Buy Local or Buy for Cash Flow w/ PM out of state?

Question

Hi Community! I'm in contract on a deal currently and since then, I've found BP and I'm starting to question my decision. I'd like to get a little bit of advice on my current situation to help nudge me either way.

I live in San Diego County which is typically a "growth" market and buying property here with minimum DP in a decent area will typically get negative or even CF, but the occupancy rates are very high AND equity gain is almost guaranteed over a few year period.

Here's a quick snapshot:

Age: late 20's

Income from Job: over 200K, legally max 401k (18k per year).

Investing goals: I want some buy and hold props to add to retirement (income levels wont let me start IRA). I would also like to invest for income in the future.

Primary Residence: purchased 1.5 years ago 3/2 w/ granny flat i rent out for 1250, mortgage is 2879.

No other debt, good credit

Deal to analyze: 225K 2/1  REO condo in Rancho Penasquitos (best SD in county, barely any rentals available). Cheapest property w/ 2 bd within 8 mi radius. Full payment w/ PITI, HOA & MI (119). 10%down. is $1547. needs around 6 K in renovations to demand top rent. Can rent it for 1600-1850. It doesn't flow much, BUT will rent in a day. Reason for purchase is to obtain a property in one of the most desirable areas in SD, my kids attend the SD there and i need to use address (current SD @ primary is a 2 on GS, all 3 schools at this prop are a 10), gain more experience as a landlord, and obtain debt paydown from renter, was going to buy and hold until my kids are out of school (12 years). Total out of pocket CASH w/ CC/DP/REhab is around 31K.

Thoughts since i've been on BP: Oh what you've done to my brain BP!! I was thinking that i could find a MFR in the south somewhere and have it PM'd (i travel there quite a bit for work), I was thinking that with 30 or 40K out of pocket i could probably find a deal that could create 1000+ in CF within a short amount of time. Because of my income, i can replace or grow that amount quite quickly.

Just wanted to get some of your thoughts on this while i'm stil in contract and can back out... Thanks for helping a newb :)

Dan H. · Answer

It seems you are prepared for some negative cash flow.  I agree with your assessment of Poway school district especially the elementary schools.  There is not a school district in the state that is as large or larger that performs better on the standardized testing.

I have purchased properties in San Diego county since 1992.  I have purchased near market highs (as well as near market lows).  Every San Diego property that I have owned at least 3 years (including those purchased near market highs) is worth more than $100K above purchase price.  I suspect Thomas S. does not understand the So Cal market or the demand.   Add in PUSD and I cannot imagine it depreciating long term.  As I suspect you are aware PUSD residences sell fast and even at the worse of the housing crisis they sold fairly fast.

Just be prepared for some negative cash flow (not too much: it will be slightly positive until large expense).

A little over a year ago I placed an offer on a duplex in Poway and did not mess around.  I went in immediately at asking + $30K.  The realtor did not even acknowledge the offer as apparently we did not make the list of offers to even confer with.  Sad part is that I was willing to pay more but was not given the chance (I thought my offer would at the very least get an opportunity for a subsequent offer).  If I had purchased it at $50K over ask I would still be up as the property has appreciated that much in the last year.  There simply are no multiplexes in PUSD that hit the market (I believe none have hit the market in the last year).

Good luck

David Thompson · Answer

Hi Ross,

IMO the BP community should be about education, sharing of experiences, both good and bad. To say out of state PMs rip u off I don't think serves newbies well if we just stop there.  There are many good turnkey programs and PMs on this forum that the BP community can recommend someone anywhere you want to invest outside of your state.  Don't let that discourage you.

I'd research population and job growth in U.S. and see if any states you travel to appear on that list. Spend some time on your trips to top cities meeting RE agents that are investor focused. Post on BP ahead of your trip to that city..use key words as alerts are setup by members..to attend some local meetups. Take time to learn market, network, meet some local PMs recommended by BP members. This is what this community is all about. I would bet your comfort level will change dramatically and your opportunities expand exponentially once u have targeted a city then leveraged this community for whatever you need.

David Faulkner · Answer

My experience has been if you buy for cash flow w/ PM out of state, that PM/contractor will find a way to suck up all that cash flow so they get the reward while you get the risk. Stay close to home or move to a  high cash flow state to invest there locally ... problem is that nobody ever wants to move to a high cash flow state, and that is why they are high cash flow (and low growth); it is simply supply and demand in action. Plenty will argue this point, but this is my perspective having invested both in SoCal and out of state for well over a decade and having no bias of trying to sell anything either way.

Ross Y. · Answer

Wow, I love this community. @dan I love the insight. @Mattr. Great info. I will definitely leverage the community on my travels and any out of state questions. What a Gem I've found in BP.

Matt R. · Answer

@Ross Y. Welcome to BP! Your idea of buying the cheapest place in the best hood seems to be a good one in Cali. Something to ponder...since 2000 the top 3 areas for total returns in Cali are LA, SF and San Diego. All of those are 1,2 and 3 for the nation as well. I will bet if you bail out of that contract they will just relist it for more. The out of state cash flow markets are a dime a dozen....why is that? Entry level 10 rated school areas in Cali have multiple offers full price...why is that?

Good luck with whatever you decide!

Ali Boone · Answer

It all depends on your ultimate goals, but yes, you will find much higher cash flow and better price-to-rent ratios elsewhere from San Diego. Keep in mind, yes SD will appreciate more than a lot but we are also much closer to the top of the general RE market than not so the appreciation will be minimal compared to what it can be if you were to buy at a different time. There's no right or wrong answer here, just an analysis of what you want to accomplish. If it's possible returns over time and something local to you, then the condo may work (but keeping in mind too that condo fees are a killer to an owner of a rental property! Free money out the window). But if you just want passive cash flow, elsewhere might be better. Where in the south are you thinking?

Sean Tracey · Answer

Hi @Ross Y. It looks like you're in a solid position financially with your regular income. You have some room to play the appreciation game, but only do so if you're prepared for the risk. I'm in NY and evaluating what my first steps should be as far as investing close to home or out of state. I will only look for cash flowing properties, though. I'm not willing to rely on appreciation. If you're unsure of your next steps, why not just plow a bunch of your excess money into index funds in a taxable account. Take some time to network on here, and maybe you'll find some people out of state you'd be comfortable with that can get you a better cash on cash return with higher cash flow. No need to rush things when you're earning 200k+.

By the way, you may be able to do what's called a Backdoor Roth contribution. Basically, you max your Traditional IRA (a nondeductible contribution) and then immediately convert that to a Roth IRA. You would only pay taxes on any gains, which should be minimal. Put it in a money market account until you do the conversion. That will get you an extra $5500/year in tax advantaged savings.

Also, look into what's called a Mega Backdoor Roth IRA. This is a bit trickier to explain, and will require some research on your part. You would need to ask your HR department if your 401k provider allows for after-tax contributions and in-service rollovers. In short, this may allow you to put an additional $35k into a Roth IRA each year.

Both of those methods are perfectly legal, and somewhat commonly used techniques to max out tax-advantaged space. If you're interested just google "Roth IRA ladder" and "Mega Backdoor Roth IRA". One caveat, if you have an existing Traditional IRA, it might complicate a Mega Backdoor.

Brent Coombs · Answer

@Ross Y., seems like your reason for THIS investment isn't for cash flow anyway, so because you have other family considerations, our advice on this one is not really required.

Anyone on >$200k/y should be able to achieve their investment goals quite easily, but yes, buying in cash flow counties (out of State if necessary) is a recommended way of generating your desired "income in the future".

If you trust the market there to continue appreciating, you can afford to be wrong - THIS time, but will likely get the benefit of your prediction over time. (Fortune does tend to favor the rich).

Only YOU can gauge your tolerance for negative cash flow while waiting for appreciation.

For those of us who are paupers, we HAVE to invest for positive cash flow EVERY time (until such time as we can AFFORD to gamble on future appreciation instead)!

Welcome to BP - may it continue messing with your brain! Cheers...

Ali Boone · Answer

Chattanooga is an amazing town (I used to go there a ton, living between Atlanta and Nashville) but not sure how the cash flow numbers there pan out. Their prices have gone up a lot over the last few years as it's gotten more popular. KC is definitely rocking and rolling for turnkeys. Not sure what that other one was....did you mean Raleigh?

And yeah, some folks aren't as worried about cash flow for all the purchases, so your SD makes sense.

Reach out anytime later if you want more help with out-of-state! Happy to help and share ideas.

Ross Y. · Answer

@Ali boone. Hi Ali. Thank you for the reply. My goal here is to own a property in the school district here at even cash flow and i assume over the next 12 years, it will appreciate, anything on top of that is a bonus. Im OK with this one not producing much for the other benefits, if it saves me 2k monthly on private school, it's a win IMO.

For out of state, I'm not sure exactly where, Chattanooga TN looks decent due to the expansion of Google fiber and tech hubs growing there, Kansas city looks decent and I've seen some turnkey B props for under 70k that look good. Relight loos nice as well. After this fiscal quarter I will get a nice commission check and will do some more research or those areas. Thoughts?

Buy Local or Buy for Cash Flow w/ PM out of state?

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