Live in a rental to buy out of state?

[Vidal Preciado]

I live in San Diego, CA and want to buy my first rental property but I don't have a primary residence yet. Does renting an apartment so I I can use my savings out of state sound like a good idea? Or would you dig for a house hack untill a decent deal comes up?

[Dan H.]

OOS equates to 80% LTV (possibly 75% LTV). FHA in San Diego equates to as high as 96.5% LTV. This implies that without closing costs you can purchase a home local that is 5.5 times as expensive as the OOS property (assuming you can qualify for the loan).

Why is this important? If the purchase appreciates 10% (over whatever time span), the 96.5% LTV will have returned 285% while the 80% LTV will have returned 50% from the property appreciation.

Historically San Diego has outstanding appreciation. This implies not only will the higher LTV produces a higher return, but it is also extremely likely that the San Diego purchase will have a higher long term appreciation rate. This implies that the San Diego purchase is likely to achieve that 10% appreciation much faster than cheaper markets. We have quite a few local properties. Every one of them, regardless if they were purchased with horrendous timing at full retail, has appreciated at least $1K/month over the holding period. We have 2 properties that have appreciated over $4K/month over the holding period. This implies if you purchase a local property to live in, there is a very good chance over the long term that you experience at least $1k/month appreciation over the hold period. Note there have been a few depreciating cycles (worse being the Great Recession), so my statement is very likely in the long term, but may not be true in the short term. Two of our purchases depreciated close to 20% after purchase (and both were purchased at retail), but both are up over $1K/month over the hold period now (1993 3/2/2 SFH purchase in Claremont for $167K, worth ~$700K today; 2003 4/3/3 SFH purchased for $741K, worth ~1.25M today).

OOS almost necessitates use of a PM.  I high priced markets like San Diego true PM fees (after including all costs) could be 8%, but in lower cost markets you should factor in a cost of 10% (when including for all costs).

What do you get in the OOS market? Not a cheaper entry cost in the case of an OO local property. Not likely same return from appreciation. Not likely cheaper rental costs when factored as a percentage of rents.

Note because the local property is not a rental there is no cash flow comparison.  If the local property was a rental, the initial cash flow would be better in many markets.  San Diego's cash flow is slower to be realized, but for long term holds will out produce the cheaper markets (it is simple math that the higher appreciating rent with both areas experiencing similar other cost increases will always eventually produce the better cash flow).

If you want a local rental property, you could consider a house hack option.  I typically suggest a detached duplex if going this route.  There are various reasons why this is my recommendation that I will not cover unless you express interest.

Good luck