Q! All cash purchase out of state or financing to buy in SoCal?

Question

Hi All,

I'm trying to decide if I want to take on the risks of buying property out of state.  I like this idea because I can probably get a property for 35k-40k all cash in the MidWest somewhere. This would allow for potentially good cash flow while still allowing me to pay for project management, etc.  I could also potentially refinance a property bought with all cash and then purchase another...  But it would require me to fly out to the city every so often to check on things, among other problems I'd have to manage from Cali.  This is not to mention the staring difficulties of finding people to trust in my chosen market.

On the other hand, I could reduce the risks that come with out of state worries (flights, PM's not doing their job, etc) and buy locally in the SoCal area. However, it seems I will NOT be able to do all cash. This means, I will cut into my cash flow significantly and put myself on "the hook" for another 15-30years if I get a conventional loan. This doesn't feel ideal to me, but I know I could go to my property quickly if need be (well, depending on LA traffic).
I understand the specific numbers matter most, but I am hoping some of you can give me input on what other factors I should consider or what you think might be the best choice. Perhaps there are some big pieces I am missing that I haven't considered.

You all will help me get over my analysis paralysis!  ;)

Dan H. · Answer

I am a big fan of So Cal investors investing in So Cal.  The post about 1 property in So Cal versus 10 properties at the average return location with same investment money is correct for past 5 or 10 years.  All you need to do is look at 10 fastest appreciating markets for last decade and compare them to the national average.  So Cal not only would have been the superior investment but it would not even be close compared to the average locale.  Of course past performance is not necessarily an indicator of future performance.  However, One thing to note about So Cal properties is the supply is finite especially in coastal urban areas.  The demand seems to be infinite.

It is my belief that most experienced RE investors leverage their money and therefore will typically choose to finance over paying cash with the exception being if the cash has additional payoff such as being required because purchasing at auction, required to close the deal, required because the property as purchased cannot get traditional financing due to various issues, etc.  So if you can get traditional financing using it will allow you to leverage your capital more than putting all the capital on the one property.

You received all sorts of good advice on avoiding $30K properties.  I suggest a blog on this site titled something like Why $30K properties do not work.  It basically points out that cap expenses are independent of the cost of the property (ignoring size and bathroom counts).  Cap expense therefore are a bigger hit on lower rent properties.  There are of course other issues with lower rent properties.

So here is my case for So Cal:

- Appreciation

- Advantages of local including expertise, cost to get to property, able to self-manage if desired (typically ~10%).  The family had an out of state property hit by 2 hurricanes.  Even though we hired contractors because we were not present we were the property getting the least attention with the slowest work.

- Appreciation: Do the research.  Use your own knowledge of the supply/demand.  It really is simple Econ 101.  I am not stating that it is certain to appreciate like it has but econ 101 tells me that excluding something catastrophic it is likely to continue to appreciate.

- Prop 13: My family suffered from this big time on a property on Gulf Shores Alabama.  The taxes went up faster than the rents (until the hurricanes).  We sold this property even though it was awesome (on the sand).

- I have no problem finding cash flow properties in my chosen area in So Cal.  These properties cash flow using a $300/unit per month cap expense and 5% vacancy (our vacancy rate is less than this) and 5% maintenance expense.  This cash flow does not include equity gain from making the payment which is in effect additional cash flow that can be obtained with a little effort.  They may not cash flow with other parts of the country but the effort is less than out of state and so far the appreciation has more than made up for any reduced cash flow (Each property I have owned at least 3 years has gone up at least $100K - I have one property that has been owned only 1.5 years and is probably up $30 to $40K).

- The equity gain for rehabs is larger than many other parts of the country.  Nice properties are greatly valued over neglected properties.  This implies that I can purchase neglected properties, rehab, and have additional appreciation (more per unit than many other parts of the country).

Good luck with whatever you decide.

Charles Moore · Answer

Hi, Jennifer,

You bring up several points I've seen discussed and learned from here on BP. Being on the west coast as well, I have a similar situation to you. Here is what I have learned:

If you want cashflow that you can add to your income and, more importantly, cover maintenance and Cap ex and vacancy, then anywhere on the west coast - especially CA - performs poorly compared to other markets. CA is an appreciation market, which is a speculation game. Plus you would be tying up  all your capital in one property, thus increasing your risk during vacancies when you have no rental income, but still a hefty CA mortgage to pay.

Concerning cash purchase vs. financing - that's a big debate topic on BP, and each person's situation determines what strategy is best, but for folks like you and I just starting our RE investing careers, financing has a lot of advantages. You can get more bang for the buck (able to purchase more properties), tax advantages with interest deduction, and are only spending your own money in the downpayment while trnants pay for the rest of the property over time, but don't enjoy the ownership incentives you do. If you pencil out a side-by-side comparison of slapping down $100K on a cash purchase vs 4 downpayments with the same money, you might find your 4 leveraged houses combined provide you more cashflow that your paid for property, taking vacancy, maintenance, and depreciation into account.

Concerning out-of-state investing, consider looking at the reputable turnkey companies friendly to out-if-state investors in lucrative markets, like Memphis Invest in Mdmohis, Dallas, or Houston; companies in Indianapolis, Cleveland, Kansas City, Birmingham, or Fl. A top notch turnkey will manage your rentals for you without your needing to fly out all the time - see what other BP members say about this.

Concerning properties in the $30K-$45K range - I suggest you look at a $60-100K range. Those tend to have higher cash flow because of less vacancy, maintenance, and fewer deferred maintenance items. The higher rent these attract also attract higher quality trnants who take better care of the property, and let you have a much more passive income stream.

Putting all these aspects together, you could for example buy 3 properties in another state financed with 20% down and averaging $200-$250 each month with little action required of you.

Hope this helps!

Steve Endress · Answer

@Jennifer Noble  I would not recommend all-cash 30-40K purchases in the midwest.  It always looks good on paper, rarely works out in my experience and from talking to just about everyone else.  I recommend for someone starting out to have 100K cash and purchase 3 100K properties with financing, keeping about 20K in reserves after using the rest for downpayment.  I own properties in 3 midwest cities and would be glad to share more experiences with you if interested.

Brittany Thompson · Answer

Hi Jennifer

I am local wholesaler in the Birmingham, AL area.  If you consider investing here, there are a ton of properties that you could acquire at a great price point. I have seen here where you could invest 40k to 100k and easily rent for at least 1000/month to 1500/month in respected areas. If you are open to this area, I would be more than happy to connect with you and help you however I can. Many Blessings to you.

Jennifer Noble · Answer

Thank you @Steve Endress, I have been sufficiently convinced to keep some money in my reserves!  This is why this place is so great, as soon as I read those who said to use my capital to get more properties and keep some for other expenses, I said "Duh!  Makes total sense."  @Dan Heuschele and @Amit M., I appreciate the vote for Cali.  I have been searching for some possible markets in Cali, but I have not settled on one that may work for me.  I will certain read some of your posts, Amit. Thanks all!

Amit M. · Answer

I agree with @Dan Heuschele

I'll quickly add: search these forms for cashflow vs appreciation, or my name, and you can read lots of other discussions on this topic.

Cody L. · Answer

For what it's worth, I'm a SoCal investor (San Diego) who buys in Houston, TX.   I'd love to buy in San Diego but the pricing is insane and people think that a proforma 4 CAP is awesome.

So don't worry about buying outside your state.  I go to Houston maybe 1 or 2 times a year and have 1000+ units.   Get a good management company and you're golden.

Lee Scarlett · Answer

@Jennifer Noble, I think you got some really good advice just now.  I just assisted a buyer getting a property for near $30k in a C+ area.  This team will self-manage since they are local.  I have other buyers in California and they definitely stick to B and A areas with properties over $60k.  I will PM you some additional info that you may find helpful.

Jennifer Noble · Answer

@Mike D'Arrigo, Thanks!  I'd love to see the report and webinar.  I appreciate your response.

@Eric Dowling Thanks, I'm not totally disagreeing.. But I'm just not sure about more wealth coming from 1 SoCal C class property!  It just doesn't seem to work when I do the numbers.

Mike D'Arrigo · Answer

@Jennifer Noble Although the Midwest has very affordable prices, @Charles Moore is absolutely right about $30K-$40K properties. These are going to be in the very rough areas that don't attract good tenants. We've been selling turn key properties in Indianapolis and Kansas City and in my experience, you are better off with higher end properties. That doesn't mean you have to buy A class properties in the best neighborhoods but I wouldn't recommend anything below a C class. Indy and KC are strong cash flow markets and you can do very well for far less than $100K. Instead of paying cash for a low end property, why not finance a solid B class? You're out of pocket cash would still only be half of what it would be on that $40K property and you'll have a more stable asset. I wrote a report and did a webinar on how to invest out of state. I'd be happy to send you links to both.

Q! All cash purchase out of state or financing to buy in SoCal?

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