Worth it to compete for a 5% cap in the Bay Area?

[isaakthepirate]

Hi All,
5 of us, friends and family, with real estate experience, are considering pooling our $400K to go for a multi-unit property in the Bay Area.

We're also considering the alternate, with 3 of us putting in $300K and buying outside of the Bay Area, within driving distance (Sacramento, possibly Nevada).

The Bay Area is super competitive right now, and most of what I'm calculating with accurate interest rates are only giving me a 5% cap rate.

Any experienced RE investors want to weigh in? What would you do with $300K you wanted to invest in RE you could drive to from the Bay Area?

[arebelspy]

you wanted to invest in RE you could drive to from the Bay Area?

Explain this part to me.

If you're willing to drive 3-5 hours to get there, are you willing to fly the same amount of time?  Because then you can choose pretty much any market, and then be choosing on numbers and fundamentals rather than distance from an arbitrary location. :)

[isaakthepirate]

It's a stipulation of one of the folks in the team, which is to look at the property and respond to any emergencies, he wants to be able to drive out there.

[arebelspy]

It's a stipulation of one of the folks in the team, which is to look at the property and respond to any emergencies, he wants to be able to drive out there.

And did you point out that he could fly somewhere to look at it and respond to any emergencies in the same amount of time?

[Another Reader]

I would put the $300k in the bank until something else that made sense came along.

And check your assumptions behind that 5 percent cap rate.  The real cap rate might be lower, unless the neighborhood is undesirable.

[isaakthepirate]

I have, but I don't see it changing.

Am I understanding your response is: don't invest in the Bay Area and surrounding areas, invest in national real estate?

If so, I'd be willing to consider this suggestion, but probably not other folks in the group. What are some good resources to start? I own a triplex with an 11% cap in Oakland, I have Bigger Pockets ebook on the basics, but it still feels a little out of my range to be able to invest outside my local area.

[Poorman]

The Bay Area is super competitive right now, and most of what I'm calculating with accurate interest rates are only giving me a 5% cap rate.

Any experienced RE investors want to weigh in? What would you do with $300K you wanted to invest in RE you could drive to from the Bay Area?

Maybe I'm misunderstanding but the mortgage interest rate does not affect your cap rate.  Do you mean cash-on-cash return?  Down here in Orange County the cap rate is between 3-4% for smallish apartment buildings, so I'm betting the rate is no higher than that in the Bay Area.  There are definitely areas 2-3 hours away that might have good opportunities for cash flow, but the Bay Area is strictly an appreciation play, something I wouldn't be comfortable with at this point in the cycle.  You would be taking a negative cash flow.

[Another Reader]

If you invest in the Bay Area at that kind of cap rate, you cannot get positive leverage.  Your only hope of a decent return is appreciation.  Right now, in many areas, the market is higher than it has ever been.  How long is that going to last?

Why don't you put the money aside until you find an opportunity that meets your cash flow/cap rate criteria?  If the money is burning a hole in your pocket, pay off some mortgage debt.

[waltworks]

How many people are involved? I mean, even 2 is too many, usually, unless you're married to each other. A "group" is a *disaster*, and in this case it's a group of *inexperienced* RE investors? Gah!

I'd run far far away regardless of the deal or the cap rate (which it sounds like are crappy anyway).

-W

[isaakthepirate]

Thanks everyone for this feedback. I am interested in investing again in RE, and my gf and I are willing to go outside the area. Can anyone point me to some good resources on how to learn more about that? I successfully did a lot of work and tenant screening for my triplex, so I'm not a completely newbie, but I don't know much about how to pick a good property outside my area.

We're trying to invest our 100K at at least a 10% return to help pay for my gf's graduate school while she completes her program.

Any suggestions, links, etc. are greatly appreciated.

[arebelspy]

I agree with Another Reader and walt.

I am interested in investing again in RE, and my gf and I are willing to go outside the area. Can anyone point me to some good resources on how to learn more about that? I successfully did a lot of work and tenant screening for my triplex, so I'm not a completely newbie, but I don't know much about how to pick a good property outside my area.

http://forum.mrmoneymustache.com/real-estate-and-landlording/purchasing-real-estate-you've-never-seen/

[waltworks]

Not to be a jerk here, but how is your $100k going to pay for grad school if it's tied up in an almost completely illiquid investment? RE seems like just about the worst possible thing to do with a bunch of excess cash when you have a known big expense coming up.

Your worst case scenario there is *bad*, where something terrible (lawsuit, major problem with the house, etc) happens with the property but you're still on the hook for the student loans (cough, not dischargeable in bankruptcy, cough).

Just pay for the grad program out of pocket and stick any excess in whatever investments you like. And do NOT invest any money with a group of your friends, unless you want to lose both.

-W

[CashFlowDiaries]

I agree with the rest of the posters.  This doesnt sound like a good investment you want to get into.  The last 3 rentals i bought were out of state and although its scary to get into, if you research your butt off and make sure you do it right, you can come across a winner.  One of the big factors for investing out of state is having a good property manager.  The first steps you would want to do is first:

1) Find a city that you are interested in investing in that has much better returns.   Some criteria you want to look out for are increasing population, good rent to price ratios, diverse economy. Stuff like that, you can find that kind of info just researching on the internet. city-data, census, crime reports, etc..

2)  Interview multiple property managers in the new desired location and find one that you would be willing to work with and has good referrals you can talk to.  You can do this all over the phone and email.

3) Start looking at available properties and running numbers on them. When you find a few that you like, run it by your PM that you are going to do business with and see what they say.  They will know the local areas well and will be able to confirm some of your numbers.

4) Fly to the new city and check all the neighborhoods, areas and potential properties.  Make sure you like the city yourself and that youre satisfied with what you see.

5) Once you have a property you want to put under contract, put it under contract and get a contingency based on the inspection and appraisal results.  You need to be able to walk away if it turns out bad.

Those are just basic steps but you get the idea.  There is plenty of money that can be made investing outside of your local area.  Trust me, i know because im doing it.   I was priced out of where I live now in Austin, TX. I have 3 properties here and now that I cant find good deals, I was forced to go out of state.  So far its going great.  Right now Im actually saving up to buy my 4th out of state rental.

[isaakthepirate]

CashFlowDiaries, thanks so much. This is super useful and I appreciate the outline. I'll work on this angle and see what I can make happen.