it worth it. Hint- it will take insane amounts of appreciation.

Invest in STR or Vacation Rentals

Again, it's about the numbers. STR and vacation rentals have much higher expenses oftentimes than having long-term tenants. What would the numbers actually pan out to be? Last I knew, Vegas wasn't high on the cash flow anymore (it did used to be). And then there is the risk, as you mentioned, about the laws. Generally though, this option is much higher workload than a lot.

Purchase a MFR somewhere in the Inland Empire 

It won't cash flow.

Invest out state.

This is your best, most solid option for cash flow. Lower purchase prices, less hassle by having long-term tenants (vs STR), and higher cash flow. Overall higher cash-on-cash returns.

[Eric Aboutboul]

@aliboone seems like great advice. I am in a very similar boat as @Jeffbrys living in SoCal and trying to get the most bang for my buck. I've observed out of state markets through some investor friends and just fell out of escrow in New Jersey. The returns are much higher but the appreciation is very limited. Do you recommend any particular areas that may offer a good return and decent appreciation?

@Jeff Brysundefined

[Sean Autry]

Following this discussion to see what feedback you get.

I have a MFR in the high desert (first investment). Cash flowed nicely for several months, but recently I've had tenant issues (inherited tenants). Tenant base is sub-par up there, but I'm still optimistic we can find good ones and keep this place cash flowing.... Point of my saying that is cash flow can be found here in socal if you can stomach the more distant towns and the headaches of a C-class area.

On the other hand- I myself am curious about out of state... being a newbie in SoCal (a very expensive state), I'm in a similar boat as you... eager to hear what others have to say.

[Simon Ruiz]

@Jeff Brys @Eric Aboutboul @Ali Boone @Sean Autry Whats your guys opinion on REITS as another strategy to itself? There is a thread that went a bit more in depth on REITS >>> Data proves REITs are better than buying real estate? <<<  

[Ali Boone]

@Simon Ruiz I would never say never, but I've always been a bigger fan of real property myself. More control, more financial benefit, etc. But less passive, so it really depends. Here's more on my thoughts on it (old article, but still applicable)- 

https://www.biggerpockets.com/renewsblog/2015/01/2...

Depends a lot on the difference in returns offered too.

[James Wise]

Welcome to BP @Jeff Brys

[Amit Kumar]

I'm brand new to this and in the so cal market as well. The numbers make no sense. I was interested in out of state properties but the process seems a bit daunting. Do you fly out frequently to check/purchase properties? How do you find the team? Just start out with turnkey? I've see that Ali Boone does this regularily. Can you share some advice please?!

[Ali Boone]

@Amit Kumar Sure, happy to help. But maybe we start a separate thread so we don't overtake this one since he's asking a different question?

[Aaron Mazzrillo]

The numbers make lots of sense. More sense than you'll find in any out of state con game. You just have to stop looking for deals in Homes & Land magazine and get out in the streets. You need to get in front of people. Skip the agents. Those sellers are already corrupted. I'm not even sure how many rentals I've purchased right here in SoCal this year. No agents. No banks. Talk to sellers. Build relationships with private lenders. That is how the pros do it. Agents, banks and out of state are all a waste of your time and money.

[Jeff Brys]

Thanks everyone for your responses.

@Ali BooneIn regards to out of state investing, how do you even begin researching other markets for this? I mentioned Vegas because I know people there that are having success and it's a city I visit all the time. But these other markets in the South and Midwest I know literally nothing about. Would they not be the first to go belly up if we have another recession? This is what worries me the most.

@Sean Autry I feel like the only areas that do cash-flow are these C-class 'hoods you mention. I don't like the idea of sub-par tenants, especially with my first property. I was thinking maybe Riverside or Redlands near the Universities. With some nice upgrades, I would hope to target staff, grad students, or even the more responsible undergrads.

I also understand the STRs are more work intensive but the returns can be much higher. The other bonus is low cost vacation options for the fam. I considered local destinations like Big Bear and Mammoth, but it seems too seasonal and I feel like I'd probably have to pay the mortgage out of pocket for half the year.

[Tom Ott]

Originally posted by @Jeff Brys:

Hi BP!

I started listening to the podcast a few weeks ago and I have to say I'm hooked. The more I'm learning about REI, the more I think it's a good idea. But, I'm having trouble developing a strategy that makes the most sense to me. I think I'm interested in MFR as the rate of return seems much better. But, the MFR I can afford in LA are either in a warzone, or will require me to dump all my cash into it just to close the deal.

Here's some strategies I'm considering:

House hack a MFR in an up and coming neighborhood in NELA (Glassell Park, Highland Park, Cypress, Echo Park, etc) at a negative cash-flow (but still cost less than equivalent rent). Appreciation has been going bananas here the last few years, plus I've lived in these neighborhoods before and I like the vibe.

Invest in STR or Vacation Rentals. I was looking into Las Vegas as I have a friend who moved to LA and is successfully renting his 4bd home there. He has all kinds of contacts I could lean on to get me started and we could help each other out w/ management. However, new regulations look like a headache and it could be sitting vacant while I wait for approval from the city. I could possibly buy a condo all cash here so that may minimize vacancy expenses.

Purchase a MFR somewhere in the Inland Empire (looking at Corona or Riverside) or maybe even SFR or two to rent out. Only an hour and change drive to check on the place but may be too remote to manage ourselves. Paying a management company may eat up too much of the cash flow to make it worthwhile.

Invest out state. Maybe somewhere in the South or Midwest? Numbers seem attractive, but I've lived in So-cal all of my life so I really know nothing of other markets. Would definitely need a great remote ground team. Upside is I could likely afford several cash-flowing properties with the right financing. 

Looking for any and all input about the above. Also open to hearing about anything else I haven't yet considered.

Hello and welcome! If you are looking to invest out of state, I would suggest looking into a company who knows the market pretty well. Since you only know CA, you want someone who can give you some good advice about other markets. You are bound to get a decent ROI outside of CA for sure!

[Sean Autry]

Aaron Mazzrillo , there's no question you've got the SoCal market figured out. I've seen a lot of your posts. They give us SoCal rookies confidence that it can be done. But a few questions:

Are your recent purchases in CA multis or SFR?

Are they cash flowing (the properties you've bought this year)?

Large cash outlays to acquire (and make them cash flow)?

Finally, what areas?

[Laura Z.]

Following for similar advice...

Looking for my first SFR deal so I'd love to connect with other newbies to exchange ideas.

My criteria for looking for a location is growing population so I was loving Bend OR but now my husband and I have added tax incentives so that's pointing us toward Nevada (Reno) or maybe Utah. 

[David Faulkner]

House hack, but only if/when you can find a great deal where you can add some sweat equity. This is the option where you have the most control over your financial destiny ... in all the other options, you need to put your financial future in the hands of others and rely on them to serve your best financial interests and make or break the investment for you.

[Aaron Mazzrillo]

Originally posted by @Sean Autry:

Aaron Mazzrillo , there's no question you've got the SoCal market figured out. I've seen a lot of your posts. They give us SoCal rookies confidence that it can be done. But a few questions:

Are your recent purchases in CA multis or SFR?

Are they cash flowing (the properties you've bought this year)?

Large cash outlays to acquire (and make them cash flow)?

Finally, what areas?

Are your recent purchases in CA multis or SFR?

 Combo of houses and multis. No larger apartments (5+), but I'm not fishing for those. If you seek, you shall find.

Are they cash flowing (the properties you've bought this year)?

I pay my private lender 10% interest only so the cash flow may or may not be there day of close, but I'm capturing nice spreads of equity so I am working on replacing those lenders with lower interest rate loans or definancing them with sales or less desirable properties and wholesale fees. 

Large cash outlays to acquire (and make them cash flow)?

Depends on the deal. I bought a great 2 bed house in a B+ neighborhood a few months ago for $201K and my lender funded $200K. I bought another house recently for $100K, my lender funded $120K and I rented it for $1,300. He then called and said because of what it appraised for, he'd be interested in putting a 2nd on the house. I declined. I'm in escrow now on a deal with multiple properties which will require me writing a check for around $50K to close it and more for rehab costs, but I expect it to cash flow north of $500/month. The last house I closed on I paid $210K and my lender funded $210K. It was already rented to a great tenant and the house is in great shape. It certainly isn't cash flowing, but it only cost me out of pocket $4,105 and another $1,000 to cut down all the queen palms the former owner put in the front yard. Once I fix the financing it will cash flow nicely. Until then, I still bought at a wholesale price so I have lots of upside if I need to unload the property. I could get a quick check by wholesaling it. I could get a small check now and more later by partnering with a rehabber and keeping the financing in place or if I have more time, I could just 60 day the tenant and rehab/sell it myself for maximum profit. It all averages out in the end and it takes more than a microscope to look at our market. You should be looking at it with binoculars.

Finally, what areas?

Within reasonable driving distance from my present location. Sorry, no free maps to the gold mines.  You can find deals anywhere. You just have to stop believing you can't and that they don't exist or everyone else is buying them before you discover them. Probably a deal within 10 minutes walk of your house. I know this to be true because a good friend of mine flipped a house on the street behind my house and on a good day I could have hit that house with a rock thrown from my backyard. I didn't even know there was an opportunity there - because I didn't look. Have you ever gotten out on the street and walked around for 10 minutes really looking at properties right in your neighborhood. Amazing what you'll find once you start looking around and not just zipping past everything on your way somewhere else. 

Recently I've started listening to The Strangest Secret by Earl Nightingale. I've owned it for years, but dusted it off and started relearning it again. Find it online and buy/download it. Do what he says to do when he talks about the 30 day challenge. See what happens for you. You've got nothing to lose.

[Ali Boone]

Well my main resource for market info is working with guys who specialize in market analysis and are way smarter than I am on it. Happy to share resources anytime. But in general, here are some things I look for- 

https://www.biggerpockets.com/renewsblog/2014/02/2...

May not be very helpful, but it may at least get you started in thinking of things to look out for. 

As far as which cities go belly up first...it depends on the market. Indianapolis, for example, is one of the most stable markets and declined significantly less during the less crash than most. (but on the flip side, it doesn't appreciate much either) Whereas other ones did tank more. So it's not so much region-specific, but more so market by market. Typically the amount of crash is fairly proportionate to the level of appreciation potential. The markets that appreciate the most often crash the hardest. The ones that don't appreciate much, don't usually crash as hard. So there are trade-offs (and of course that logic isn't accurate for every city). 

I'm not personally a fan of Vegas, primarily because the prices there right now have skyrocketed and cash flow is tight or negative now. But even in their heyday when there was insane cash flow, I never felt comfortable with investing there because Vegas is built primarily with only one main industry- entertainment- which is affected hardcore by recessions and crashes.

Hope that's a start for some help?

[Shelby Pracht]

@Jeff Brys I just wanted to pipe in about STRs. I can't speak for Big Bear or Vegas, but I have a few STRs in Mammoth that have been amazing! As far as seasonality goes, we actually grossed more in July than we did in January this year. The beauty of Mammoth is the proximity to Yosemite National Park. All summer long we have guests from all over that stay the night and then head into Yosemite the next day. We have consistently cash-flowed every single month since we started Airbnb-ing. I'm happy to share numbers, etc. if you want them. Just wanted you to know that you can definitely make the STRs work as good investments if you do it right.