Invest locally in LA or out of state?

Question

Hello,

I live in LA and I managed to save up about $230k-250k in my real estate investment account. Is buying a duplex (or triplex if i can find/afford one) with the intention of living in one unit and renting out the other (i imagine both units would rent for a total of $6k) better than if i were to buy a rental property out of state? My concern with buying in la is that the property won't cashflow (cost > rent) but should i even be concerned with that if i plan to live in one of those units? I pay $3400 for rent now and that would be abuot half of the costs but i dont think anyone would rent those units for $3400.  I would also prefer to buy and hold versus living in it for two years and then selling it without capital gains tax, i think.

Should i go out of state and find something in like OK for $100k purchase price?

Diana Costta · Answer

Hi Marcus,

I would add that if you do decide to go out of state. You still need to have processes defined on what to look for in a property manager and how to manage him. Best, Diana.

Abbot Sim · Answer

Hey @markus tam, I appreciate the post you made. I am in the similar boat, wanting to start somewhere but the LA market is tough. It'd be great to connect to see what you have been thinking.

Marcus Tam · Answer

Thanks for the insight Denis. I think being hands on with property management for my first investment would be a good learning experience so i dont think i mind it, for now.

I probably would buy out of state after buying my own residence in LA. As you mentioned, scaling in LA is going to be tough without considerable capital and i tink even at the $250k range ,im gonna struggle to find positive cash flow if i dont live in one of the units

Denis Woosley · Answer

@Jon Schwartz summed it up great! solid analysis. Another thing to consider is the sacrifice of living in a duplex and being more hands on as a landlord vs a more passive investment where you won't need to be the first line of defense. Many midwest metro areas are seeing solid appreciation but nothing is going to come close to LA appreciation, especially when it is compounded by your leverage. Also with a live in house hack like the duplex Jon posted you can force appreciation if you want to get your hands a little dirty.

You will have a harder time scaling in SoCal. How long will it take for you to save up another $200k to do it again? Once you have expended all that capital you won't be able to reuse it. If you want to take advantage of the equity gain after a year will you want to move from the place you live? If you are investing out of state and want to pivot to another deal you can more easily sell. Hope that helps!

Marcus Tam · Answer

@Jon Schwartz

Thanks! Just emailed you

Jon Schwartz · Answer

Marcus,

LA duplex house-hacker here. Isn't this the eternal question for Angelinos getting started?

The first consideration is whether or not you need current income. If you're looking to quit your day job and live on cashflow, then you should definitely go out-of-state. However, if you have a job/career that you'll be sticking with for sometime, and you have the capital to get in the game, you should stay in LA. You'll build more wealth from coastal appreciation than Midwest cashflow. My plan is to build equity in LA for the next several years while I'm still happily in my career, then start selling off LA assets to pickup cashflowing properties elsewhere in the country.

Let's also look at rough numbers:

If you bought $230K worth of real estate in OK or some similar market, what kind of cash-on-cash return would be achievable? I'd guess around 10%, give or take. That comes out to $1917/month cashflow. If you use that money just to pay your rent, it effectively drops your LA housing cost to $1483/month.

If you bought an LA duplex, $230K is just enough to buy, for example, this listing:

https://www.redfin.com/CA/Los-...

I love this area below Mid Wilshire; it's rapidly gaining value as high prices are driving people further south toward the 10. Since the Lowes opened at Pico and San Vicente, this area has been on a constant and upward trajectory.

This property is great because one unit is currently vacant, so you don't have to deal with tenant relocation. And the rented unit is getting market rent!

Numbers-wise, your net monthly cost with this property would be about $3100. However, of that, $1582 is going toward principal paydown, which boosts your net worth. So in effect, house hacking this duplex is like paying $1518/month in rent. I got these numbers using a spreadsheet I built when I house hacked my duplex; happy to share it with you.

That's a way of doing a comparison between an apple and an orange: investing in OK would reduce your effective rent to $1483/month while investing in LA would reduce your effective rent to $1518/month.

(Admittedly, this is very much an apples/oranges comparison, but I find it helpful to distill the numbers down in this way to get something of a comparison point.)

So investing in OK will benefit you $35/month more in your cost of living. I'd argue that riding LA appreciation is worth a lot more than $35/month -- especially if you plan to hold, especially in this neighborhood south of Mid Wilshire.

All the best,

Jon