First time RE investor in an expensive market. Is it worth it?

Buying & Selling Real Estate
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First time RE investor in an expensive market. Is it worth it?

Dylan Grabowski
Homeowner · Denver, CO · Member since 2017 · 21 posts · 2 votes

Hello to all the fine folks at BP!

I live in an expensive market. I'm also studying REI and building up a down payment for a property sometime down the line. These things take time, but...

Is it even worth looking for a first property (I'm mostly interested in 2-4 unit multi-family) in an expensive market? Sure, there's 3% down lenders (which I haven't met yet) and FHA. But, at what cost?

I want to live in my own home, and rent out other units. However, four or five properties can be purchased in other markets for the same price as one property in the Oakland/East Bay area.

If you've gone through similar thought exercises, what were your conclusions? If you've invested for a long-time, what are your words of wisdom? Advice? Thoughts?

I'm interested to hear what the minds of BP have to say about the topic.

Cheers!!

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Account Closed
Lender · Milpitas, CA · Member since 2016 · 376 posts · 248 votes
9y

@Dylan Grabowski Like all the other posters, I feel your pain. The lifelong debate of appreciation vs cashflow is something that everyone struggles with. However, after many months of deliberating, I came to the conclusion that as a newbie investor you should go with cashflow. With cashflow, you may make less money in the end, but you'll be able to get in the game and get your feet wet with a low risk asset (losing 40k hurts a lot less than losing 1M).

I attended a workshop where one of the speakers (Eungelo Rumora from Ohio Cashflow) said, "you can't eat equity". It's true, you may get an asset in the Bay Area that has appreciated greatly, but if the rents are still not keeping up with your mortgage payment, then the only way to get money from the asset is to sell it (refinancing it will only increase your debt service). Once you sell the property, then you'll be in the same situation as you were before. Cash on hand but no cash inflow.

If you focus on cashflow instead, you can purchase a property, refinance your principal out in the future, and still have an appreciating asset that gives you positive cashflow every month, while paying your debt service down.

It sucks investing outside of your backyard, but it's easier than having negative cashflow for years.

Good luck!

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  • Andrew Johnson
    Real Estate Investor · Encinitas, CA · Member since 2016 · 3k+ posts · 3k+ votes
    9y
    Dylan Grabowski Maybe one question to ask is if you're investing for appreciation or cash-flow. Either option can (and over the long-term, usually does) make money. However, I wouldn't buy in California for cash-flow or buy in Alabama for appreciation. Not knocking Alabama! Personally, I like cash-flow but every cash-flow investor would have made more buying Oakland properties in 2009. What the future holds is anyone's guess...
    1Reply
  • Tim McGarvey
    Rental Property Investor · Napa, CA · Member since 2016 · 68 posts · 57 votes
    9y
    Dylan Grabowski I'm facing the same dilemma right now in the South Bay. Looking for a duplex for my first purchase but having trouble finding something that would even come close to cash flowing. The most frustrating part is that I would be able to afford multiple investment properties in other markets but am barely able to get started here on the lowest end properties out there. I'm starting to put together some campaigns to find FSBO and off market deals in my area. Wish I could be of more help, but just know you're not alone!
    0Reply
  • Ali Boone
    Real Estate Coach · Venice Beach, CA · Member since 2012 · 6k+ posts · 3k+ votes
    9y

    I'm going to keep my answer circled more around the idea of spending what you would have to for you to live in the property you want as an investment property versus using that money for straight investment properties in other markets. 

    In short...do the math. Figure out how much you will pay in rent to rent a place to live in (then you can live anywhere you want and it not be dependent on where you can find a property too), versus how much [negative] cash flow you will take the hit on each month on an MFR you live in. I think it will be obvious which option will actually cost you more...

    But I totally hear you. I'm down south in Venice Beach and it's the same issue here. I was recently looking at buying some places around here, but to buy a building exactly where I really want to live will be $1M/door, easily...and whichever door I don't live in will only rent for $3500-5500. So that little of rent against the $1M pricetag...pshaw. Ouch. So I rent here, live exactly where I want, and buy investment properties for way cheaper and way nicer returns elsewhere. Granted, they don't have the appreciation potential like the properties here, but prices are so ridiculously high right now, not sure it's exactly the time to buy for appreciation.

    For more details on my considerations when I was wondering the same thing you are now, check out an old article I wrote-

    https://www.biggerpockets.com/renewsblog/2014/01/1...

    Hope that helps!

    0Reply
  • Jason L.
    Investor · Redwood City, CA · Member since 2016 · 33 posts · 28 votes
    9y

    Hey, just wanted to add my own situation here.  We Californians have a huge barrier to entry, but if you can get in, it seems like you could appreciate nicely.  But it's a gamble, right?

    I'd love to buy for cash flow as a buy and hold investment, but I don't know where.  I've looked at Jacksonville, FL since I lived there and have a place there, but it's far. I've looked in Texas but the taxes and insurance are high.  I looked at Vegas and prices don't seem conducive to cash flow right now.  

    So, those are all options, and I'm open to other markets too, I just don't know them as well.  

    You get a whole lot of noise, listening to podcasts and reading BP. Sometimes it's hard to separate the wheat from the chaff...

    You can get lost in all the research and try to make the "best" decision, but I think in the end, you just have to jump in and go for it. 

    I need to practice what I'm preaching...

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  • Account Closed
    Lender · Milpitas, CA · Member since 2016 · 376 posts · 248 votes
    9y

    @Dylan Grabowski Like all the other posters, I feel your pain. The lifelong debate of appreciation vs cashflow is something that everyone struggles with. However, after many months of deliberating, I came to the conclusion that as a newbie investor you should go with cashflow. With cashflow, you may make less money in the end, but you'll be able to get in the game and get your feet wet with a low risk asset (losing 40k hurts a lot less than losing 1M).

    I attended a workshop where one of the speakers (Eungelo Rumora from Ohio Cashflow) said, "you can't eat equity". It's true, you may get an asset in the Bay Area that has appreciated greatly, but if the rents are still not keeping up with your mortgage payment, then the only way to get money from the asset is to sell it (refinancing it will only increase your debt service). Once you sell the property, then you'll be in the same situation as you were before. Cash on hand but no cash inflow.

    If you focus on cashflow instead, you can purchase a property, refinance your principal out in the future, and still have an appreciating asset that gives you positive cashflow every month, while paying your debt service down.

    It sucks investing outside of your backyard, but it's easier than having negative cashflow for years.

    Good luck!

    2Reply
  • Engelo RumoraBusiness Member
    Investor · Toledo, OH · Member since 2013 · 4k+ posts · 2k+ votes
    9y
    Originally posted by @Account Closed:

    @Dylan Grabowski Like all the other posters, I feel your pain. The lifelong debate of appreciation vs cashflow is something that everyone struggles with. However, after many months of deliberating, I came to the conclusion that as a newbie investor you should go with cashflow. With cashflow, you may make less money in the end, but you'll be able to get in the game and get your feet wet with a low risk asset (losing 40k hurts a lot less than losing 1M).

    I attended a workshop where one of the speakers (Eungelo Rumora from Ohio Cashflow) said, "you can't eat equity". It's true, you may get an asset in the Bay Area that has appreciated greatly, but if the rents are still not keeping up with your mortgage payment, then the only way to get money from the asset is to sell it (refinancing it will only increase your debt service). Once you sell the property, then you'll be in the same situation as you were before. Cash on hand but no cash inflow.

    If you focus on cashflow instead, you can purchase a property, refinance your principal out in the future, and still have an appreciating asset that gives you positive cashflow every month, while paying your debt service down.

    It sucks investing outside of your backyard, but it's easier than having negative cashflow for years.

    Good luck!

    Thanks for mention mate

    Always base your decisions on the numbers in the deal as they stand today and not what they might look like tomorrow.

    Predicting a future value is playing a very risky game IMO

    Much success

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