Posted by Ronald * Starr(in No CA) on August 05, 2003 at 14:27:24:
“Is it even possible to make the numbers work in this market area?”
Probably not. Not if you mean make a positive cash flow from rental properties.
Higher priced properties are less efficient rent generators than are lower-priced properties. You get less rental income for every dollar of property owned.
I live in the type of market you describe. Here are my suggestions for investors in such markets:
Buy for the appreciation, not the cash flow. Pay the negative cash flow and hope that the appreciation will much more than make up for the rental losses. This is, quite clearly, a risky approach. And you can’t carry very many of these type of properties unless you have extremely good income. The benefit: you can own rental properties near you. You may make out like a bandit on the appreciation–as you did with your first house. And, as I suspect you are doing with your rental property, right? And, if you can make use of them, the expensive properties provide more tax shelter for other income.
Buy bargain-priced properties locally and resell as soon as possible for a quick profit. This is NOT real estate investing, as the IRS defines it, or as we traditionally look at it. However, it is an approach to making money with real estate in high-priced areas. You don’t hold the property very long so have negative cash flow for only a short period. There are NO tax benefits at all. There is little or no rent, so little or no cash flow. What there is is INSTANT APPRECIATION. A quick profit. Benefit: you can do it locally. When the rental market makes no sense on a cash flow basis, many people switch to this approach. Thus, the competition for good and great deals becomes intense. It makes it harder to make a good deal. But, for the knowledgeable investor who is willing to put in the effort, it is a viable strategy which I call “real estate merchandising.” Until I find or somebody gives me a phrase I like better.
If you want traditional real estate rental investing for the long term, buy your income properties someplace else, where prices are lower. You can get a positive cash flow. You may have lower appreciation, perhaps considerably lower than the appreciation you mention having experienced. That is why the properties there are still so much cheaper than where you live, they have not had much appreciation. And you will likely not experience a lot of appreciation in the future either. The tax benefits are modest, but at least there are some. I live in Oakland, CA, but started buying rentals in Sacramento in 1988, when the prices got too high here. For the past four years I have been buying my rental properties in the state of Oklahoma, where the prices are much lower. I bought in Sacremento for appreciation and tax benefits, which I have received. I did not expect much positive cash flow, and that has been true. However, there is some now, since the property values have gone up smartly in the past five years and rents are up some too. In OK I get good cash flow, virtually no tax benefits. And I get little natural appreciation, about 3 or 3.5% in 2002. However, I make up for that somewhat by buying at bargain prices and getting instant appreciation.
So, there you have it. Three general approaches to take. Pick the one you like and start moving.
Good InvestingRon Starr