In HCOL, first investment property out of state bad idea?

Question

I currently live in a HCOL area and after doing some math, it doesn't make sense to purchase a place to live in and rent out (house hack) vs. just getting a very cheap room in a shared house. For instance the 2bed 2bath condo that I rent now for $3,150 (with roommate) had an identical unit just sell for $850,000 with $675/mo HOA.  I would only buy if I was personally invested in a property for other than monetary goals.

I'm trying to put together a general plan of attack.  I currently have $30k USD (no debt) and plan on getting serious about buying a place when I have $50K probably around tax refund time. These are just high level ideas that I'm trying to see if they warrant any further time investment to determine viability, or if they are just horrible ideas.

First Case: I am originally from a VLCOL area, and my uncle has been flipping some lower income houses semi successfully(?) and could provide maintenance/boots on the ground. I was thinking about getting a duplex in this area (they can be had for very cheap, 50-75k USD for a decent one, down to 20k for iffy quality w/ roughly ~$350-$500/mo/unit rent) and using it to get me started. The area is not great, but there are people who rent, and I could purchase a place with cash.

Second Case: is to go to one of the few growing areas in that state where houses are more expensive but still very cheap compared to where I live now. I saw a few duplexes listed for 200-300k, I have a few friends from the area that could provide knowledge about the neighborhoods. My boots on the ground would be about 1h 45m drive away, so still reachable but no where near being in the neighborhood. There is also an elite college in the area providing constant tenants with capital.

With the out of state options my money goes a lot further, I don't feel like it would be much of a risk as I could always outright eat the loss in the first case, and in the second case I could pay the mortgage until being able to offload the property.

Julian Pilate-Hutcherson · Answer

I currently live in the SF Bay Area and my team and I have no interest in purchasing any properties in the area or in California anytime soon. Based on my research, I have not had much luck finding properties within the state that would provide the cash flow worth the money that would be put into a property.

I am a fan of your first option because:

1. If you purchase 1 hr 45 min away, you might as well purchase a property 3000 miles away for many times cheaper with a higher chance of cash flow.  I would suggest asking yourself what type of control would you gain by physically being at the location that you can't have over the phone or through a hired property manager or project overseer? If you bought a property in LCOL areas with decent cash flow, you'd be able to afford these hired hands. Unless you can find a once-in-a-lifetime deal, I see that it would very unlikely for that to happen in California.

2. You have a huge benefit by already having a trusted family member to serve as "boots on the ground" project overseer or property manager. This already gives you a competitive edge over other OOS investors.

3. Your capital will go so much further and you'll have a higher chance of cash flow in  properties areas in the midwest or the south. Strictly based on cash flow, these LCOL markets prove to be better than the majority of markets in California. Many California investors who are investing in California are losing money every month or barely breaking even after all expenses are paid. These investors are banking that they'll make their money back through future appreciation which can be seen as speculation/gambling not investing.

Chris Mason · Answer

In the SF Bay Area this comes up all the time. The answer is that you don't have to go all the way a 4 hour airplane ride away where you can't see or control anything for less than the cost of an airline ticket. The sweet spot is that 1-3 hour drive. What that looks like a call to me from someone with $200k to put down, often a biggerpockets.com member, asking more or less what you asked. My answer is to put 5% or 10% down on a local place to live, say Oakland or San Leandro, leaving you with 25% down on a 2-4 unit in Stockton, Sacramento, Vallejo, etc, where the cashflow is a little better but the appreciation not quite as great. So you end up with both an appreciation play (your primary residence, all those reasons you want to live in the are are ALSO things that drive appreciation) and a cashflow play (the triplex 2 hours away), with that same chunk of money. Nothing wrong with a little diversification.