The great California vs Out-of-State debate

[Ruben Parra]

Hi BP members!

This is just my second post and it feels great to have received such good feedback and support.

Since I don't usually carry around $100K in cash, my southern California backyard market can seem a little intimidating and out of reach for someone who is looking to invest in their first rental property. I think many of us start looking out of state as a better option to get our portfolio started. I have seen many passionate posts either advocating out of state for better returns, or defending the CA rental market as a stable cash flow strategy.

I'm personally looking for positive cash flow with somewhat decent returns  and the possibility of appreciation. I'm a little worried about another housing correction in California. Even Bakersfield seems like it could be in trouble with the oil job layoffs. I plan to stay out  any rehab or property management work myself so not having immediate access to the property is a risk I'm willing to take in any case.

Can anybody from CA who has tried both in and out of state markets share their experiences? What were the greatest difficulties you faced in each? What are the benefits or rewards you found in each one? And finally what advice would you give a new investor who is looking for their first property in an out of state market?

Then there's the question of certain markets or cities being better suited for multifamily units vs SFR's, but I'll leave that discussion for another day!

[Will Barnard]

Originally posted by @Ruben Parra:

I'm personally looking for positive cash flow with somewhat decent returns  and the possibility of appreciation. I'm a little worried about another housing correction in California.

 Ruben, your statement here is similar to saying i want to make $100k a year and want the possibility of not having to work for it. I say that not to be mean, but to point out that cash flow AND appreciation do not often come hand in hand. More often, it is one or the other. In states like CA, there are many areas that offer large opportunities for appreciation, but that requires good timing on the investors part (or luck if you want to roll that way). As for true cash flow, typically that is in lower priced areas where the cost of the dirt and the cost of the building is far less in relationship to the rental rate ratio you get.

So the question is, what is your goal, to have enough cash flow from rental doors to support you for life, or is your goal not monthly income, but future appreciation to obtain larger chunks of cash at one time? In cash flow markets, if you nail some appreciation, that is just the gravy, stay focused on one or the other, trying to get both and you may find yourself with neither.

The largest obstacle for investing out of state is not having the ability to be there in a moments notice, managing property managers, and you having to rely on third parties. Investing in your own backyard affords you the ability to have boots on the ground and more control, but, if you live in non cash flow locations and your goal is cash flow, you have to jump through those hurdles.