My dilemma: Invest locally, San Francisco / Bay, or out of state?

[Tou V.]

Here's my dilemma.  I took out $200k from one of my properties and have to use it to generate more income.  I've gotten some feedback and opinions from others.  Just wanted to post it here to see what some of the professionals think.  Should I put $200k down on 16 - Midwest units which (hypothetically) may return $4000 ($250 x 16 - which is reasonable using 50% rule and real returns from users on BP) monthly cash flow immediately and hopefully continues to perform. Even if it only performed half as good $2000 monthly income, I'd even be able to accept that as the $200k is costing me $1100 month to borrow. Or, use that $200k on a SF / Bay property and get 0 or minimal monthly income, but know what the property will appreciate and in a few years and when rents go up, should return some monthly cash flow. The SF property definitely not going to return around $4000 a month anytime soon. What are your thoughts? I really appreciate what everyone has said.

[Arlen Chou]

@Tou V. I believe that the discussion of first tier market vs fly over markets is directed incorrectly to appreciation vs cash flow. My feeling is more of a question of barrier to entry into the REI market. All investors should be looking for both appreciation and cash flow.  If a person picks one or the other, I believe that there is a level of sophistication that is lacking in their strategy.  The amount of appreciation or cash flow maybe different for each investor and the weighting might be different, but I would hope that everybody is looking for both.  Pretty much every book you pick up on REI will highlight this point.

Obviously, the financial barrier is much higher in the Bay Area vs a mid west city.  However, the potential for appreciation is also much higher.  One the other hand, the barriers to getting clear and factual details about potential properties for purchase or the daily operations of the rentals is much harder to get from a property located in a different state.  You have to trust and lean heavily on the support team that you find/create.  I am sure that there are great established teams that can support an investor, but I always follow the saying; "trust but verify".  It is just harder to verify if I have to get on a plane to see my property vs get in my car.

No matter what anybody says, the BA is an "end goal" market.  Meaning people want to invest here, but because the barrier is so high not everybody can enter easily.  But once you are in the door, there are definite ways to get great appreciation and great cash flow.  Look for my posts about my purchases in Mountain View and Oakland to get some more details.  I have posted real purchase, refi and rent numbers.  But the cash flow part takes time and effort, it is not something that comes the month after you sign the contract.  In the fly over areas, you might get great cash flow from the get go, but you will never get the great appreciation.  

The lowest barrier of entry for your situation might be to focus on your home town or cities nearby. I know of a fellow BP member who has been successfully doing flips in Stockton, from the BA, in his spare time. You are in that city, there is no reason you could not do flips more profitably and more quickly. If you wanted to, you could do buy and hold there with similar acquisition costs and rental rates as many of the cities hundreds or even thousands of miles away, but save yourself the "turnkey" or management fees. Build up your cash further and then make the move for a BA buy and hold if that is something that you still want to do.

Don't get caught up in the hype of what "everybody else" is doing.  That could mean going to the BA or going out of state.  I suggest you focus on your "unfair advantage", which might be the fact that you are from Stockton and you have $200k available to you...

Good luck to you!

-Arlen