California Vs Out of State (really, but why?)

[Osazee Edebiri]

I think the constant discussion of California vs anywhere else is intriguing. So I pose a question. Hypothetical, if a person had a  2 million dollars to invest, they purchased property with 1 million in California and 1 million in any other state, which would perform better after 15 years and why? 

This assumes anything and everything will happen, which is the real life case anyway.  I am not automatically assuming California will perform better just because I live here in the Bay Area. I think someone may have interesting incite to why another state could out perform California property in the next 15 years.

[JD Martin]

Quote from @Osazee Edebiri:

Quote from @JD Martin:

Quote from @Osazee Edebiri:

Quote from @Todd Rasmussen:

@Osazee Edebiri

Where is dictated by how you want to invest and how much you have to place.

For me, 1 million dollars does better in TN than CA over 15 years. If there was substantially more to invest or I wanted to be more passive, then CA would be more appealing.

Yes, I definitely agree, I mean just being more familiar with an area is an advantage. But this question is based on what would perform better. So let’s say we took a person who had no ties to California or Tennessee, how would there million dollars perform better and why?

I'm in TN. For cash flow and general wealth building I love investing here but historically there's no comparison between here and most of California in terms of housing appreciation. Even our markets that are getting "expensive", like Nashville, are no comparison to most of California's prices. 

That of course comes with a caveat. As a landlord there's no way I would want to be a California investor because I don't want to work that hard for the extra return. It's the same reason I don't own C/D class housing - there's much better returns there but I don't want to work that hard.

Return and risk are strongly correlated. One of the reasons you have historically had better returns on investment property in California is because you face a lot of hurdles and aggravation that I don't face here in TN.

 I like that. At the end of the day path of least resistance even if it doesn't net a higher return. Though I do think once you get to a certain level, there is less work to deal with, no matter where you invest.

 This is really the case with virtually all investments. There's virtually nothing safer than just sticking your money in a savings account or bank CD, and probably virtually nothing easier. That's why it pays peanuts. Real estate - especially if you own/manage your properties - has a fantastic return, but it's hard work and anyone who thinks otherwise either hasn't owned anything or is comparing it to something really hard like working in a 3rd world country. That hard work is why most people will never invest in real estate (other than their primary home). And then within RE there are gradients of work. I personally think solid B housing/B neighborhoods/ B tenants are the easiest work of all, and it has good returns - but not as good as C or A, which I think is more work for different reasons, and definitely not as good as D. I have an acquaintance who owns a trailer park with 150 units - most park owned but a few tenant owned and they rent the land. His returns are much better than mine, but he works his ***** off for that return. He's a fixture at eviction court. He has junk haul off companies on speed dial. ETC. He wants that oversized return, and he gets it, but he doesn't get it for free. 

[Steve Ehrman]

@Osazee Edebiri I guess that it would depend on the measurement of performance. If you are looking at cash flow, which is my measurement, then Detroit is the best in the country right now at a 2.2% rent to purchase price of the property.

[Karen Margrave]

Like it or not, no place is like CA. We have coastal areas, mountains, lakes rivers, cities and beautiful country properties. Plus the weather is to die for! Those things alone keep CA a high demand area to live and invest in. Personally I HATE the politics of CA, but let's not go there. 

[Jonathan Heacock]

I love PA, low cost high rents only con is the appreciation isn’t there.

[Bruce Woodruff]

Quote from @Karen Margrave:

Like it or not, no place is like CA. We have coastal areas, mountains, lakes rivers, cities and beautiful country properties. Plus the weather is to die for! Those things alone keep CA a high demand area to live and invest in. Personally I HATE the politics of CA, but let's not go there. 

 But with 1/4 million people 'net' leaving every year, we'll see where this goes. Gonna be interesting!

[Dan H.]

Quote from @David Song:

Quote from @David Song:

Quote from @Osazee Edebiri:

I think the constant discussion of California vs anywhere else is intriguing. So I pose a question. Hypothetical, if a person had a  2 million dollars to invest, they purchased property with 1 million in California and 1 million in any other state, which would perform better after 15 years and why? 

This assumes anything and everything will happen, which is the real life case anyway.  I am not automatically assuming California will perform better just because I live here in the Bay Area. I think someone may have interesting incite to why another state could out perform California property in the next 15 years.

This question has been debated on BP for over a 

This question has been debated on BP over a decade. About 10 years ago, I made the decision to stay in CA Bay Area, rather than OOS. Looking back, that decision certainly paid off big time. I am curious about those folks decided to go OOS 10 years ago, how are they doing. I am sure they are doing fine, with the nationwide appreciation in the recent years. But I would love to know if they regretted their decision.

Around 20 years ago we purchased two OOS properties. I loved the location of both but especially one on the sand at Gulf Shores Alabama. The other was lake front in Alabama. We sold them both because our San Diego RE was performing far better. Two hurricanes hitting the Gulf Shore RE in consecutive years was also a factor on us selling that property. The properties were not appreciating like San Diego. the cash flow was going in the wrong direction because the STR rents were not going up as fast as the property tax and insurance. Our insurance on the Gulf Shores property went up something like ten fold in just a few years (going from memory). There were two large claims for the damage from the hurricanes.

There are times that I wish we had kept the Gulf Shores property, but it is not because I believe it would have produced better return than the San Diego properties.  It is because a duplex like that does not exist in Southern Ca and, if it did, it would be >$10m.  

Our San Diego properties have produced great returns.  The rents compared to purchase price is incredible.  The appreciation has been incredible.  The property tax is very reasonable especially on the longer hold properties (thanks prop 13).  The insurance has increased at reasonable rate.  

[Bruce Woodruff]

Quote from @Karen Margrave:

Plus the weather is to die for! 

Well if you live in the SoCal coastal strip it sure is. We lived there for 30 years. But move a little inland from either San Diego or LA and you have the same weather as in most other states, except maybe drier...... After all, California is just irrigated desert anyway.

And the weather north of let's say, Santa Cruz, is way too wet for me. San Fran for instance. 

So really we're talking about what? Maybe 20% of that huge state that has great weather?

[Aaron Gordy]

@Osazee Edebiri Your hypothesis needs to be narrowed a bit more. The Bay area is much different than LA. LA is much different than Sacramento. Texas is also very different from one location to another. Austin is very different than Houston. Dallas is different than San Antonio. Each location has their own particular zoning and building constraints.  And then there are the small town differences where the cap rates tend to be higher than the larger metros.  Let's consider San Francisco vs Oakland. Or how about Sacramento vs Dallas. You will have very different outcomes based upon the locations and even more so within the submarkets within those locations. Your hypothesis needs to be narrowed a bit more, imho. 

[Luka Milicevic]

California has a few positives going for the real estate market. The biggest positive is the regulation that will continue to artificially keep supply low keeping prices high. Of course the regulation is to protect the consumer at the expense of the consumer. 

Regulation has been California's biggest asset over the past 40 years and has kept appreciation going. 

The state has now seen 9 straight years of population decline, with a 38% increase in 2017, with another MASSIVE increase at the start of the pandemic. I think the continued population decline will eventually catch up to the state and balance out the ridiculous regulation keeping supply artificially low.

Being a real estate agent in Nashville, I have helped a lot of California transplants move here. The stories they tell me are hard to believe. I don't understand how everyone hasn't left. It sounds like literally living under an oppressive regime with how much red tape there is on EVERYTHING. It seems everyone has their breaking point-some are more patient than others, but eventually anyone that can leave probably will. 

I think the future of the state is quite bleak. I wouldn't invest there as it's a market that doesn't welcome "the little guy". Only large funds can truly compete there. 

[Dave Peterson]

I live near Sacramento.  Summer is my least favorite weather, but we have very low humidity.  Fall and Spring are awesome.  Winter depends on the amount of rain, but we get no snow in this area.  Also don't forget that CA doesn't have hurricanes and tornados.  We do have occasional earthquakes but that is also very location specific.

[Carlos Ptriawan]

 Ok fair enough. So modify the question, using your math. What state would be the best to $1m in, performing the best in 15 years?

the right question is "how do I place" my bet.

 
My own view: the answer is in the linkedin/zip recruiter/monster.com 

Find city/metro that has largest number of engineer job opening per square miles.

So you'll find:

San Jose,CA ; Burlingame,Ca ; San Francisco,CA ; San Diego,CA ; Austin,TX ; Raleigh,NC ; Boston,MA, Seattle,WA and maybe even Huntsville,AL.

Go follow the trail of money........and split the bet accordingly to those cities. Invest for 15 years and forget.

[Luka Milicevic]

Quote from @Karen Margrave:

Like it or not, no place is like CA. We have coastal areas, mountains, lakes rivers, cities and beautiful country properties. Plus the weather is to die for! Those things alone keep CA a high demand area to live and invest in. Personally I HATE the politics of CA, but let's not go there. 

 "let's not go there" is the whole reason people are leaving. 

Other states don't have those features, but they do have others-for example TN has beautiful country properties that people can actually afford. Did you know Somalia has one of the most beautiful, untouched beaches in the world? Would you live there? 

All the things you mentioned are HUGE +++ to the state. It's truly one of the most beautiful states in the country, but those things can only keep people there for so long as I believe you have had a net out migration of 350k in the last year and lost a congressional seat due to continued population decline. 

[Leo R.]

@Osazee Edebiri  what's the difference between trying to predict appreciation and speculation? (to me, there is little or no difference).

Sure, we can make all sorts of educated guesses about appreciation, but at the end of the day, nobody knows. 15 years from now, SoCal could be completely out of water...or it might not. 15 years from now, Cal could experience a catastrophic earthquake...or it might not.  15 years from now, the Cal legislature could enact sweeping rent control...or it might not.

60 years ago, there were probably plenty of people who assumed that RE in Detroit would be a great long-term appreciation play (I mean, why not--in the 1960s, Detroit was one of the most productive industrial powerhouses in the world!)...but we all know how that panned out.

Personally, I don't have Warren Buffet-like piles of cash that I can risk on speculative investments, so my strategy is to go for property that will cashflow enough to protect me from unanticipated problems, but in markets I think have decent appreciation potential...but none of my plans require appreciation to pencil out (doing that would be speculation).

Good luck out there!

[Bruce Woodruff]

Quote from @Dave Peterson:

I live near Sacramento.  Summer is my least favorite weather, but we have very low humidity.  Fall and Spring are awesome.  Winter depends on the amount of rain, but we get no snow in this area.  Also don't forget that CA doesn't have hurricanes and tornados.  We do have occasional earthquakes but that is also very location specific.

But the major faults in CA are approx 300 years overdue for movement...I toured a fault area with a Geologist a few years ago and it was frightening to say the least. They are expected to release and move about 300 ft any day now. So I wouldn't be so smug about no hurricanes or tornados, because, heaven forbid, if/when that happens it will make the worst tornado look tame.

[Bruce Woodruff]

Quote from @Luka Milicevic:

The state has now seen 9 straight years of population decline, with a 38% increase in 2017, with another MASSIVE increase at the start of the pandemic. I think the continued population decline will eventually catch up to the state and balance out the ridiculous regulation keeping supply artificially low.

I studied this in great detail before I left. And have argued errrr, discussed it on other forums ad infinitum. 

The NET loss per year is roughly 250,000, that means after you add all the people moving in - and they include homeless and illegals to try and bolster the number - that Cali is still losing 1/4 million people per year and rising.

Hence the loss of a house seat and electoral college votes, which will continue as the migration continues.

This is why the State was trying to put something called an Exit Tax into effect a couple years ago......taxing people that leave 30% of the sales cost of their assets. That idea was dropped temporarily after talk of interstate commerce clause etc....

Point is that this migration will certainly have some effect on real Estate, both in CA and maybe more importantly in the states where these people are moving...

[Johnny Wolff]

Quote from @Osazee Edebiri:

I think the constant discussion of California vs anywhere else is intriguing. So I pose a question. Hypothetical, if a person had a  2 million dollars to invest, they purchased property with 1 million in California and 1 million in any other state, which would perform better after 15 years and why? 

This assumes anything and everything will happen, which is the real life case anyway.  I am not automatically assuming California will perform better just because I live here in the Bay Area. I think someone may have interesting incite to why another state could out perform California property in the next 15 years.

 A very interesting question that I've been wrestling with recently.  I'm currently living in San Diego and deciding whether to buy here or buy elsewhere.

From a total ROI standpoint - I agree that CA wins (and I don't think its that close). Challenge is the cashflow won't be break even until the rents rise sufficiently - so you'll be getting hit consistently there. If you're cash rich and want to deploy capital and yield doesn't matter CA is the clear winner based on my modeling. But...who is so cash rich that they don't care about yield at all. Most people care at least a little bit.

[John Williams]

Appreciation is always a gamble - the past will not necessarily look like the future (especially in California). If you can still find cash flow, that is a different story. However, if you are betting on appreciation alone, you should be able to service the debt/expenses in some capacity just in case your assets don't appreciate as fast as you'd like. 

In my market, you can leverage $1,000,000 and pick up 15-20 solid homes that produce decent cash flow and appreciation!

[Tony Kim]

Quote from @Osazee Edebiri:

I think the constant discussion of California vs anywhere else is intriguing. So I pose a question. Hypothetical, if a person had a  2 million dollars to invest, they purchased property with 1 million in California and 1 million in any other state, which would perform better after 15 years and why? 

This assumes anything and everything will happen, which is the real life case anyway.  I am not automatically assuming California will perform better just because I live here in the Bay Area. I think someone may have interesting incite to why another state could out perform California property in the next 15 years.

By comparing it to "any other state", you're making it impossible to answer the question. I feel values are inflated here in California. But I also feel values are even more inflated to the extreme in several other parts of the country. I just came back from a one week business trip to Dallas. Of course, that obviously doesn't make me an expert on the Dallas market, but it did reinforce my belief that the best market to invest in is still your backyard. I loved Dallas and I loved the people here...super-friendly and I ate loads of great BBQ. But I'm pretty sure I wouldn't want to buy a multi-unit in Dallas unless I lived here. But if I DID live in Dallas, I would start gobbling up properties before prices started to resemble Austin or Houston. It also reinforced my beliefs about California...and they are pretty much in line with @Karen Margrave's post. I just wouldn't be able to give it up to relocate and thereby have direct access to cheaper properties.

California is at a point where direct ownership by Mom and Pop investors such as myself just doesn't make much sense unless you're extremely well capitalized. If you're intent on direct ownership, then most par-time investors like me will have to invest OOS to avoid negative cash-flow for the first several years. I leave it to the pros and have put most of my focus on evaluating syndicated deals on the west coast, of which there is a ton of activity. The pros don't seem to be frightened of the oppressive CA regime. It's mainly the Mom and Pops like me that like to overplay it. 

[Matthew McKee]

Quote from @Osazee Edebiri:

Quote from @Matthew McKee:

Quote from @Carlos Ptriawan:

Actually there's no such this as CA vs out of state.
This is all just mathematical equation dude. So lets have this exceltable how the house appreciation performs since 2009 :

Bay Area    6.9%
San Diego  6.5%
Kansas City 3.2%
Nationwide Average 3.1%
Typical Inflation every year 2.9%
..
Indianapolis,IN 1.8% (just for illustration ,not accurate)
Birmingham,AL  1.5%  (just for illustration,not accurate)

 There's a metro that's accelerating double in the inflation rate, that's where you see the highest acceleration. The highest acceleration is equal to a lower cap rate equal to lower cash flow.

In the other spectrum, there're cities where it's lacking appreciation, so you can still always have higher cash flow/higher cap rate in that city.

In another question: what makes the city appreciates a lot? economic booking and highest supply/demand ratio.

In the year 2300, if Silicon valley moves to Boise Idaho, Boise Idaho will appreciate double as well. 

So it's not about "where", but it's about "economy". Higher economic output triggers higher appreciation, it happened everywhere regardless it's San Jose, NYC, Singapore, Berlin, or London. 

It's a function of math.

this is an astute breakdown.

At the end of the day, no one has a crystal ball. If the numbers makes sense, a deal can work in any market but who knows what that market will become in 15 years. 

 Right, but if that was truly the case people wouldn't associate such a negative connotation with investing California vs any other state. 

Biases are largely formed from historical data or common rhetoric, biases are also personal opinions often shared by a number of people. Yes California is an intimidating market and the current tenant/landlord laws make it even more so but numbers don’t form biases and the future isn’t chained by the past.

I’m mostly just being philosophical but I do believe every market has the potential to be flipped.

[Carlos Ptriawan]

Here I break down for you. THis is the real time ratio between Engineering jobs wanted and home available for sale.
I use indeed and zillow.

san jose,ca 8200 engineer jobs: 860 home listing.
san diego,ca 3200 engineer jobs: 1748 home listing
austin,tx 2900 engineer jobs: 3500 home listing.
raleigh,nc 1900 engineer jobs: 1200 home listing
huntsville,al 1700 engineer jobs: 774 home listing.

Now you know why Bay Area keeps growing, the demand for engineering job is so high that there's no home for sell, there're 10:1 ratio !
Austin is like 1:1 ratio, there's house for every new job meaning there's no scarcity of house in TX.

Huntsville,AL is good choice as it has 2:1 ratio 

The texas guy is correct, we need to move those engineer job to TX. The demand for job in CA is too high ...

[Carlos Ptriawan]

By comparing it to "any other state", you're making it impossible to answer the question. I feel values are inflated here in California. But I also feel values are even more inflated to the extreme in several other parts of the country. I just came back from a one week business trip to Dallas.

Value everywhere is inflated. But there's this research from Blacknight Mortgage(?) Research is showing the "total mortgage payment ratio compare to median income" ratio where Mortgage/Income ratio is higher in Austin,TX and Las Vegas, NV.   Bay Area is actually in the middle of the range so relatively Bay Area is cheaper than Austin from middle class perspective. While the lowest ratio (most affordable) is in the area of raleigh,NC ; SC , etc,etc..

It's not a coincidence that Austin and Vegas is feeling price depreciation in the last few months along with Bay Area as well.

[Thomas Higgins]

Loved this question as you can take it anywhere! Market, asset type, politics, Macro, Micro etc. Here is my take as I see it as a great opportunity to show the value of multifamily cash yield-focused investing. I will use two examples to illustrate the power of multifamily cash flow investing in markets with good cap rates:

In California, I buy a 3-million-dollar house (after accounting for buying costs and a reasonable LTV 1M/.33) seems about right. I find a great broker and am able to purchase based on local comps with a 4% cap rate (or cash on cash yield). I get a loan from an awesome broker at a 5% interest rate. I own it for 15 years and the market appreciates by 3% per year.

In Ohio, I buy a 20-unit property ($1M/.25 / 200k a door) for $3M and own and operate it for 15 years. Let's assume I buy this 20-unit building at a 6.75% cap rate and get a loan at a 6% interest rate with a 75% LTV.

I modeled both scenarios back of an envelope to illustrate the differences in each strategy. I should note that my sense for the California SFH space is that a 4% cap rate on a $3M home may not be attainable, and some people may argue 3% appreciation is too low or high. I am using it as a benchmark to show both ways of looking at real estate and not comment on the appreciation potential of an entire state.

I hope you find this helpful!

[Dan H.]

Quote from @Luka Milicevic:

Quote from @Karen Margrave:

Like it or not, no place is like CA. We have coastal areas, mountains, lakes rivers, cities and beautiful country properties. Plus the weather is to die for! Those things alone keep CA a high demand area to live and invest in. Personally I HATE the politics of CA, but let's not go there. 

 "let's not go there" is the whole reason people are leaving. 

Other states don't have those features, but they do have others-for example TN has beautiful country properties that people can actually afford. Did you know Somalia has one of the most beautiful, untouched beaches in the world? Would you live there? 

All the things you mentioned are HUGE +++ to the state. It's truly one of the most beautiful states in the country, but those things can only keep people there for so long as I believe you have had a net out migration of 350k in the last year and lost a congressional seat due to continued population decline. 

 The CA population did not decline on 2020 census vs 2010 census. In fact it had the 2nd highest increase of population behind only Texas.  The issue is that the population did not grow at the same percentage of the US population as already represented by the state.  So even though it had 2nd largest increase, it’s percentage of the US population declined and therefore it lost a representative.  

California’s population is significantly larger than any other state.  The population can increase significantly but still decline as a percentage of the US population. 

[Bonnie Low]

@Osazee Edebiri Go Wildcats! LOL

[Carlos Ptriawan]

 People always add something that's irrelevant.

Yes CA pop is declining, yes hmeless is increasing yes CA gov is anti landlord. But that's irrelevant.

What's relevant is # of tech jobs and supply/demand of real estate.

Folks coming to bay area to fill high paying tech job, not to change the city landlord  law , not to change the gov into red state, etc etc

If tomorrow Bill Gates and Musk decides to move to Boise Idaho, we will move there too, it's that simple