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.

[Bruce Woodruff]

Where in California? San Diego or the Bay Area? Hard to beat that appreciation.

Rental properties or primary homes? If rentals you always have the ugly Blue State thing waiting to popup.

Too many variables. Narrow it down a bit.

But generally if you stay coastal in Cali, it's tough to beat. 

Unless this whole mass exodus thang pushes prices down.....

[Osazee Edebiri]

Quote from @Bruce Woodruff:

Where in California? San Diego or the Bay Area? Hard to beat that appreciation.

Rental properties or primary homes? If rentals you always have the ugly Blue State thing waiting to popup.

Too many variables. Narrow it down a bit.

But generally if you stay coastal in Cali, it's tough to beat. 

Unless this whole mass exodus thang pushes prices down.....

 I mean it's really wherever, for those of us that know California we know it's vast. You said costal, but what about a property in Tahoe. I think there are still many people that don't realize we have snow in California lol. My goal is not really about specific cities, it's about hearing other people give legitimate reasons they feel another state will perform better. They can pick any city they want. 

From your response, I feel it's say to say you feel California will perform better in 15 years, even though you're in Arizona?

[Bruce Woodruff]

All other things being equal, I would say a property in Southern California that is not too far inland will perform better than any place else in the country.

But I would not say that for the rest of california, no. I think that there are many other parts of the US that will begin to outperform the bulk of California.

I lived in California for decades, and just recently left. I have had properties that I bought here perform even better than California properties to be honest.

At least as far as appreciation is concerned.

[Matthew Crivelli]

California offers high property taxes, tenant friendly laws to a fault, ENDLESS regulations and more volatility than anywhere in the country. Old timer type wisdom would tell you to invest elsewhere and I would have to agree.

[Bruce Woodruff]

Quote from @Matthew Crivelli:

California offers high property taxes, tenant friendly laws to a fault, ENDLESS regulations and more volatility than anywhere in the country. Old timer type wisdom would tell you to invest elsewhere and I would have to agree.

Actually their property taxes are locked at 1%, plus local tax, so not really that bad. It was 1.25% when I was in San Diego County, but we're at half that here in AZ. 

Everything else you said is true, but if you're just talking RE performance, Cali has historically been hard to beat. I think that changes too, once more people realize the benefits of moving elsewhere, but the OP said 15 years, and I don't think it shifts that quickly.....

[Zach Cohen]

I am a new investor in the San Diego area and I am weary of investing here/ California for multiple reasons.... the income tax on rentals is high... like the above poster stated the tenants can essentially squat here with out paying rent and landlords have no rights... and this is not the same California of even 5 years ago. The state is overrun by crime and homelessness, people are leaving this state in a mass exodus as are corporations. 

[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.

[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?

[Osazee Edebiri]

Quote from @Bruce Woodruff:

All other things being equal, I would say a property in Southern California that is not too far inland will perform better than any place else in the country.

But I would not say that for the rest of california, no. I think that there are many other parts of the US that will begin to outperform the bulk of California.

I lived in California for decades, and just recently left. I have had properties that I bought here perform even better than California properties to be honest.

At least as far as appreciation is concerned.

Interesting, why socal over the Bay? I definitely get the costal appeal in SoCal, especially like the OC, they have cites that are excellently developed, I used to work for Irvine Company.

However Pinnsula cites in the Bay are some of the most valuable properties. 
I went to a pool party Los Altos on Saturday. No shade to the house, but at a 4 million dollar plus worth value, you could get a brand new way better house in the OC. (I should have asked the host how much he was renting it for).

So I am not sure about SoCal over the Bay.

[Osazee Edebiri]

Quote from @Matthew Crivelli:

California offers high property taxes, tenant friendly laws to a fault, ENDLESS regulations and more volatility than anywhere in the country. Old timer type wisdom would tell you to invest elsewhere and I would have to agree.

Texas is a place that many would say is more landlord friendly, but they have higher property taxes than California.

Landlord friendly is not an issue if buy in the right expensive California city. Not sure if you have experienced a lot of California, but as a young timer born and raised in the Bay 😉. I can tell you if you buy a house in almost any city where the schools are all rated 10’s you will likely not have the landlord issue people are scared of California for.

I will agree with you Matthew, there are some cities that have Endless regulations, but many cities in other states have those problems too.

What stay do you have doing better than Cali in 15 years?

[Osazee Edebiri]

Quote from @Zach Cohen:

I am a new investor in the San Diego area and I am weary of investing here/ California for multiple reasons.... the income tax on rentals is high... like the above poster stated the tenants can essentially squat here with out paying rent and landlords have no rights... and this is not the same California of even 5 years ago. The state is overrun by crime and homelessness, people are leaving this state in a mass exodus as are corporations. 

Agreed, some nasty issues, but do you think there is another state that beats California in 15 years and why? 

Stating the negatives of Cali doesn’t mean that other states will beat it in 15 even with those issues.

[Bill B.]

Don’t forget. Huge state income tax on that capital gain, even if you do a 1031 out of the state. You’re betting on California versus Miami, versus, Austin or Dallas, versus I dunno, Puerto Rico. Suddenly you’re facing rent caps and relocation fees a ban on no-cause evictions. You can not imagine what California will think of in the next 15. 

Their ideas in the last 12 months. Tax billionaires, even if they leave the state. Pay fast food workers $22/hour. 25% tax on anyone that sells a property within 5 years of purchase, any vacant hotel rooms must be made available to the homeless, stealing less than $1,000 isn’t a crime, protests against cleaning up parks, free drug needles, camping on the sidewalk and in peoples yards is a right, etc etc etc. 15 years ago NONE of these things would have been predicted. 

I’m not saying you can’t make money in California, lots of people doing it. On the other hand. If you didn’t live there you wouldn’t consider it. Why would you want to invest where they actively HATE you  

“If San Diego wasn’t in California I’d move there tomorrow.”  (Assuming it was still in the US not Mexico…)

[Chris John]

@Osazee Edebiri

Here's my argument against California (besides the obvious regulation and rent control).  If I were going to invest $1M, I wouldn't buy $1M worth of property.  I would leverage it and buy $4-$5M worth of property.

At that point, I wouldn't expect to be able to cashflow that in California currently, so I'd have to make up some of that $3-$4M worth of mortgage payment out of pocket (not happening.  I'm just a teacher!  haha.) 

However, I could buy properties in Jacksonville that would cashflow (and most likely appreciate too).

The problem with appreciation is that it doesn't help if you can't hold onto the property long enough to realize it.  Some of us need cashflow too...

[Bruce Woodruff]

Quote from @Osazee Edebiri:

I will agree with you Matthew, there are some cities that have Endless regulations, but many cities in other states have those problems too.

You're incorrect here. I understand you are biased towards Cali, and that's ok as long as you realize that. But there are no other states with the over regulation that Cali has. Zero. I lived and owned many businesses and properties there for over 40 years, longer than you've been alive.

And if someone decides to squat in your Bay Area Mansion the State Law will protect them, it's a State issue and then County, not neighborhood. (Although I get that you're saying that rich areas will treat it differently, the elites never follow their own rules)

[Dan H.]

Quote from @Matthew Crivelli:

California offers high property taxes, tenant friendly laws to a fault, ENDLESS regulations and more volatility than anywhere in the country. Old timer type wisdom would tell you to invest elsewhere and I would have to agree.

 California’s property tax is typically ranked as 15th or 16th lowest in the nation. 

Endless regulations still result in one of the lowest eviction rates and lowest rent delinquent rates in the country. 

Case Shiller shows the 3 best returns for residential property for this century are coastal California cities.  

neighborhoodScout has virtually every California coastal city as 10 out of 10 in appreciation for this century. 

Every reputable source shows coastal California has produced better returns for this century than other large residential RE markets. 

Volatility of coastal Ca is a myth.  Virtually every coastal Ca city has had few significant depreciation cycles.  The coastal Ca cities recovered from the Great Recession faster than the bulk of other cities.

Your old timer wisdom would not have served you well in the recent past.  Question is how would it serve you going forward.  My opinion, not well.  

[Dan H.]

Quote from @Bruce Woodruff:

Quote from @Matthew Crivelli:

California offers high property taxes, tenant friendly laws to a fault, ENDLESS regulations and more volatility than anywhere in the country. Old timer type wisdom would tell you to invest elsewhere and I would have to agree.

Actually their property taxes are locked at 1%, plus local tax, so not really that bad. It was 1.25% when I was in San Diego County, but we're at half that here in AZ. 

Everything else you said is true, but if you're just talking RE performance, Cali has historically been hard to beat. I think that changes too, once more people realize the benefits of moving elsewhere, but the OP said 15 years, and I don't think it shifts that quickly.....

 With prop 13, the median (or maybe it is average) is around 0.7%.  So even better than the 1% plus local prop taxes.  Most rankings have CA as the 15th or 16th lowest property tax.  

[Darius Ogloza]

@Osazee Edebiri I actually ran something close to your hypothetical back in 2004. I took a $400,000K HELOC from my primary residence in Marin County and purchased eight properties in Rochester NY - mix of a duplexes and SFR's on the theory that California property served as a kind of "stock" and that I needed some "bonds" in my portfolio. I ended up selling most of the Rochester properties in 2014-15 at a rough break even point as there was little appreciation on most and the cash flow was mostly eaten up by capital improvements and repairs. Had I used the $400K to purchase another Marin County fixer I would be up another seven figures today. Easy. Of course, one example proves nothing but I here's a data point/some food for thought.

P.S. nothing against Rochester.  It's a great place to invest but you have to run the numbers and then run them again figuring that the weather and taxes are going to have an effect on your bottom line.  

[Wale Lawal]

@Osazee Edebiri

California is called the Golden State for many reasons. Plenty of sun, the gold rush, and extraordinary past opportunities to invest in real estate. While California is still an ideal setting for certain people, it is quickly becoming more difficult to justify buying property there. This is especially true because there are, arguably, 49 other states with more attractive real estate investment incentives.

For people who have only known California as home, it can be a little difficult to think about shopping for property anywhere else. Try to counter this bit of nostalgic grief by framing real estate investment properly. It helps to keep an open mind about a smart relocation. Here are five benefits that accompany property ownership outside of California.

1. Living More Comfortably, While Chasing Other Economic Opportunities

It is no secret that the cost of California acreage is only surpassed by certain select metropolitan properties in places like Manhattan. For the price of a simple home and plot in California, a small ranch can be purchased in many other states. Plus, the tax burdens in these places are much more manageable. Also consider states like North Dakota. Property prices there are also rising, but there is much more raw land available. Industry growth is also producing income opportunities that are setting records.

2. Investing Beyond Ballooning Markets, or Scarcity Fears

Investing in real estate simply because the market is volatile is not a secure plan. Try to remember 2007. Places like Utah and Colorado have balanced housing market statistics. Though there are upward trends, they are not only occurring because cities are running out of room.

3. Exploring States with More Resident-Friendly Governments

Sometimes, when reading California news, it seems as if the state government doesn’t actually like the job of managing its population. This is especially true when it comes to the act of finding affordable property in a safe neighborhood. Consider economically unique shifts like those in Wyoming. This state has just provided home buyer and business incentives for people using money vehicles like Bitcoin. This is a no-nonsense move to attract people who want to make the state home.

4. Escaping the “Nanny State”

Freedom is a huge issue with property buyers, regardless of age and class status. New California legislation, like the recent home solar power mandate, is the last straw for many people. There is a renewed desire for personal liberty in modern America. This is precisely why a state like Idaho is one of the fastest growing. In a city like Boise, new residents can enjoy metropolitan attractions, untouched wilderness areas, and private acreages with simple municipal laws to “homestead.”

5. Being Part of a Place with Growing Attractiveness for the Future

While a state like California has nearly endless attractions for visitors, most property owners would say that it is headed in the wrong direction. Why invest in an area that has an uncertain social and economic future? Bottom line real estate profits are only one factor in finding the right property. Take the time to learn about markets in areas that will likely remain popular for decades to come.

Good Luck!

[Shiela R.]

Colorado has the third lowest property taxes in the US.  Boulder has a housing cap (limited supply) and steady demand.  So not unlike geographical limits to supply on the CA coast.  And as many have said, the state of CA has some issues regarding landlord tenant laws. I was recently speaking with two different people who live outside of CO. One an accountant in PA and the other a water law attorney in Utah and we  are astonished that there isn't more talk of the American Southwest running out of water. Is anyone else concerned about lack of water in CA and the rest of the Southwest?  Would this be a contributing factor to not invest in these areas? 

[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.

[JD Martin]

Quote from @Shiela R.:

Colorado has the third lowest property taxes in the US.  Boulder has a housing cap (limited supply) and steady demand.  So not unlike geographical limits to supply on the CA coast.  And as many have said, the state of CA has some issues regarding landlord tenant laws. I was recently speaking with two different people who live outside of CO. One an accountant in PA and the other a water law attorney in Utah and we  are astonished that there isn't more talk of the American Southwest running out of water. Is anyone else concerned about lack of water in CA and the rest of the Southwest?  Would this be a contributing factor to not invest in these areas? 

I'm not concerned because I don't live there, but if I lived there I would be very concerned. Potable water is going to be the coming century's oil.

[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.

[Aaron Gordy]

@Osazee Edebiri I think that one of the richest folks currently: Elon Musk has kind of led by example by putting down billion dollar roots in Texas. He left California. 

[Osazee Edebiri]

Quote from @Bill B.:

Don’t forget. Huge state income tax on that capital gain, even if you do a 1031 out of the state. You’re betting on California versus Miami, versus, Austin or Dallas, versus I dunno, Puerto Rico. Suddenly you’re facing rent caps and relocation fees a ban on no-cause evictions. You can not imagine what California will think of in the next 15. 

Their ideas in the last 12 months. Tax billionaires, even if they leave the state. Pay fast food workers $22/hour. 25% tax on anyone that sells a property within 5 years of purchase, any vacant hotel rooms must be made available to the homeless, stealing less than $1,000 isn’t a crime, protests against cleaning up parks, free drug needles, camping on the sidewalk and in peoples yards is a right, etc etc etc. 15 years ago NONE of these things would have been predicted. 

I’m not saying you can’t make money in California, lots of people doing it. On the other hand. If you didn’t live there you wouldn’t consider it. Why would you want to invest where they actively HATE you  

“If San Diego wasn’t in California I’d move there tomorrow.”  (Assuming it was still in the US not Mexico…)

 Lol, I hear you about San Diego, but again there are tons of cities in California, they are not all the same or managed the same.  I feel like if we are talking about negatives did you hear about Illinois purge law 2023. Bad laws aren't impervious to only California.

Ok, but which State would do better in 15 year, if not California and why? We can't just move SD haha.

[Carlos Ptriawan]

Quote from @Aaron Gordy:

@Osazee Edebiri I think that one of the richest folks currently: Elon Musk has kind of led by example by putting down billion dollar roots in Texas. He left California. 

 We need more people like  Elon Musk.

When these techies move to different places, the new place suddenly has price appreciation, good for realtor :-) 10 years later, people start complaining 'why everything is so expensive here, lets's move to Florida or Alabama'.