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.

[Becca F.]

I did a brief search of SFH prices for Brentwood and current rents (Trulia). The lowest priced home is $599,000 for 3 bedroom 2 bedroom. Most of them are in the $600,000 range. Rents are $2950 to $3200. Mortgage payment on a $680,000 house will be more than the rent and I'm putting 20% to 25% down for investment property. I don't see I could cash flow with interest rates being 7% now. I can't wait for something to appreciate in 5 to 10 years while being -$1000 or more every month. Then I'm leaving my children this huge mortgage with a non-cashing flowing house if I die.

I spoke with my lender and she said unless I'm buying multi-family it doesn't look good for SFH rents especially in California because prices and interest rates are high. There's no way I can buy a multi-family for $400,000, maybe a nice duplex in Indiana? I talked to an investor in Florida near the Panhandle (near 30A and Navarre Beach, Freeport and West Panama City Beach) who said I could buy a house for $425,000 to $450,000 with rents $2300 to $2500 (long term rentals) or $3500 to 4000 (furnished short-term or mid-term rentals) or a $250,000 house needing cosmetic renovations ($1330 mortgage payment with $1900 rent). His opinion is that Florida is a combination of California and Texas and I'd have better appreciation than Indiana. Those long term rents for the $400,000 houses don't look like I'd get a good return with current mortgage payments. My strength isn't in running the rental property analysis calculators. Now I'm thinking to not buy any rentals and buy some stocks or index funds, where I could easily escape if I need liquid assets. I'm so confused.

d the rents are currently $2950 to $3200.

[Naveed Q.]

[Naveed Q.]

I wonder how California fares against Texas in GDP per capita.

https://countryeconomy.com/cou...

[Karen Margrave]

Where I live in Redding they say we have 300 days of sunshine. We are one of the sunniest places in America. Our summers are not for the faint at heart, as the heat can get up to 118 (rarely) but we have great air conditioning!!  We have beautiful natural resources all around us (lakes, rivers, caverns and volcanoes). As a Realtor I see every day people fleeing CA for other states. It's basically anywhere but CA (or NY) We also have wildfires. However; there's still a huge demand on housing in CA, and even with people leaving, there's not enough housing. Our weather, the ocean, and all the other natural resources so far have proven to be a draw. However; now that we're seeing businesses leaving, big tech doing layoffs, and manufacturing going, we may see things turn around in the larger cities. Our education system in CA as much of America is failing too, so as they say, sit down, buckle up and hold on! 

[Karen Margrave]

When the market crashed my husband, our adult kids and their kids all left Redding, CA and moved to Orange County, CA. Why? Because southern CA always is the first to rebound after recessions. That's how I found Biggerpockets. Not knowing the so cal market, I was in search of information, and fell in love with the site. 

We were (2) general contractors, an electrical contractor, 2 Brokers and 1 agent. Our specialty was spec new construction. There was no better place for us to take that risk than the coastal areas of Orange County, in our opinion. There's a broad based economy, everything you can imagine to do, gorgeous beaches, perfect weather, world class schools and medical facilities. Drawback obviously is cost. However; there's a reason everything costs more, there's more demand, and thus high appreciation on properties.  

I loved doing business there. The reason we left was my husband unexpectedly passed away, and I had to regroup. My son and I moved to Bend, OR and did some projects there, then back to Redding, CA. 

[Steve Harlow]

There is no good answer to this. Depends where in Calif your taking about. If that's not defined it a pointless discussion. I have properties in California and about 7 other states.I buy different kinds of properties in different states. What are your performance metrics, IRR, Annualized returns, etc.

What's your risk tolerance?   You need to take your analysis to the next level.

[Becca F.]

Quote from @Steve Harlow:

There is no good answer to this. Depends where in Calif your taking about. If that's not defined it a pointless discussion. I have properties in California and about 7 other states.I buy different kinds of properties in different states. What are your performance metrics, IRR, Annualized returns, etc.

What's your risk tolerance?   You need to take your analysis to the next level.

Well said! I see lots of blanket statements "Don't invest in California. Prices are too high and it's not landlord friendly" to "You can't beat the California appreciation. It'll pay off in the long term" California is a huge state with Northern (San Francisco Bay Area, northern counties, Central Valley) and Southern (LA area, San Diego). I have 2 Bay Area properties that are cash flowing positive. My investor friends who acquired properties before 2010 and a few a long time ago (1970s to 1990s) are doing well charging market rate rents and the lower property taxes from Prop. 13. 

Right now my risk tolerance isn't very high so I'm looking out-of-state (most likely Midwest, Tennessee). The Bay Area has the highest income earners and it depends on how far they will move out while rents are increasing here. I could look at Stockton or Sacramento. Stockton is questionable to me with high crime areas and prices are still higher than the Midwest. I have a SFH in Indiana - there's no Prop. 13 there so I just saw another property tax increase. The assessed value is much lower than a California house so I'm still getting decent cash flow. I could cover the monthly payment for a while if I buy another $150,000 to $225,000 Midwest SFH if I couldn't get a tenant in right away. I couldn't do that on $600,000 to $1 million house in the Bay Area. I do see Bay Area investors here make the numbers work - I can't compete against a $700,000 all cash offer. I'll look at IRR and annualized return while doing my out-of state analysis. Also a beginning investor is in a different situation than an experienced investor with lots of equity. There are many ways to invest: different geographic locations, SFH, multi-family, long term rentals, mid-term rentals and short-term rentals and there's not one way that works for everyone.

[Robert C.]

Quote from @Becca F.:

Quote from @Steve Harlow:

There is no good answer to this. Depends where in Calif your taking about. If that's not defined it a pointless discussion. I have properties in California and about 7 other states.I buy different kinds of properties in different states. What are your performance metrics, IRR, Annualized returns, etc.

What's your risk tolerance?   You need to take your analysis to the next level.

Well said! I see lots of blanket statements "Don't invest in California. Prices are too high and it's not landlord friendly" to "You can't beat the California appreciation. It'll pay off in the long term" California is a huge state with Northern (San Francisco Bay Area, northern counties, Central Valley) and Southern (LA area, San Diego). I have 2 Bay Area properties that are cash flowing positive. My investor friends who acquired properties before 2010 and a few a long time ago (1970s to 1990s) are doing well charging market rate rents and the lower property taxes from Prop. 13. 

Right now my risk tolerance isn't very high so I'm looking out-of-state (most likely Midwest, Tennessee). The Bay Area has the highest income earners and it depends on how far they will move out while rents are increasing here. I could look at Stockton or Sacramento. Stockton is questionable to me with high crime areas and prices are still higher than the Midwest. I have a SFH in Indiana - there's no Prop. 13 there so I just saw another property tax increase. The assessed value is much lower than a California house so I'm still getting decent cash flow. I could cover the monthly payment for a while if I buy another $150,000 to $225,000 Midwest SFH if I couldn't get a tenant in right away. I couldn't do that on $600,000 to $1 million house in the Bay Area. I do see Bay Area investors here make the numbers work - I can't compete against a $700,000 all cash offer. I'll look at IRR and annualized return while doing my out-of state analysis. Also a beginning investor is in a different situation than an experienced investor with lots of equity. There are many ways to invest: different geographic locations, SFH, multi-family, long term rentals, mid-term rentals and short-term rentals and there's not one way that works for everyone.

Prop 13 is the most underestimated reason to invest in California. Honestly, the advantages it gives you over time didn't really fully hit me until I 1031'ed out of a building in 2015 and looked back on the decision several years later. I don't want to say it was a mistake, but when you happen to hit the part of the cycle that's on an upward trajectory, I've learned there's very little reason to give your property tax basis away by selling vs. a cash out refi. You can think of it as another hedge on inflation on top of fixed rate debt. 

[Bruce Woodruff]

Quote from @Robert C.:

Not when buying at today's prices. It's primary benefit is for those who bought decades ago and are holding, not investors. It's just numbers.....buy a much lower priced property at tax rates close to (or lower) than California's and you'll be way ahead.

For example, I was paying 1.25% in Cali and now pay .65% in AZ. True, it's not locked in but after 3 years here it has barely moved upward.

[Robert C.]

Quote from @Bruce Woodruff:

Quote from @Robert C.:

Not when buying at today's prices. It's primary benefit is for those who bought decades ago and are holding, not investors. It's just numbers.....buy a much lower priced property at tax rates close to (or lower) than California's and you'll be way ahead.

For example, I was paying 1.25% in Cali and now pay .65% in AZ. True, it's not locked in but after 3 years here it has barely moved upward.

No doubt, the benefits if you bought decades ago are huge today, but that same principle applies with buying today, you just have to wait for it. Hindsight is 20/20 and we won't be able to see who is right until another couple decades have passed. Also, I take issue with saying that it does not benefit investors... there is such as a thing as a buy and hold investor... ahem.. like me. But yeah, anybody flipping or syndicating won't ever see the full benefits because they don't hold long enough.