How would you invest $70K

Question

Hello all,

First off, I would like to say that BP is such an amazing community. Before a friend told me about BP, never in my wildest dreams would I imagine such an amazing resource exists, where experts in real estate give sound advice out of joy in helping others. Incredible.

I’m getting myself ready to embark on a journey in real estate, and currently I am gathering as much information as I can (before I can even get to the “analysis paralysis” stage). I’ve already read a few books (including the BP books), read a lot around BP, and I am waiting for the BRRRR book to come out. Here’s my novice question if anyone would care to pass on some wisdom: $70K (hypothetical) to invest: would you rather buy and BRRRR in Midwest / southeast or would you rather use this as downpayment for a multi or SFH locally in my area (seattle)?

A little bit of background. I currently live in an expensive market (Seattle / Bellevue, WA). My long term goal is to buy and hold (and hopefully through BRRRR strategy - as I see it as a very efficient way to build equity and portfolio). Through time I hope to 1031 into larger properties until a certain “number” is reached. Hypothetically if I have $70K per year to invest, what would you rather do:

1. Buy OOS (Midwest/south east) with cash and BRRRR (and the headache that potentially comes with OOS - building a team u can trust - hello Clayton Morris..?, lack of appreciation potential, harder to sell / 1031, etc...).

2. Use it as downpayment locally each year and hopefully through value-add properties as well as appreciation can create equity for me to cash out refi and scale that way. And keep in mind that locally, investment amount would probably need to be higher than $70K... more like $100K for SFH or even more for multi...

I see the pro for OOS is higher cash flow, ability to perhaps scale a bit faster. But the downside is that often I see people post that buying “cheap” houses comes with “cheap” value - C properties are C properties, no way around it. People tend to poo-poo it. Appreciation will be low, and it would be harder to sell when / if the time comes (again, people point to that often times cheap houses sits on markets for months at a time, versus in seattle it sells like hot cakes)

Upside of local investment is that it appears “safer” - I know the market, I can drive to it to make sure no one “Morris”ed me, and when the time comes to sell / 1031 - hey, it’s easy, and it most likely will come with good appreciation (I know, appreciation is not guaranteed; it’s icing on the cake).

What would you guys do? I often see frequent flyers like Jay Hinrichs post on here, and I say to myself, hey, one day I would like to be like that guy, and give back to newbies. I already do that in various aspects in life - helping others without expecting anything in return. And hopefully one day I can do the same in the RE world. Thanks a lot guys!

Account Closed · Answer

Edward- I'd be super cautious investing locally. You're not going to cash flow in your local market in most cases. If markets collapse, you're going to be stuck with a negative-cash flow property that is worth less than what you had purchased it for as well.

Don't get hung up on cheap property. C class assets in WA or CA are akin to C class assets in the midwest if you use the same scoring criteria universally. If you don't like C assets, then invest in B assets.

OOS is the way to go, but those risks you discuss are real. I definitely 100% disagree with local investing being safer, IMO, your risk of losing money is going to be higher in your market. I'm definitely partial to the out of state thing, I do it... you have to do it intelligently. If you adhere to a specific buying process, you're not going to fall for some crappy provider's overestimated pro-forma, or underrenovated property.

You've got to pick the right OOS market. You have to find a good property manager (I got mine through referrals). You need to run a conservative pro-forma. You need to get a 3rd party inspection to ensure the property is in the condition you expect. You need to get an appraisal (esp if you're new, use financing) to ensure the property is of the value you expect it to be. The people that fell for the Morris Invest BS bought cash without inspections. Shame on that company for scamming folks... but those buyers did not do their own do diligence. Work with a provider that ENCOURAGES you to do your due diligence.

^^^if you stick with all of that, investing out of state suddenly becomes a lot less risky/scary.

Cassi Justiz · Answer

I would use it to buy "safe" first time home buyer range houses in the Midwest. (The OKC market is great for buy and hold, but not enough distressed inventory to BRRRR easily.)

If it were me I would invest in solid B areas or better with good schools. With 70k you could leverage it into 2 houses in the sub 150k range. Those types of houses are FLYING off the market here and I assume most other places in the midwest. If you buy bad houses, you are only going to be able to sell to other investors or cash buyers. If you buy solid first time buyer homes and list them in good condition, you will be able to move them in no time.

Alyssa Dyer · Answer

Account Closed completely agree, but some investors love it. To each their own!

Edward C. · Answer

Account Closed Looks like my developing strategy is very similar to yours! Very good point on C properties here is C property - and it requires higher entry price point at that around here. A few of my colleagues are in 3 cap, 4 cap properties that have break even flow... and they call it a win!! And that’s not even accounting for capex! Appreciation is the game they’re going for, and that just doesn’t sound right to me. Their investment philosophy is different than mine I guess - they’re “parking” their money, whereas I am trying to build wealth at a faster pace hopefully to partially retire in X years.

Another good point Elliot on conservative pro-forma: I’ve been talking with local RE investor friendly brokers, and a few brought some packages my way. When I asked them why allocations for property management / monthly maintenance fees aren’t in the pro-forma, I haven’t heard back from them since.

Thanks for the comment Elliott!

Jonathan McGee · Answer

@Edward C. Glad to hear you are doing your research before diving in head first!

I've had great success working with out of state investors such as yourself utilizing the BRRRR method here in Memphis.  Of course, you could just buy utilizing a loan with a down payment but in my opinion, if you have the cash to purchase up front, you have more leverage with the bank on the back end.

You could sink $15k into a down payment because the bank is only offering a certain amount on the loan towards your purchase and still have a hefty LTV. By purchasing a discounted property with cash and performing a light remodel, you are borrowing against your asset and with the right lender, you can get back 95% of your cash.

I know a lot of people get nervous about having a remodel going on miles away, but if you find a reputable local investment company that can get it done in house, it can be an easy process. If you go this route, just try to focus on deals that aren't needing over $20,000 to get in retail condition.

Good luck with your venture!

Edward C. · Answer

@Ryan Kuja that’s a good suggestion re: Olympia. I will def look it up. As well as west michigan. OOS markets I currently find interesting are OKC, Alabama, Huntsville, FLA like Jacksonville / Orlando (a bit pricier)... etc. Hopefully that is of some help to someone... If anyone else has other markets in mind please share if able.

Currently around here in Seattle/Bellevue, I feel like Buffett’s saying goes: “when everyone is greedy, you should be afraid, and when everyone is afraid, you should be greedy” or something like that. Around here I def feel like everyone and their mom is trying to be in RE right now and buying everything they can just to “get in the game”, even though the numbers don’t make much sense. Although i’m a novice but I’m fairly confident that this area is at or near the top of the housing market cycle.

Thanks for your comment Ryan.

Alyssa Dyer · Answer

Account Closed great advice!

I agree that OOS is the way, as long as you're working with the right team. And like he and others said you can still buy B or even A class OOS if that's the strategy you're most comfortable with.

Account Closed · Answer

@Alyssa Dyer

Thanks! I definitely tell my investors to stay away from A class though. More volatile when economies change and lower cash flow, kind of defeats the purpose of going out of state. They sure are nice though, for whatever that's worth.

Account Closed · Answer

@Edward C.

FRIENDS DON'T LET FRIENDS BUY 3 CAPS. They need to be absolved of their investing sins, lol!

Appreciation is a great reason to invest- if you can get it. I think buying in volatile markets in 2019 (read: anything on the west coast + most major cities nationwide) just means you're paying someone else's appreciation check while helping them get out at the right time before things get softer. It's happened before. I'm parking my money too, but why own a real property that requires active management if you're going to make less money than you would in an ally bank high interest savings account?

I'd be super glad to talk about a more detailed due diligence process with you or anyone that is considering buying rentals, it doesn't matter if in state or out of state. It's not THAT complicated, we just can't be emotional buyers that "want" a deal to work.

Thanks for the replies Edward!

Edward C. · Answer

@Ken Maddis that sounds like what I would be interested in doing, once I find the right market. If you don’t mind, perhaps I can PM you for further discussion? I have a few markets I’m currently looking at. Still quite a few months away, but just learning.

I’ve been looking at Denver and surrounding as well. It’s a great market and in the distant future it will be a market I would like to look for opportunities in for population growth, job growth, infrastructure, positioning for climate change (very long term) etc.. Thanks for your comment Ken.

How would you invest $70K

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