Best Way To Start In a High-Cost Location

[John Schofield]

I've got a decent sum of money that I'd like to deploy into real estate. I've been listening to the BP Podcast and reading real estate books for a while, but I'm having a hard time figuring out what direction to go. Here's my situation:

• I have a job, and I like it, so I'm not looking for a real estate investment that would take up as much time as another job. That leaves out wholesaling and flipping.
• What I'd really like to do is buy-and-hold investing, but Los Angeles doesn't seem a good environment for that. There are some decent cap rates about a three hour drive from my house, but I'm not sure as a new landlord I should be taking on something that far away. (I've been looking at duplexes and triplexes on LoopNet.)
• That leaves me with investing somewhere even further (Texas, Arizona, Nevada, etc.) but I don't think investing somewhere that far away, as a new landlord, is a good idea.
• So buy-and-hold seems to be out. That leaves hard money lending. (Am I missing something?) But I haven't seen many posts or books about being a hard-money lender, and that seems like a field where ignorance could really cost you.

Any thoughts from anyone? Suggestions for where to look for further information? I'd love to hear stories from people who have been in my situation. I'm open to any suggestions for a niche to dive into -- commercial, residential, hard-money lending, etc.

[Leonard L.]

@John Schofield Hard money investing requires a lot of knowledge.   For example, do you need a license to lend money secured by real property in California (answer, yes, with some exceptions).  Also, if the loan is not mediated by a licensed broker, you are subject to usury and other restrictions.  These are among the many traps for the novices.   Due diligence, legal documents, finding borrowers, turning your capital, all of this can add up to as much time and trouble as wholesaling if you are doing it all on your own.

There is the partner route suggested by @Mark Mynhier above.  This is a good idea.  But it does not answer the question of what strategy you should pursue, because you could as easily partner with a hard money lender as a wholesaler or fix/flip guy.

My advice is not to give up on buy and hold.  Personally, I am willing to trade cap rate for equity, meaning I would rather own the asset and have a lower cap rate than have no equity but a higher return (which is lending).    Are you better off with a 5% cap rate and equity, or a 10% cap rate with no equity?  There is no correct answer, since that depends on your view of future market appreciation, by definition uncertain.  But if you are thinking buy/hold, you are probably a believer the power of long term appreciation.  Also, if you are willing to use mortgage debt, buy/hold allows the power of leverage.  Again, something you can't easily get without owning the equity.

I buy mostly in the Inland Empire, which is closer to me in OC than it is to the Valley.  I was lucky to buy many of my assets in 2010/2011, which means I have been spoiled with a 10%+ unlevered return as well as excellent appreciation.  Those days are gone, of course, but I still manage to find deals with get a 5-8% return from time to time.  However, I am looking to move closer in and have been hunting through LA's neighborhoods myself in trying to decide where my next play is.

My thinking has been influenced by David Schumacher's book - Buy and Hold.  I believe in the future of Los Angeles and think that if you buy in a decent neighborhood (looking in parts of Hollywood, Echo Park, Mt Washington, USC adjacent, and other transforming areas of LA), get a tenant to pay the mortgage, then repeat as often as your capital allows, you will look up in 20 or 30 years and have both substantial income and massive asset base.   Personally, I am skeptical that the same will be true if you follow the advice of many here at BP about investing in distant markets (cough, Detroit).

Good luck.