New Investor Trying to Find a Market

[Hannah Paitchel]

Hi Everyone!

I'm new to Bigger Pockets and have spent the last 6 months listening to the podcast, reading investing books and talking to friends who are all interested in the same stuff. I now am at the perfect time to start investing! I'm looking to buy a rental property for $150,000 max and my goal/priority is buying a cash flowing property. I'm young (25) and just starting out so the goal is to find financial freedom so I don't have to work my 9-5 for years on end. I'm looking to buy by the end of the year.

I currently live in LA and don't think this market is what I'm looking for. Eventually it could be the right market for long-term appreciation, but for now I'm focusing on cash flow. I grew up in New England so I am familiar with that area and think the opportunities are more or less the same as LA/California. I'm looking primarily for suggestions on markets and for people to tell their stories for where they are investing. I'd love to share our experiences on getting started, your do's/don'ts and anyone in-network they'd recommend in said market.

Thanks for your input and looking forward to networking!

Hannah Paitchel

[Dan H.]

I recommend all newbies start local.  I especially recommend coastal CA RE investors start local.

My recommendation is to house hack a detached duplex or a SFH with a detached ADU.

Here are some of my thoughts: 

• Using FHA financing you can get 96.5% LTV compared with typically no higher than 80% LTV not owner occupied (i.e. OOS). Not only does this increase the cost of the property you have money for (the same down lets you purchase over 5 times the value), but it also increases the leverage. The increased leverage increases the return rate.
• The rent from the second unit of a duplex can help your income qualification for financing.
• Best financing terms (lowest interest, highest LTV, etc.) is typically for the owner occupied properties. You are very unlikely to get as good a loan on an OOS property.
• There is initial cash flow and actual cashflow.  Few markets in the US have the historical long term cash flow of Los Angeles.  It is simple math that the property with the higher rate of rent increase will always eventually be the superior cash flow market.
• Self management not only saves money, but it builds experience and skill sets.  I recommend everyone start self managing.  If it is not for you, hire a professional PM.  Local self managing is an option, OOS not much of an option (there are some who do it, but I do not know how).  Self management is work, and I am not against paying someone for their efforts/skills but especially when starting profits can be thin and the option to self manage for the money savings could be the difference between success and failure.
• The locals have an expertise that is tough to duplicate from OOS.  Simply, the locals have a competitive advantage.
• Building the team is not easy when done local.  Doing it for an OOS investment is full or risk and difficulties.
• Prop 13 is a CA RE investor's often under appreciated bonus.  We have a property that we are paying almost $1.5K/month less property tax than if we purchased today.
• Why do you think the lower cost markets cost less?  I have 2 answers that are both correct.  1) The market is efficient.  This implies that the price is based on many factors including expected return and expected risk.  They are typically cheaper because they are expected to produce a lower return 2) Very related to #1, they have less historical appreciation.  My market is in San Diego county which is similar to LA.  We have purchased with great timing and poor timing.  Our lowest appreciating property is over $1.9K/month (that is our poorly timed purchase) over our hold period.  We have 3 properties that have appreciated over $4k/month over the hold period.  We have one property that has appreciated over $6.8K/month over its hold period (21 years, do the math if you want on the appreciation on this property over our hold).
• Case Shiller has the Los Angeles market as the #2 overall return for buy and hold properties for this century (just ahead of my San Diego market).  The reality is you live in an outstanding RE market.

OOS is more risk and historically has produced lower returns.  Consider the items above before you choose to not invest in you local market which also happens to historically be one of the best markets in the US.

Good luck