Author Topic: How to get started when your area is not a good place to invest  (Read 8130 times)

gimp

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So, I live in the SF bay area.

Anyone familiar with the area knows what I mean. To anyone not, it goes something like this. Salary of over 100k for new college grads, check. 3-bedroom houses in ok areas with a small yard for over $1m, check. Cheapest real estate is around $350k for a townhouse/condo/apartment with an HOA/condo fee.

There are a few investment strategies around me, depending on how much money you have. The cheapest I've seen, posted by another person from the MMM forums, was to take a large but crappy house in a crappy area of SF, get a bunch of government approval as a first-time home owner who plans to live in the house and help fix the area, and rent out rooms. It's a valid strategy, but it means your part-time job is now dealing with crime and blight. Doable, but much less passive than I'd like; besides, it doesn't scale - you get to do this once.

More expensive strategies are basically limited to buying homes with cash ($1m+ in cash) or building apartments/townhouses (good luck building anything in the bay area, and that's not exactly a passive investment.)

Having done a bit of research and a bit of driving, it's quite reasonable to find relatively inexpensive properties (under $50k) several hours' drive from the bay area. Around 3 or so hours for me is where I found a place I'm quite interested in exploring.

How would you folks get started?

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Personal details, some important, some not:
- 23, just graduated school
- Want to get into the business within 5 years, preferably a bit sooner
- Goal is financial independence, but not early retirement: will keep working regardless of investment income
- Cash flow is king, but open to investments with less cash flow potential if they provide other returns; however, I don't want to bank on appreciation so cash flow is probably still king
- Assets: 10k cash
- Liabilities: 38k student loans - or rather, will pay 38k including interest as I pay them off in ~3.5 years
- Income: 105k
- Net worth increase: ~35k/yr in tax-advantaged accounts, ~9k/yr in loan repayment
- Plan to improve that ratio asap. I know 40-45% saved isn't that great. Currently around 30k taxes and 23k rent. The more I reduce, the more money I will have to invest into this in the 5-year period. Planning 30-50k available cash.
- I will continue to invest the majority of my cash into tax-advantaged accounts - 401k, roth ira, hsa. I'd like real estate to be 25-35% of my net worth.

plantingourpennies

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Re: How to get started when your area is not a good place to invest
« Reply #1 on: June 20, 2014, 05:46:50 PM »
I started by only playing games that are stacked in my favor.

gimp

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Re: How to get started when your area is not a good place to invest
« Reply #2 on: June 20, 2014, 05:50:43 PM »
If I understand you correctly, you're saying "don't bother"?

randymarsh

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Re: How to get started when your area is not a good place to invest
« Reply #3 on: June 20, 2014, 06:26:04 PM »
I don't think real estate is your thing right now.

1. High cost area
2. I think many of the obvious deals are gone now. Prices in many markets have recovered.
3. Deals that still do exist will likely be snapped up by cash buyers
4. You have relatively low assets and a decent chunk of loan debt.

If I was in your shoes I would continue investing in index funds, paying down debt, and possibly saving some cash to use for a future investment.


waltworks

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Re: How to get started when your area is not a good place to invest
« Reply #4 on: June 20, 2014, 06:38:13 PM »
Yeah, I'm gonna have to agree with financialstudent. You are not going to be able to compete with cash buyers for the stuff remaining that is good for cash flow. Index, save, and if things change in a few years you can reconsider. For now you are not in a particularly good position to do RE investing.

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jmoney

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Re: How to get started when your area is not a good place to invest
« Reply #5 on: June 20, 2014, 09:31:27 PM »
I think you are just trying to invest the wrong way in San Francisco. I argue there is a strategy in every market and you are trying to invest in rental properties in a tough market. I've heard of the rent control and other caveats of the SF Bay area.

Now what works in your market? You live in a wholesalers paradise. There is strong housing demand and super high prices so if you mark the price up $10 k here and there, no big deal to the average buyer. In my small market of Ohio, I can make $5-10 k for a deal like this. I think you could probably get $10-30k. Here's what you do:

1) Find a property and put it under contract super cheap. It must be a motivated seller (estate sale, lost job, can't afford payments, etc.) Lets say you find a property worth $300 k and put it under contract for $225 k because the seller moved out of town and can't afford the payments anymore.
2) Find a cash buyer who will pay $245 k and close fast.
3) Assign the contract to them and keep $20 k off the top. You never own the property and collect $20 k for assigning your interest in the property and for negotiating such a low price.

Ofcourse there are more details than this and you need the right things in your contract so you can back out. But this is the easiest form of investing and will get you up to speed on the market quickly. You're challenge is to find good deals and sell them to a hungry buyer school of piranhas. Do a google search and you will find more. I can also suggest a few speaks and their courses.

Others strategies that will work well for you is a lease option assignment, buying subject to and selling on land contract, buying on owner financing and renting. These are more complicated and down require a down payment if you negotiate it that way. If someone were motivated enough, they will be happy to hand over the keys and their mortgage debt to you for free. Especially with the huge mortgages in your market. These strategies in the last paragraph a more complicated and you should consult with an attorney to make sure you do them correctly. They also will make you a lot more money. Start with wholesaling and join your local real estate investors assoication.

arebelspy

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Re: How to get started when your area is not a good place to invest
« Reply #6 on: June 20, 2014, 09:45:41 PM »
There are pros and cons of wholesaling, but it is a real estate job.  It's not investing in real estate.

It'd be like telling someone who wants to invest in real estate to become an agent and help others buy and sell homes.

Real estate jobs and real estate investing are two totally different things.
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jmoney

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Re: How to get started when your area is not a good place to invest
« Reply #7 on: June 20, 2014, 10:00:07 PM »
Well wholesaling can be a job or a business. I know of a few who wholesale through employees entirely. It will probably start as a job but doesn't have to end up that way.

And yes wholesaling a great first step to make money and learn what a good deal is. Should be an easy way to put cash in the bank fast in SF. And you always can get out of a deal if the numbers don't work if your contract is worded right while still learning. A great first strategy to make money but switch to cashflow later on. Should be able to have 10-20% down for a rental with just a few deals.

arebelspy

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Re: How to get started when your area is not a good place to invest
« Reply #8 on: June 20, 2014, 10:45:14 PM »
Well wholesaling can be a job or a business.

Again though, that's not an investment, it's a job.  :)
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with three kids.
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gimp

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Re: How to get started when your area is not a good place to invest
« Reply #9 on: June 22, 2014, 01:13:05 AM »
Thanks, guys. It makes sense not to get started in an area 3 hours away, since I won't know it as well as I know my area. So it goes. Maybe in five years I'll rethink it.

Another Reader

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Re: How to get started when your area is not a good place to invest
« Reply #10 on: June 22, 2014, 10:12:19 AM »
There was a person that posted on Bigger Pockets a lot back in 2012 who invested in the Fresno area.  I found his articles to be interesting.  At the time he was recruiting private investors, but I have no idea what happened to him.  Here's a link to his website where there are some useful articles:

http://www.wealthbuildingpro.com/index.html

and an archive of his articles on Bigger Pockets:

http://www.biggerpockets.com/renewsblog/author/mpjzuber/

IIRC, he lived and held a job here in Silicon Valley.

Joel

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Re: How to get started when your area is not a good place to invest
« Reply #11 on: June 22, 2014, 10:57:27 AM »
I live in Sacramento, and I have also determined that this area is just too expensive to invest in real estate. (Not nearly as ridiculous as the Bay Area though). This interests me. Especially for a first real estate purchase, it seems like it would be too difficult to not live near it.

arebelspy

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Re: How to get started when your area is not a good place to invest
« Reply #12 on: June 22, 2014, 11:03:48 AM »
It makes sense not to get started in an area 3 hours away, since I won't know it as well as I know my area.

Yeah, I don't understand investing in an area 3 hours away.. if you're willing to travel 3 hours to get to the property (which should hopefully be rare), hop on a plane and fly three hours. Same commute, but you'll be able to get to a lot better investing area, most likely.  To me it seems you should either look directly in your area - within 30 minutes or so - or if you're willing for it to be further, look for the best market ("best" being defined as fitting your goals/criteria), regardless of 3 hours drive or a few hour flight.
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with three kids.
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Fuzz

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Re: How to get started when your area is not a good place to invest
« Reply #13 on: June 22, 2014, 03:19:19 PM »
I'm not sure the first posters understood your question--you don't want to invest in SF--you want to invest in an area with 50K houses that is a 3 hr drive from SF.

If I were you, I would tell us where since you may get some great particularized advice and no one is going to "steal your idea."

Arebelspy has way more experience in this area than I do (or most people for that matter), so his point about looking nationwide for real estate deals is a good one. Maybe something in the midwest would suit you.

That said, I understand the appeal of being able to drive somewhere vs fly. It's generally cheaper, and you can work it around your schedule. If you were compelled to fly to Indiana for the best deal, you'd fly to an airport, rent a car, drive .5 to 2.5 hours...that's not as easy it could be.

Also, you're 23, you have a kickass job, you have the energy to stay up late learning this stuff, you're smart. I think you should pull the trigger on a 50K rental property. You would learn a ton, which is itself valuable and would make you a better-rounded person. And if you lost money, so long as you structured it in an LLC, so what? You would lose the entire investment of 10-20K?

A) that's a possibility but not the most likely outcome. B) that's not going to kill you; it would set you back about 4-6 months at your current savings rate? C) who cares? This is your life; doing hard things and learning from them has tremendous value. One asset you have is time. If you take a risk and buy a rental property and it doesn't work out perfectly, well, if you decide to do it again in 8 years, you'll be a far smarter/more experienced 31 than I am. So try for a single or a double, not a home run, see if you like it. If you like it and it works, repeat.

Keep us posted as you go through this journey. good luck!



Bearded Man

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Re: How to get started when your area is not a good place to invest
« Reply #14 on: June 22, 2014, 06:21:02 PM »
I don't think real estate is your thing right now.

1. High cost area
2. I think many of the obvious deals are gone now. Prices in many markets have recovered.
3. Deals that still do exist will likely be snapped up by cash buyers
4. You have relatively low assets and a decent chunk of loan debt.

If I was in your shoes I would continue investing in index funds, paying down debt, and possibly saving some cash to use for a future investment.

This. The problem is that your income is just a living wage relative to the cost of living in SF. Take your income and invest in out of state properties and now you've got something. That's what I would do if I wanted to stay in RE. If you are open to stocks, index funds all the way. Only speculate with money you can afford to lose.


gimp

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Re: How to get started when your area is not a good place to invest
« Reply #15 on: June 23, 2014, 11:34:44 AM »
Arebelspy: That's an interesting point to bring up. Partly because it's easier, partly because I love driving... and partly because I wouldn't mind a getaway place for myself - sort of  like, if this doesn't work out, I can make use of the place for myself. With that said, you're right about being able to fly anywhere.

Fuzz - thank you. The 'where' that appeals to me right now (not that much research put into it) is Lakeport, CA near Clear Lake. Homes for $25-50k, right near a lake, 3 hours from SJ, 2.5 hours from SF, 2 hours from Sacramento. Plenty of foreclosures in the area.

Another Reader

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Re: How to get started when your area is not a good place to invest
« Reply #16 on: June 23, 2014, 12:01:28 PM »
I don't see any homes listed on the local MLS (via Realtor,com) for those prices in Lakeport.  Where are you finding these listings?  The least expensive single family is a short sale listed at $100k, and it's under contract.

Lake County is a depressed area with little in the way of employment.  It has a reputation as a methamphetamine manufacturing center.  I would not want to own rental real estate up there.

gimp

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Re: How to get started when your area is not a good place to invest
« Reply #17 on: June 23, 2014, 01:14:15 PM »
Welp, good thing I'm not about to buy anything right now, then...

Thanks again, guys. I have learned that I don't know shit and will revisit the question in several years.

arebelspy

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Re: How to get started when your area is not a good place to invest
« Reply #18 on: June 23, 2014, 01:22:20 PM »
Welp, good thing I'm not about to buy anything right now, then...

Thanks again, guys. I have learned that I don't know shit and will revisit the question in several years.

No no.  You learned the right thing (you don't have the knowledge you need yet), but took the wrong lesson from it.  The lesson shouldn't be  "ignore it for a few years" - when you revisit it in a few years, you still won't know anything, and you'll be in the same position as now.

The lesson should be "I need to learn about this stuff" - and then start learning.  Right now.

Then when you want to purchase in whatever time frame (a few years, or whatever), you'll have the knowledge to do so successfully.

I bought my first rental when I was your age.  It wasn't ideal, and I've learned a lot since then.  But putting it off a few years sure wouldn't have put me in the position I am today.
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with three kids.
If you want to know more about us, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

Johnny Aloha

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Re: How to get started when your area is not a good place to invest
« Reply #19 on: June 23, 2014, 01:42:29 PM »
For the OP - I've also had the 'problem' you describe of high COL area. 

First and most importantly - learn, learn, learn and build up nice reserves until you're ready.  There is so much to learn, and so many ways to make $1M in RE, it's redonkulous.

I started by looking at turnkey rentals.  I found the risk/reward wasn't satisfying for me.  In order to earn better returns, I started networking with investors in good investment markets.  This has been much more rewarding and educational, and currently I have offers out on some pretty good cash flow deals through partnerships with investors in those markets.

Now I'm looking into syndications.  Basically, you buy direct fractional ownership of an apartment complex, most deals are 100+ units.  There are higher entry costs and lower liquidity, but seems very passive and stable if that's what you are looking for.  Lots more research and learning on my plate!

Again, it all comes back to knowledge and networking.  And location shouldn't deter you from investing.

gimp

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Re: How to get started when your area is not a good place to invest
« Reply #20 on: June 23, 2014, 01:56:07 PM »
Welp, good thing I'm not about to buy anything right now, then...

Thanks again, guys. I have learned that I don't know shit and will revisit the question in several years.

No no.  You learned the right thing (you don't have the knowledge you need yet), but took the wrong lesson from it.  The lesson shouldn't be  "ignore it for a few years" - when you revisit it in a few years, you still won't know anything, and you'll be in the same position as now.

The lesson should be "I need to learn about this stuff" - and then start learning.  Right now.

Then when you want to purchase in whatever time frame (a few years, or whatever), you'll have the knowledge to do so successfully.

I bought my first rental when I was your age.  It wasn't ideal, and I've learned a lot since then.  But putting it off a few years sure wouldn't have put me in the position I am today.

You're totally right, and I expressed myself poorly. I meant to say that I'll keep reading, but with a more passive view in mind so I can plunk down some cash when I'm ready in several years. I definitely think that my strategy will be to network with fine folks like you, find out a place that has opportunity, check it out with boots on the ground and hopefully some support from people who know what they're doing more than I do, and put in the money.

Ideally I'd find someone with more ideas than capital who knows a few things I don't. We'll see how that goes.

Until then, I'll go find a thread here on recommended reading and grab a couple books.

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Re: How to get started when your area is not a good place to invest
« Reply #21 on: June 23, 2014, 02:24:34 PM »
No one is trying to discourage you.  We all got started somewhere.  There are a lot of traps for the unwary and it takes some knowledge to avoid making an expensive mistake when you write the first check.  $50k homes in Lakeport made no sense to me for the reasons I cited and it seemed like you were looking for price without understanding the product.

There are a lot of ways to get the information you need to decide if this is really what you want to do and to get started.  Read the books suggested in the sticky thread.  Find a local real estate investors' group and attend a meeting or two (but watch out for the ones that exist to sell you something).  Find someone that has successfully invested in what you think might work, the three hours driving time radius.  That's why I suggested reading Michael Zuber's articles on Bigger Pockets and on his website.  He has been investing in the Fresno area while living in the Bay Area, exactly what you were thinking about.  When you have a free day and an idea of what makes a good rental market, take a drive up to Lakeport and see if it meets any of your criteria.  Start networking - in general, I have found other investors to be helpful and willing to impart their knowledge.

Even if you aren't ready to invest money today, invest your time.  There are no "secrets" that must be hidden, investing is a lot of education, networking, and in the end the courage to write a big check with some confidence in what you are doing.
« Last Edit: June 23, 2014, 02:32:09 PM by Another Reader »

gimp

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Re: How to get started when your area is not a good place to invest
« Reply #22 on: June 23, 2014, 02:32:55 PM »
Thanks. I appreciate your advice and I'll definitely take it.

(I chose Lakeport mostly at random - zillow showed cheap houses, it was close by, it was on a lake... not exactly a lot of thought went into estimating how good a location it actually is. Like you said, I looked for price, not product.)

dragoncar

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Re: How to get started when your area is not a good place to invest
« Reply #23 on: June 23, 2014, 09:25:28 PM »
Thanks. I appreciate your advice and I'll definitely take it.

(I chose Lakeport mostly at random - zillow showed cheap houses, it was close by, it was on a lake... not exactly a lot of thought went into estimating how good a location it actually is. Like you said, I looked for price, not product.)

Haha, I looked at Lakeport as a possibility for early retirement location.  From what I gather, it's a meth capital partly because there are a lot of halfway houses up there, and a high former inmate population?  Too bad, because it seems beautiful.

gimp

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Re: How to get started when your area is not a good place to invest
« Reply #24 on: June 24, 2014, 12:18:43 PM »
Yep, too bad. Explains the prices, though. On a lake, sunny california, relatively simple drive to two major population centers, almost nestled into wine country... hmm.

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Re: How to get started when your area is not a good place to invest
« Reply #25 on: June 24, 2014, 12:50:27 PM »
Relatively simple drive to two major population centers???  The closest place with any employment is Santa Rosa.  A few lower level employees in Santa Rosa do commute from the edge of Lake County because it's less expensive, but it's a LONG drive all the way to Lakeport.  Ukiah has very little in the way of employment.   And look at those roads on Google.  Not exactly four lane freeways.  Take a day and drive up there and check it out.

dragoncar

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Re: How to get started when your area is not a good place to invest
« Reply #26 on: June 24, 2014, 01:16:29 PM »
Relatively simple drive to two major population centers???  The closest place with any employment is Santa Rosa.  A few lower level employees in Santa Rosa do commute from the edge of Lake County because it's less expensive, but it's a LONG drive all the way to Lakeport.  Ukiah has very little in the way of employment.   And look at those roads on Google.  Not exactly four lane freeways.  Take a day and drive up there and check it out.

2.5 hrs to SF or Sacramento.  Of course, it's only about an hour to Calistoga, which is technically in the SF Bay Area (Napa county).

I think they should rename it Lannisport.
« Last Edit: June 24, 2014, 01:19:01 PM by dragoncar »

gimp

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Re: How to get started when your area is not a good place to invest
« Reply #27 on: June 24, 2014, 02:22:19 PM »
Not advocating driving it every day, but occasionally? Yes, very simple. I've been in the area: once you're out of the sideroads, you have fast empty country roads and then highways. Pleasure to drive. At least for me.

Not that it's relevant. So it goes. Thanks again, folks.

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Re: How to get started when your area is not a good place to invest
« Reply #28 on: June 24, 2014, 02:58:20 PM »
When I look for rental property locations, I look for areas with a strong, growing, and diverse employment base.  I want tenants that have steady jobs and some history.  People that have the financial capacity to pay rent consistently, have proven that they are willing to do so, and who care enough about where they live to take reasonable care of the property.  Because there is not a large employment base in Lakeport, the population of renters there generally do not meet my criteria.  I would expect going in to have rent collection problems, tenant behavior problems including law enforcement issues, and excessive wear and tear on the properties.  On top of this, the demand for resale properties is limited by the location, so appreciation will be lower than in the higher demand areas.  Why would I deliberately choose to invest there?  Wouldn't I be better off in Fresno, where the economy is stronger, the employment base is broader, and with good tenant selection I can get people that meet my criteria?  Yes, it isn't pretty like Lake County, but that's not why I invest in rental property.

gimp

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Re: How to get started when your area is not a good place to invest
« Reply #29 on: June 24, 2014, 05:09:39 PM »
Indeed, and absolutely right you are.

Poorman

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Re: How to get started when your area is not a good place to invest
« Reply #30 on: June 25, 2014, 04:25:14 PM »
Excellent post AR.

DoubleDown

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Re: How to get started when your area is not a good place to invest
« Reply #31 on: June 26, 2014, 02:16:35 PM »
What about some of the university towns in the Sacramento Valley or surrounding area, like Chico or Davis? I have no idea what prices are like there, but they are decent areas with a stable population and the desirability of the colleges, and clearly way more affordable than the Bay Area (but still within a 3-hour drive).