Purchase A Home in CA or Invest Out-of-State?!

[Krystin Aversa]

I'm currently paying 3k/month for a one bedroom apartment in the Bay Area. I'm seeking advice on what would be a better investment option/smarter financial decision: to buy a home in the Bay Area, or to continue renting and use that money to buy investment properties out of state. Purchasing a home here would require use of nearly all of my saved capital for a down payment, and would increase my rent to about 5-6k. The train of thought with this option is that I am currently spending 3k/month on rent in someone else's pocket, money which could be going towards an asset that belongs to me with the benefit of principal pay down and appreciation, and I could still invest OOS it would just take a longer time (2-3years) to save the capital again. The other option would be to continue renting and to begin investing OOS this year, and with the money I have saved I could in fact purchase multiple properties in a different state (which I would intend to BRRR/hold as rental properties). Any advice/thoughts/perspectives are appreciated!

[Account Closed]

Hi @Krystin Aversa, I'm based in the Bay Area as well! I have owned my home in the Bay Area (Milpitas) and purchased out of state rental properties. When I purchased my home in the South Bay, I had to cash out all of my savings to pay for the down payment, and like you, my "rent" went up a lot. Thankfully, I was able to rent out the spare bedrooms of my house to my roommates which drastically reduced my cost of living expenses. 

Over the years, my out-out-of state rental properties have given me enough cash flow to live life on my terms, but when it comes to total net worth, my Bay Area property has appreciated so much over the past few years that it completely outweighs the net income from my rentals. 

Hopefully this helps, feel free to DM me or reply back on this thread if you have any more follow up questions.

[Jon Schwartz]

Originally posted by @Krystin Aversa:

I'm currently paying 3k/month for a one bedroom apartment in the Bay Area. I'm seeking advice on what would be a better investment option/smarter financial decision: to buy a home in the Bay Area, or to continue renting and use that money to buy investment properties out of state. Purchasing a home here would require use of nearly all of my saved capital for a down payment, and would increase my rent to about 5-6k. The train of thought with this option is that I am currently spending 3k/month on rent in someone else's pocket, money which could be going towards an asset that belongs to me with the benefit of principal pay down and appreciation, and I could still invest OOS it would just take a longer time (2-3years) to save the capital again. The other option would be to continue renting and to begin investing OOS this year, and with the money I have saved I could in fact purchase multiple properties in a different state (which I would intend to BRRR/hold as rental properties). Any advice/thoughts/perspectives are appreciated!

Krystin,

House hack! Buy a duplex!

Your monthly out-of-pocket might still be $3K, but you'll be paying down the mortgage and building equity through Bay Area appreciation.

Buying OOS is inexpensive and accessible, but so long as you're still burning $3K/month on rent, you won't get ahead. You need a lot of Midwest property to provide $3K/month in cashflow.

I live in LA and was facing the same dilemma. Now I'm house hacking a duplex.

Good luck!

Best,

Jon 

[Marc Rice]

@Krystin Aversa

Bay Area has some insane rent numbers. I’m currently located here in the Midwest (Columbus, OH) and have seen countess investors for CA buy properties over here to get better returns and cash in on the Midwest growth.

In regards to doing an owner occupied house hack in San Fran you’d need to bring at least 1-3% down which can add up quickly. If you’re strapped for cash for a down payment in San Fran you’ll still need 20-25% down for an investment property here as well. So that’s important to consider. But overall, 1% rules that cash flow could help off set your CA rent.

[Joseph Crunkilton]

@Krystin Aversa

Out of state! Go enjoy pro landlord laws and solid returns. 

[Zeke Liston]

Originally posted by @Krystin Aversa:

I'm currently paying 3k/month for a one bedroom apartment in the Bay Area. I'm seeking advice on what would be a better investment option/smarter financial decision: to buy a home in the Bay Area, or to continue renting and use that money to buy investment properties out of state. Purchasing a home here would require use of nearly all of my saved capital for a down payment, and would increase my rent to about 5-6k. The train of thought with this option is that I am currently spending 3k/month on rent in someone else's pocket, money which could be going towards an asset that belongs to me with the benefit of principal pay down and appreciation, and I could still invest OOS it would just take a longer time (2-3years) to save the capital again. The other option would be to continue renting and to begin investing OOS this year, and with the money I have saved I could in fact purchase multiple properties in a different state (which I would intend to BRRR/hold as rental properties). Any advice/thoughts/perspectives are appreciated!

 Hi Krystin, I would look into buying an OOS investing that will pay for your rent. Columbus, OH is a market with both great cashflow and appreciation. 

[Krystin Aversa]

@Sean Pan

Hi Sean, thank you so much for your insight! I was leaning towards purchasing a house hack in the Bay Area for similar benefits as you have described. My only concern is that the area has appreciated so much already, do you think there is still room for significant appreciation?

[Krystin Aversa]

@Jon Schwartz

Hi Jon, really appreciate your insight! I was leaning towards a house hack for similar reasons. You mentioned Bay Area appreciation, do you think there is still room for further appreciation in this market?

[Remington Lyman]

Originally posted by @Krystin Aversa:

I'm currently paying 3k/month for a one bedroom apartment in the Bay Area. I'm seeking advice on what would be a better investment option/smarter financial decision: to buy a home in the Bay Area, or to continue renting and use that money to buy investment properties out of state. Purchasing a home here would require use of nearly all of my saved capital for a down payment, and would increase my rent to about 5-6k. The train of thought with this option is that I am currently spending 3k/month on rent in someone else's pocket, money which could be going towards an asset that belongs to me with the benefit of principal pay down and appreciation, and I could still invest OOS it would just take a longer time (2-3years) to save the capital again. The other option would be to continue renting and to begin investing OOS this year, and with the money I have saved I could in fact purchase multiple properties in a different state (which I would intend to BRRR/hold as rental properties). Any advice/thoughts/perspectives are appreciated!

 You should buy in Columbus, Ohio

[Nicola Rutherford]

Hi Krystin!

Also a novice from the bay area here, not sure I have enough experience to answer your question, but I can say I relate! I was in a very similar quandry 6 months ago but I decided to buy local. I couldn't handle spending 30k per year on *someone else's* mortgage any longer! It is possible to keep your expenses lower if you are willing to look in Oakland or Richmond (or another suburban area) or if you manage to catch a great deal for your first property, they are out there if you have a good team and act quick! Especially if you're comfortable putting in a little work on the place. Even with just 3% down my mortgage in Central Oakland is hundreds less than 3k per month before renting any rooms. Thanks to those sweet, sweet low interest rates. 

If you've managed to save up enough for a deposit, you could just keep saving and have your next purchase be oos rental while you build equity in your home. 

If you had a killer rent situation like $700/mo it would make more sense to keep renting and invest elsewhere. Just my 2c! Whatever you do it sounds like you'll be taking steps toward future security and that's awesome. 

[Krystin Aversa]

@Nicola Rutherford

Hi Nicola!! Your insight and perspective is much appreciated. It’s particularly helpful to hear the personal experience (and success!) of someone in a similar situation. I share in your sentiment regarding the 30k/year going to someone else’s pocket, and that is really driving my desire to start local and, like you said, continue to pursue OOS investing after. With the numbers you mentioned I could actually resume pursuing OOS investing much sooner after purchasing a property here in the Bay Area. I will def expand my search to the areas you suggested. Did you work with an agent who you would be able to refer? I know a great agent can be all the difference in finding the right property. Thank you so much for sharing your experience, it really has been incredibly helpful and motivating. And congratulations on your home!

[Jon Schwartz]

Originally posted by @Krystin Aversa:

@Jon Schwartz

Hi Jon, really appreciate your insight! I was leaning towards a house hack for similar reasons. You mentioned Bay Area appreciation, do you think there is still room for further appreciation in this market?

In the long term, absolutely. I wouldn't buy in the Bay Area if you're planning on selling in a year, but if you have a five or more years on the horizon, I think you'll experience appreciation. 

[Nicola Rutherford]

Yes! I'm not sure if she's on here but my agent was Christine Holt www.xtineholt.com 

She was super responsive and negotiated me a great deal to close on my first offer. plus she's a lovely person all around! She also helped my best friends get the house they loved a couple blocks away from me last month.

[Krystin Aversa]

@Remington Lyman

Hi Remington, I’ve heard a lot of great things about the Columbus, OH market. I noted in your description you started your real estate portfolio through a house hack. Do you think this is a good strategy for me to implement as well, since I am currently paying 3k/month in rent and essentially receiving no added benefit/equity/appreciation for this, or are you suggesting I continue renting indefinitely while I am in the Bay Area and begin my real estate portfolio through OOS investing in a market like Columbus?

[Krystin Aversa]

@Nicola Rutherford

Thank you so much for the referral and insight! Looking forward to connecting with Christine to explore my options in this area

[Krystin Aversa]

@Zeke Liston

Hi Zeke, thank you for your input! When you say to buy an OOS investment that will pay for my rent, are you referring to the rent on the OOS property? I would likely need to own multiple (over 10, if cash flowing ~ 300/month) OOS properties to be able to cover my rent in the Bay Area. I have heard a lot of great things regarding both cash flow and appreciation in the Columbus, OH market; my dilemma is whether or not to pursue that first and continue to pay over 30k/year in rent for an apartment here while I invest OOS, or to purchase a property here and delay my OOS inverting for a bit while I regain the capital.

[Krystin Aversa]

@Joseph Crunkilton

Hi Joseph, thanks for your input. Do you think it would be wise to continue paying over 30k/year in rent while I pursue OOS investing first and more aggressively? There are so many incentives to OOS investing, such as the landlord friendly laws and great returns as you mentioned. But the idea of continuing to pay over 30k/year towards rent that is providing me no equity or appreciation is what is making this decision a bit more difficult

[Krystin Aversa]

@Marc Rice

Hi Marc, I appreciate your insight! My dilemma is that I can comfortably do a 5% down payment here, or 20% elsewhere in a market like OH, but not both simultaneously, so I’m trying to determine which is the better financial decision to set me up for a successful investment portfolio. I have considered investing OOS initially, and have read a great deal actually about the Columbus, OH market, but the concept of continuing to pay over 30k/year in rent while I live and work here in the Bay Area, with no equity or appreciation in return, is difficult to accept or view as a favorable financial position.

[Marc Rice]

@Krystin Aversa

I know in Ohio we have lenders who can do as low as 1% down on a “down payment assistance” for first time home buyers for a single family owner occupied. Maybe try calling 10 banks and see who has that program. Then buy a single family house and rent out the bedrooms to roommates. Then with the 4% other down payment you saved (5-1=4) buy some investment property in Columbus!

[Carlos Ptriawan]

I'm from Bay Area too.
To answer your question, the answer is AND. So I'm accumulating more CA properties and OOS.

However, here's the trick: if you want to purchase in Bay Area, there're still some cash-flowing market in bay area. They're in C neighborhood and you must manage it yourself. If you have experience with Property Management, it's easy and fun.

I develop my portfolio into Appreciation+CashFlow in CA and huge CashFlow in OOS.

One thing that you may need to do, to increase return you need to increase and understand your risk. If you don't want to buy house in C neighborhood and manage it, you'd better invest OOS.

Someone else mention to buy OO duplex in Bay Area, I run the number, in bay area OO duplex doesn't make sense because the caprate is sub 3-4 percent. (Price per unit 500k and can be rented only for $2500)

[Joseph Crunkilton]

@Krystin Aversa

A house hack would be great then. I wanted to do that but my Fiancee really did not want to so we did not. At least with ownership you can borrow against the house or use your equity. 

[Darius Ogloza]

@Krystin Aversa There are guys (this is mostly or exclusively a male thing) who spend a lot of time at the gym working on their biceps and pay no attention to their legs.  They develop huge biceps but maintain spindly legs such that they come out looking like a cartoon character.  When faced with your issue, I look to this analogy.  Owning a home is like developing a good set of legs.  It's your foundation.  As a homeowner, you will learn a lot about houses, which, in turn, will make you a better investor in the future (because you will develop a better sense of the systems that comprise houses and how real estate is financed), etc).  And yes, you can try hacking a bedroom or two to reduce the total payment if necessary.  

I have been investing in real estate in the Bay Area (and elsewhere) for almost 25 years and the performance over this time between our Bay Area assets and out of area assets simply has no comparison in terms of genuine wealth building. As to what will happen in the future, no one has a crystal ball. No one can guarantee anything. However, it may be helpful for you to know that when we bought our first SFR in Mill Valley in 1997 for a price in the mid $400,000's we were absolutely convinced it was the top of the market and that we were sure to lose our investment.

[Jay Hinrichs]

Originally posted by @Darius Ogloza:

@Krystin Aversa There are guys (this is mostly or exclusively a male thing) who spend a lot of time at the gym working on their biceps and pay no attention to their legs.  They develop huge biceps but maintain spindly legs such that they come out looking like a cartoon character.  When faced with your issue, I look to this analogy.  Owning a home is like developing a good set of legs.  It's your foundation.  As a homeowner, you will learn a lot about houses, which, in turn, will make you a better investor in the future (because you will develop a better sense of the systems that comprise houses and how real estate is financed), etc).  And yes, you can try hacking a bedroom or two to reduce the total payment if necessary.  

I have been investing in real estate in the Bay Area (and elsewhere) for almost 25 years and the performance over this time between our Bay Area assets and out of area assets simply has no comparison in terms of genuine wealth building. As to what will happen in the future, no one has a crystal ball. No one can guarantee anything. However, it may be helpful for you to know that when we bought our first SFR in Mill Valley in 1997 for a price in the mid $400,000's we were absolutely convinced it was the top of the market and that we were sure to lose our investment.

YUP  there is no way that OOS drip income over a 20 to 30 year hold will do as well as we have done in the Bay Area and Oregon comes close to the multi millions in appreciation we have made over those years.. you would have to start out with 50 plus homes at 200 a month to get close..

and we all know 200 one month of positive cash flow is 200 of negative with one bad tenant..   plus with owner occ when you rack up that 500k of equity and your married its TAX FREE that is by far the best tax treatment in America .. !!! 

I like the foundation analogy.. put a roof over your head so you have a solid base to work from. U have to live somewhere and let that property at the worst over 20 or 30 years probably have it paid for and enough appreciation to darn near retire on that one house.. We see it all the time in Oregon and Nevada with CA transplants .

But if you want to go out of state I like one simple rule.. figure out the median house price of a given area and buy at that price point.

Don't go into a market with a 150k median price and buy a 75k house thinking your going to get rich and retire :)  U want to buy in neighborhoods that are primarily owner occ .. NOT primarily rental..  as your appreciation will be stymied by rental rates since investors price out the property based on rental returns NOT intrinsic values like homeowners do.

[Jay Hinrichs]

Hey i bought my first house in 79 in Milpitas  It was a Shapell new construction on 1143 Arizona Ave right behind the high school.. paid 80k for it.. this massive appreciation is  a  major component of many Bay Area and West coast folks success's I know it is for me.

I bought a house in Palo Alto for 185kk and so on and so forth.

And there are many cities out in the mid west or East rust belt where homes are selling for less than they sold for in the 80s 

west coast gentrifies and values rise.. other areas become over run with rentals and values regress or stagnate..  have to choose wisely

its location location location just like it always has been.   But Bay Area was not immune to a down turn in 89 to 92 saw 50% devaluation in many sub markets of the Bay Area.. my brother in law picked up an awesome house in Los Altos hills in 92 for 1.2 million and in 87 it sold for 2.5   and now worth who knows how much 6 to 8 million probably.  lot alone would be 2.5 to 3 million.. just like my houses in Palo Alto the lots alone are worth 2 million.. will it last who knows.. but it was good for us.

PS I had Keith up to Portland a few years back and you guys funded a few for me in Sac.  Great company Conventus. 

[Zeke Liston]

Originally posted by @Krystin Aversa:

@Zeke Liston

Hi Zeke, thank you for your input! When you say to buy an OOS investment that will pay for my rent, are you referring to the rent on the OOS property? I would likely need to own multiple (over 10, if cash flowing ~ 300/month) OOS properties to be able to cover my rent in the Bay Area. I have heard a lot of great things regarding both cash flow and appreciation in the Columbus, OH market; my dilemma is whether or not to pursue that first and continue to pay over 30k/year in rent for an apartment here while I invest OOS, or to purchase a property here and delay my OOS inverting for a bit while I regain the capital.

 Would you be able to house-hack something in your local market? I know you said that your payment would likely increase to $5-$6K/month. It would be great if you could buy something locally, rent out several of the bedrooms to get your monthly payment lower than it is now. 

[Carlos Ptriawan]

I give you a straight number. If you buy A GOOD quality duplex now in San Jose with 25% down (price per unit 500-600k), even with OO property, the other unit mortgage that you need to pay is around $2200/mo. But you can rent it out for $2500-$2600 only.

If you buy SFR/condo in A class neighborhood in East Bay for $750k , the mortgage is $2200-$2300.

The quality of the house , environment and relative to value...East Bay is much better than South Bay. 
So run your number and do a lot of simulation.

----
Regarding out of state, when looking at for future projection, a higher-than-normal multifamily cap rate return such as 9% in out of state , within 5 year return CAN outpace max-7% return appreciation of bay area home (which has 3%-4% cap rate).

When we're buying investment property there're two things that we actually buying:
1. we're buying today's the cap rate
2. we're speculating future cap rate

Which means between point A to B , we're hoping there's accelaration of cap rate declining when selling. People that bought in bay area 20 years ago, their purchase is succesful because the cap rate is decreasing overtime. 

Now, it's easier for a property that was in 8% cap rate, to be in 4% cap rate within 10 years. That's what happens in bay area, but to move from 4% to 3% will be much more difficult because rent growth need to catch up as well. So understanding the cap rate and the future potential cap rate is key.

So if you have money in a place you could create portfolio where your egg is divided between mostly CF and mostly Appreciation(+cash flow). What you don't want to buy is you buy in market where top ceiling is almost reached (like Miami).

If I have to buy, my priority will be buying SFR or condo in Bay Area.