Newbie California investor looking to B&H out of state (Milwaukee?)

[Nick Wiswell]

Hi everyone,

I'm a mid-twenties engineer out of the SF Bay Area.

I've been lurking the site for a few months as I've mulled the "Real Estate Option" - we're getting to that phase of the boom-bust cycle that I'm just not super comfortable with my money in stocks anymore, but I'm not big on the idea of letting it sit idle, either.

Fortunately, mortgage interest rates are at historic lows! With the Fed rate hike coming any time now, I'm motivated to execute on a buy-and-hold property deal in the next few months and get some of that cheap leverage. I've got about $50k-$60k unencumbered cash to invest, so my target quadplex price would be around $200k at 25% down. I'm looking primarily to maximize cash-on-cash return - not super interested in equity appreciation, since I'm not really planning to sell.

It didn't take long to determine California wasn't the right place to buy. What I did find out is that quadplexes look really great for cashflow. 

It also makes sense from a financing perspective - my credit score is 760+ right now, but the average length of credit history will come down really fast if I get a few SFR mortgages.

Being an engineer, my instinct was to go straight for the data. I got a bunch of Census statistics and the January Zillow Price/Rent ratio for every ZIP code in the country. I threw this all in an Excel file, then filtered it to exclude ZIP codes with vacancy rates above 5%, fewer than 100 quads, median rent less than $800, median household income less than $50,000 (I am looking to avoid Class C-D), and fewer than 5,000 households in the area.

Then I sorted by the price-to-rent, and got this for the Top 10:

Naples, FL 34105

Town of Horseheads, NY 14845

Plantation Island, FL 34109

Pittsburgh, PA 15211

Homewood, IL 60430

Chili, NY 14624

Penn Hills, PA 15234

Pennsville Township, NJ 08070

Milwaukee, WI 53222

Saint Clair Shores, MI 48082

The rules prohibit me from linking the Google Doc, but if you are interested in it I am more than happy to share - just ask! You can even download a copy and set your own filter parameters.

The first 8 I didn't like for a variety of reasons (Naples has a snowbird problem and is going to be underwater any year now, Horseheads is small and I'm looking for good property managers, Pittsburgh has been struggling macroeconomically...)

I did like the look of Milwaukee.

I listened to BiggerPockets Podcast #73 with Mehran Kamari, another California investor who partnered with Dawn Anastasi to be his "boots on the ground" and help make his first out-of-state purchase in Milwaukee. I'm hoping to do something similar. 

If you think you'd be a good match, drop me a line.

I've also got a few questions:

1) Since this is obviously a lot more work than stock market investing (and a lot less liquid, too), I'm looking for 15-20% cash-on-cash return, given a 4.25% interest rate. The 50% rule suggests it should be possible, but I'm not sure if that takes into account property management fees.

Am I crazy?

2) Should I be contacting a real estate agent at this point? If I partner with someone here, do I even need one?

3) Will I need to take more than one plane trip? I expect to need at least one, but the fewer the better, since I've got a regular 9-5.

4) Any ideas better than Milwaukee?

Thanks for reading.

[Account Closed]

Nick,

Wow!!!  Your thread brought out some heavy hitters like Arlen, Kathryn, Bob and Jay.  Congrats. Unfortunately, these heavy hitters cannot SAVE everyone.  Everyone has to "learn by doing."  

I saw so many flaws in your above posts that I don't know where to begin.  Let's discuss just 6 points.  Unlike others, I will not bother to convince you to invest locally.

1 - "It didn't take long to determine California wasn't the right place to buy."  CA is a big place.  I guess you meant the Bay Area.  @J. Martin has been investing in the Bay Area and has built up a $1MM real estate portfolio with an annual gross rent of $140k in the last 18 months or so.  J didn't even have $50k - $60k of capital to start out with so you're way ahead of the game compared to him.  Why could he do it and not you?   

2 - "The median house price in Cupertino, one of the wealthiest areas, is more than eight times the median income."  Do you know why, or shall I say have you figured out why that is the case?   

3- "I know young engineer couples that cannot afford their down payment, and would get rejected by the bank anyhow on a DTI basis."  Ironically, I know young engineer couples, who are first time home buyers, bought $1.47MM to $2.1MM home in the Bay Area recently. Could it be that we don't hang out with the same crowd? :0)

4 - "When interest rates reverse there is going to be a bloodbath."  Think about what you just said.  Let me ask you.  Based on history, what makes interest rates to go up?

5 - "I can't predict growth. I like boring - it's predictable. And if I can make 15-20% CoC..."  Here is the response above from @Jay Hinrichs  who owned 350 properties out-of-state till recently.  "The big assumption you make is that you actually get the rents on time and consistently."

6 - "Ben Graham's value investment philosophy."  Value investing has to do with buying assets at a discount.  As Warren Buffett said, the only thing we can control is the purchase price.  Buffett also likes to buy assets with a margin of safety.  What you have described above is not value investing IMO.

Let me leave something that I learned from Master Oogway - "One often meets his destiny on the road he takes to avoid it."

Happy Hunting and Investigating.