Out of state vs. backyard

Investor Mindset
5yFollow

Out of state vs. backyard

Peter Eberhardt
Investor · San Diego, CA · Member since 2017 · 84 posts · 107 votes

Hey all, I am just getting into real estate and want to see these two sides from other perspectives. I feel as though I understand the pros and cons of each throughly and have chosen out of state.

I live in San Diego, purchased a condo about 3 years ago and currently house hacking. I did a light to moderate remodel (new hard floors, carpet, popcorn ceiling removal, paint, new kitchen cabinets, electrical) and it has appreciated (with the help of Covid of course) 60k already. My goals are to buy and hold for cash flow, start with SFH and move up to multiunit.

I really want to invest in my backyard. It makes so much more sense, I know the area, I know the prices, I know the rents, I can do so much more here as far as fixing up places myself for way cheaper, and managing everything myself. But, the prices are so high and the numbers don’t work. If I rented out my entire condo I would still be negative $50 cash flow. Buying into most places here would barely meet the 0.5% rule.

So, I am looking to other markets, Columbus specifically. I can buy three SFH there for the price of one here. I'll never know the area as good as I do here, I'll have to have help managing, appreciation is not as quick, and I'll have to get things close to turnkey as possible to start until I can find honest contractors. But then again, who is to say I'll be in San Diego forever and this market too will become a distant investment.

I know everyone’s goals, opinions, and desirability factors are different, but from the generic standpoint what is your perspective? Less cash flow in your backyard, or more cash flow 2200 miles away?

4Reply
75 views

Most Popular Reply

Twana RasoulBusiness Member
Real Estate Agent · San Diego, CA · Member since 2017 · 1k+ posts · 1k+ votes
5y

@Peter Eberhardt You started off the right way by buying local and house hacking.  you have found that it has worked well for you, why not continue? initial cashflow is overrated a bit and misunderstood.  I've made much more on my initial negative cashflow properties locally than I ever will on my positive cashflow out of state properties.  Buy your next house hack now, a single family home and rent out the other rooms, or my preference, multifamily.

Compass5122 Reviews
WebsiteView Page
7Reply
See this reply in the discussion

16 Replies

Jump to latestLatest
  • Emma Chen
    Member since 2020 · 4 posts · 6 votes
    5y

    I'm in the same boat I recently bought a SFH here in the bay area, renting it out and only breaking even on it after everything under th sun. I really wanted to stay in my backyard, somewhere in California but hearing about my friends nightmare tenants and how hard it is to evict them here, plus the insane taxes is really throwing a damper on my aspirations. For me going out of state makes more financial sense. But then California places have a higher rate of appreciation, but I would rather get experience under my belt with multiple units (which is only possible OOS atm) and keep growing.

    3Reply
  • Twana RasoulBusiness Member
    Real Estate Agent · San Diego, CA · Member since 2017 · 1k+ posts · 1k+ votes
    5y

    @Peter Eberhardt You started off the right way by buying local and house hacking.  you have found that it has worked well for you, why not continue? initial cashflow is overrated a bit and misunderstood.  I've made much more on my initial negative cashflow properties locally than I ever will on my positive cashflow out of state properties.  Buy your next house hack now, a single family home and rent out the other rooms, or my preference, multifamily.

    Compass5122 Reviews
    WebsiteView Page
    7Reply
  • Mark Frattini
    Real Estate Agent · San Diego, CA · Member since 2014 · 338 posts · 176 votes
    5y

    @Peter Eberhardt

    Cash flow properties are great and I own a few myself. As I mentioned in your other post I have multifamily properties in Columbus. Historically southern California appreciation tends to outweigh Midwest cash-flow. On your condo which as you probably know tends to appreciate slower than a single family detached home has gained 20K a year in appreciation. That's $1,600 dollars added to your net worth each month. That doesn't include principal pay down, tax benefits or the utility of being able to live in the house. San Diego is a great place to live and invest and so is Columbus. There are many different scenarios and assumptions to buying locally vs long distance.

    Look into doing another house hack or find a 2-4 unit and move into one of the units.

    6Reply
  • Arlen Chou
    Investor · Los Altos, CA · Member since 2014 · 942 posts · 1k+ votes
    5y

    @Peter Eberhardt you live in a great "backyard" and you are in a great position to lock in great interest rates. I attended UCSD and still miss the SD area to this day! Putting politics aside, due to covid there will probably be a down cycle in real estate prices in 2021. There cannot be a continued up swing in prices on rental properties as more and more service level people get laid off. Additionally, rentals around shut down universities cannot be enjoying the same level of occupancy as pre-covid. I personally believe that will put pressure on landlords who jumped into the market over the past few years leading to forced sales in the near future.

    The question then becomes, do you believe those areas will come back a few months or years down the road. If you do, your moves should be to lock in the best rate you can on your current property. Then find your next property and get another loan as a primary residence and house hack it. I don't know if you are married or if you have kids, but the only time you can really plan to house hack is when you are young and single. Maybe push into the first few years of a marriage if your SO will go along with the program. For most people it is really not possible after they have kids.  

    My point being this might be a great time to build on a base of appreciation based properties that you can protect with low interest rates and plan to move to cash flow properties later in your REI strategy. Depending on your financial situation, you might look for a duplex, triplex or fourplex. Just remember this strategy is predicated on your view of future appreciation in your "backyard". But again, I think you live in a great backyard.

    I wish you the best of luck!

    1Reply
  • Brandon GoldsmithBusiness Member
    Real Estate Agent · Columbus, OH · Member since 2020 · 1k+ posts · 1k+ votes
    5y

    If investing in your city is feasible it is always the way to go. it is much easier to have the contacts you need and be present for anything. However, a lot of people are in your situation and the numbers just aren't thing no matter what way they try and spin them. Out of state investing is very doable. it all comes down to having the right team in place and this will ultimately streamline the process with good returns. Good luck! @Peter Eberhardt

    [email protected]614-963-3340
    3Reply
  • Zeke Liston
    Real Estate Agent · Columbus, OH · Member since 2018 · 1k+ posts · 1k+ votes
    5y
    Originally posted by @Peter Eberhardt:

    Hey all, I am just getting into real estate and want to see these two sides from other perspectives. I feel as though I understand the pros and cons of each throughly and have chosen out of state.

    I live in San Diego, purchased a condo about 3 years ago and currently house hacking. I did a light to moderate remodel (new hard floors, carpet, popcorn ceiling removal, paint, new kitchen cabinets, electrical) and it has appreciated (with the help of Covid of course) 60k already. My goals are to buy and hold for cash flow, start with SFH and move up to multiunit.

    I really want to invest in my backyard. It makes so much more sense, I know the area, I know the prices, I know the rents, I can do so much more here as far as fixing up places myself for way cheaper, and managing everything myself. But, the prices are so high and the numbers don’t work. If I rented out my entire condo I would still be negative $50 cash flow. Buying into most places here would barely meet the 0.5% rule.

    So, I am looking to other markets, Columbus specifically. I can buy three SFH there for the price of one here. I'll never know the area as good as I do here, I'll have to have help managing, appreciation is not as quick, and I'll have to get things close to turnkey as possible to start until I can find honest contractors. But then again, who is to say I'll be in San Diego forever and this market too will become a distant investment.

    I know everyone’s goals, opinions, and desirability factors are different, but from the generic standpoint what is your perspective? Less cash flow in your backyard, or more cash flow 2200 miles away?

    I would agree that investing in your backyard is a great way to go. Personally, I need to see both cash flow and appreciation in the deals I invest in, I don't want to take negative cashflow just for appreciation, that'll cap the number of properties I can singularly own. If you can set up your CORE 4 in an OOS market, I believe you would quickly get very confident in the area and start to learn about the market, just like you did with San Diego! 

    Columbus offers both appreciation and cash flow. The population and economic growth is booming right now. You have big-name companies like Facebook and Google both developing in the city, which in my opinion, is a sign for major growth. 

    3Reply
  • David M.
    Morris County, NJ · Member since 2020 · 5k+ posts · 2k+ votes
    5y

    @Peter Eberhardt

    There is nothing wrong with investing in your "back yard" for all your reasons and more.

    First, you do realize that the "traditional" concept of real estate investing was to just rent out the property to at least cover your expenses?  Make the money on the appreciation?  Its always been about the appreciation of the land/property.  That's how the major "families" got rich during the early years of this country.

    Secondly, it depends on your investment goals and strategy.  Yes, many investors like cash flow.  Most of the ones that I hear about are older folks who need the cash flow to live off in their effective retirement years.  Some of the younger folks seem to be doing it because the older folks are doing it or because of "quick satisfaction."  On a slightly different note, my properties didn't cash flow to start (I'm in NJ after all), but later on they started as rents outpaced my expenses.  With the principals of leverage, its going great!  --- for me...

    Good luck.

    1Reply
  • Aigo Pyles
    Flipper/Rehabber · Memphis, TN · Member since 2020 · 758 posts · 285 votes
    5y

    I believe that if you are a beginner you should start investing in your area. But if the prices in your area might be too high, you may want to go for out-of-state. 

    0Reply
  • Jonathan Oh
    Investor · Las Vegas, NV · Member since 2019 · 499 posts · 259 votes
    5y

    @Peter Eberhardt
    With the technology and information we have now, it's getting easier for investors to buy out of state. And its getting harder and harder to cashflow here which fuels even more people to look to other states. The biggest concern you should have investing out of state is your team (PM, agent, contractors, etc.). Without a good team, you'll have a tough time. Hope this helps!  

    0Reply
  • Casey Murray
    Investor · San Diego, CA · Member since 2015 · 290 posts · 80 votes
    5y

    @Peter Eberhardt Your question is a personal preference. You can crush it in REI by investing in your backyard or out of state. There's no one way. I do agree with @Twana Rasoul that you should continue house hacking as owner occupied interest rates are extremely low. Obviously inventory is super low right now so deals are harder to come by. Properties with ADU opportunity here in San Diego are a great and creative approach to generate better returns. I'm getting double digit cash on cash returns for the last property I did with ADU potential. Good luck man.

    3Reply
  • Peter Eberhardt
    OP
    Investor · San Diego, CA · Member since 2017 · 84 posts · 107 votes
    5y

    @Casey Murray since I started this thread I settled on OOS and flying out to Columbus right after Christmas! But, after I get started there I really want to buy a 2nd property here in SD. I would truly appreciate connecting with you if you don’t mind one day!

    1Reply
  • Kelsey Olson
    Realtor · San Diego, CA · Member since 2019 · 9 posts · 9 votes
    5y

    @Peter Eberhardt it depends your goals. If you want cash flow — out of state. If you want long term appreciation gains and best tax benefits absolutely invest in SD. No one gets rich in stock market off of dividends, they get rich through stock price appreciation. The same is true with real estate. Building real wealth in real estate is done by appreciation.

    2Reply
  • Dan H.Pro Member
    Investor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votes
    5y

    I question how long those investors that indicate San Diego does not have good cash flow have had San Diego rentals.   I claim San Diego has outstanding long term cash flow.  

    Cash flow is the cash flow over the hold period.  It is not the initial cash flow.  It is not the projected cash flow.  

    Every property we have owned at least 5 years has rent ratio above 1% of acquisition costs. The best LTR is approaching a 2% ratio. The best STR did better than 4% in 2019 (2020 has been impacted by COVID and the various closures).

    One post complained about CA property taxes.   However, for the long term hold, Ca Property taxes are outstanding.  We have multiple properties that have property tax below 0.5% of the current value.  

    In practice, our cash flow is not outstanding due to various extraction of equity. The current interest rates provide an optimal opportunity to extract equity. After extraction of equity, the cash flow takes a hit. Do I care? Not in the least. If I extract $100k at 3%, do you think I will be challenged to achieve better than 3% return with that money? The margin between the interest I pay and the return I achieve, is profit. In addition, the higher my LTV the better my return from appreciation. For example, a 5% appreciation at 80% LTV produces 5x the return from the appreciation achieved at 0% LTV.

    San Diego RE can produce significant wealth, but it may take some time.  Out of state cash flow can provide an immediate return, but the odds it equals or exceeds the long term return of San Diego RE is small.  

    good luck

    4Reply
  • Remington LymanBusiness Member
    Real Estate Agent · Columbus, OH · Member since 2017 · 6k+ posts · 7k+ votes
    5y
    Originally posted by @Peter Eberhardt:

    @Casey Murray since I started this thread I settled on OOS and flying out to Columbus right after Christmas! But, after I get started there I really want to buy a 2nd property here in SD. I would truly appreciate connecting with you if you don’t mind one day!

    That is awesome! Columbus, Ohio is great! 

    [email protected]614-541-8475Podcast Guest on Show My Job Laid Me Off, So I Replaced My Salary with Rentals
    Reafco512 Reviews
    WebsiteView Page
    0Reply
  • Lane Kawaoka
    Rental Property Investor · Honolulu, HAWAII (HI) · Member since 2011 · 4k+ posts · 2k+ votes
    5y

    I built my portfolio with turnkey oos rentals via cashflow cause I did not have the capital to make mistakes. Now that I have a good base of CF I can go after appreciation but I will only go after forced appreciation where I am CFing too. Why not have your cake and eat it too.

    3Reply
  • Sherry Chen
    Real Estate Agent · San Diego, CA · Member since 2020 · 26 posts · 24 votes
    5y

    The ADU laws here in San Diego far exceed the state requirement, making it one of the best places in the state to build. Where a single-family zoned property can only have one ADU, a multifamily property has the potential to have one, two or more. @Peter Eberhardt as you know, I just closed on a duplex property that has the potential for 6 additional ADUs utilizing the city's density bonus program. 

    Yes, construction costs are high, and a newly constructed ADU is not going to appraise as high as a traditional dwelling. This is why ADUs only make sense as a long-term buy-and-hold strategy. You're able to reap the benefits of monthly rental income, while your property is appreciating over time with San Diego's strong appreciation rates. San Diego's home prices are expected to appreciate over 8% next year, double the rate of the national average at 4%.

    1Reply
Join the conversationCreate a free account to reply, vote on answers and follow this thread.
Log InJoin for Free