Buy SF in LA or MF outside of California?

Question

My wife and I's goal is to buy our first property towards the end of this year when we think we will have enough for a down payment.  But our dilemma is whether to buy in LA or outside of California.

The same amount of money is enough for a 5% down in Los Angeles or 20% on more affordable markets. In LA we'd be buying a non-renovated SF (with granny's flat) where we'd move to and rent the granny's flat to help pay the mortgage.  Adding up what we pay now for rent + income from the guest house, we'd still have to add another $1000-$1500 to pay all expenses. Now, in the case of buying a triplex or fourplex in a cheaper market, we are thinking a turnkey property and saw some options that would give us about $450-$600/month positive cashflow.

On paper, it seems the smart option is to buy outside of state and get that cash flow going but there's one important thing, we live in a 1 bedroom apt with a 21-month old girl, which means maybe we have 1 more year at our current place and we'll definitely have to move to a 2-bd place and rent will increase by $500-$1000. at least, so then, there's not so much difference anymore.

I'd love to know your thoughts.

Thank you in advance!

Arlen Chou · Answer

@Joan Pla there are so many more advantages to doing a house hack than investing in a small multi out of state that it really does not make sense to burn time on looking out of state. First off you get prop 13 that will protect your future property tax increases. Secondly, you get the debt pay down of having a tenant. Third you get better interest rates on a primary residence compared to an investment property. Fourth, there are other tax advantages, but I am not a tax professional so I suggest you speak to someone more qualified. Fifth, you get hands on experience in a very controlled situation. Sixth, you don't have any PM fees that will eat at any income (if you choose to self manage).

Good luck!

Amit M. · Answer

@Joan Pla definitely buy locally and rent out the granny flat. No brainer!

You’re buying in a prime, appreciating market in LA. 10 years from now you’ll thank yourself for making that decision, when you see the appreciation in your home. You could then refi, pull money out and buy a second property- either another investment prop, or a bigger home for your family (and then rent the first one out completely, as it will probably cash flow nicey then.)

I’d watch the local markets you’re interested in like a hawk. See where prices are softening. Balance that with interest rate trajectory (especially if they continue going up next year.)

Focus on gentrifying neighborhoods (more potential for rapid appreciation,) look for value add project (maybe expansion, renovation, etc.) Even if you can’t afford to do it now, lock it in for the future.

Ask yourself this: how many people who brought in LA 15 years ago didn’t make significant $$$ via appreciation? (Usually 7-10 years is plenty of time to appreciate, but give the Great Recession of 2008-09, I’m adding a few extra years to the equation.)

Joan Pla · Answer

@Andrew Neal thanks, we are definitely looking to get an FHA loan though we've already been pre-approved for a 5% down loan, which would be our second best option.

@Arlen Chou thanks for your reply. I don't know anything about prop 13, so I'll go and educate myself on that regard. Aside from that, you pointing out the advantages makes it much easier to have a better picture. Really much appreciated.

Joan Pla · Answer

Account Closed yeah, not San Francisco for me :) I love the city but prices there, you know well they are non-sense!! :)

Andrew Neal · Answer

@Joan Pla congrats and starting your journey. Trying to invest while also living in California definitely presents some unique challenges primarily because the cost of living here is so high.

Something that has worked for my wife and I being in the Bay Area was initially using an FHA loan to jump into the market and start earning equity. Because our homes here appreciate like few other places in the world were we able to about 3.5x our initial cash investment in 2 years. We took the cash and now put 10% down on a home that needed a bit more work but we’re able to force appreciation on and allow us equity to start brrrr’ing with.

We have a toddler and another on the way so despite what some may say you definitely need to find a way to make it work for you and your family as well.

Marvin Lara · Answer

@Joan Pla I live in LA county, also a newbie, and even thinking about out of state investing. We are currently shifting from a seller's to a buyer's market. I am hoping in the next couple of months, we'll see a bigger shift where the numbers will make more sense.

I have come across a few properties where the numbers do make sense, its all about meeting the correct RE agents and telling them upfront what your criteria for a property is. Also, meet some wholesalers, they typically come across some good deals, however they may be better for flipping in most cases.

However, in California, just get used to having your offers constantly rejected.....just keep pushing and make sure not to lower your standards.

Dan Smith · Answer

It sounds like you need to take the time to assess your situation and your specific needs.  If you've never managed a property before, I would suggest not starting out with something out of state.  I currently own a MF in Massachusetts that I purchased and lived in for 2 years, but moved to CA and have been taking on the management while I live out here.  Even with all of the systems I have in place from when I lived in MA, the reality of being out of state makes everything more difficult (but not impossible).  From finding new tenants, to turning over a unit, to dealing with issues as they come up- I'm fortunate enough to have a friend who helps me out in MA with physical needs, but it's never done as well as I would personally do it.

Your situation is going to be unique to you, for instance - your daughter. I'm fortunate enough to not have any children that depend on me, so I probably have a little more free time than you to dedicate to this stuff, so what I say is best might not be for you.

I would recommend that you continue to save up for that down-payment, but also set aside time each day or week dedicated to learning about out of state investing vs investing in a market in CA.  Also remember, depending on your threshold, the further from LA you get, the farther your money will go, but also your commute.

To start your education, I would recommend Long Distance Real Estate Investing, by David Greene - it's not the most concisely written book, but it would certainly give you a look into what it takes to be successful at it.

As for me - Since I moved to LA a year ago, I have realized that the cash flow game isn't one that I feel I can do successfully and I'll continue to buy MF's back in MA in a market I know better.

Good luck and feel free to PM me if you have any questions!

Account Closed · Answer

Prices are going down in LA; i'd be you i'd just rent in Venice and see where the market will be one year from now, unless you find a spectacular deal

Account Closed · Answer

@Joan Pla

I own a large commercial property in Inglewood but i bought it in 2012. The area is already too expensive imo. I think there is too much hype about this area to make any decent deal for now; i would rather look around riverside and try to find something that cash flow

Patrick Fraire · Answer

The out of state markets certainly are better passive investments. Southern California has some of the most over priced markets in the nation. If you just throw a dart at a map of LA vs Kansas City for example, your more likely to land on a property that yields a higher cash on cash return in KC (assuming no value add just passive turnkey). The market is going down right now in CA (correct me if I’m wrong we have a lot of markets and I’m only looking at a couple) I’m hearing people haven’t even felt a pull back in the mid west yet. Basically if you were just looking for a passive investment, out of state has higher returns, the numbers don’t lie.

However the fact you have a family and need a home but you also have a taste for real estate investing.... if I were you which I definitely am not otherwise why would I be commenting on my own post. I’d swing for a “2 on one lot” in Riverside...that would give your family a home and you an investment property. Don’t know if fha would let you buy 2 Homes on one lot but there are several of those that exist in riverside. Each house can bring in between $1500-$1800 assuming they are 2/1. Purchase price your looking at like 380k-420k depending on the area. I’m sorry for all the sifting your gunna have to do with my long post but good luck man and congrats on your baby!

Buy SF in LA or MF outside of California?

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