No. CA person asks “Invest here?” [long] - Posted by Ronald * Starr(in No CA)
Posted by Ronald * Starr(in No CA) on April 23, 2002 at 21:53:16:
I received the following e-mail question. Seeing no problem with privacy, I post it here, ommitting the questioner’s name.
Date: Tue, 23 Apr 2002 17:25:52 -0700 (PDT)
Subject: Questions on REI in Northern CA
I noticed on the CRE On-line website that you live in Northern California. I was wondering if you could provide a novice some tips on investing in the area.
My wife and I live in the Santa Clara and are motivated to invest in real estate. We are not sure which is a better approach - to invest locally or in areas far away.
Obviously local homes are easier to manage and maintain. While there is definitely a rental market in the bay area, 3br/2ba home prices are averaging $500K and require at least 20% downpayment, which would take us a few years just to accumulate one.
We’ve thought about investing in areas a couple of hours drive away (like in Modesto or Stockton area) where homes go for $100K - $200. We could buy more homes at these prices, but managing/maintaining from a distance would prove time-consuming but possible.
So, there are obviously trade offs. I’m curious to know if you invest in the bay area or not. What advice would you give to a novice in northern CA? Are you aware of any REI clubs in the south bay where I can further educate myself and share best practises?
Thanks in advance for your time.
Yes, certainly a dilemma. The property values are too high to make the buy/hold/rent approach work, if you are after positive cash flow. However, there are three financial rewards for investing in rental properties for the long term: CAT-- C cash flow, A appreciation, T tax benefits. In the San Fran bay area, appreciation has been extreme, and probably provided more of the return than the other two put together. Thus, people have “gambled” or “speculated” by paying high prices, absorbing negative cash flow, and riding up the automatice escalator of wealth: appreciation.
If you could find some properties to buy with low down payment, you might be able to adopt this approach to investing. It would probably require heavy monthly investments of funds. And, it is hoping for appreciation, with no way to influence or control appreciation.
One other approach can work in such an environment. Quick turn real estate: buy cheap, fix up if needed, sell at market value. It can work. It is very difficult to do in the San Fran bay area, however. Because ordinary want to be homeowners will buy rundown properties for themselves. And they typically overpay because the underestimate the fix-up cost. Also, other investors and wouldbe-investors, such as yourself, not being able to find rental properties that make sense on a cash-flow basis, also turn to the quick turnover investing approach, providing still more competition for you.
However, if you are dilligent, you may be able to make this transaction investing approach work for you. There are a lot of properties within a 3/4 or 1 hour drive of where you live. There will be a few bargain properties that you can buy and make a profit on the resale.
There is another semi-real estate play: second loans on property. There can be loans found to buy. Carefully selected, they provide much better returns with more safety than stocks and bonds and bank accounts. However, these investments are more suited, in some ways, to longer-term invsetors than beginners. They are typically cash investments. Knowing a lot about real estate makes it easier to evaluate the properties being offered for collateral for the loan. This does not mean that beginners can not do this investment, it just is usually a little harder than for a more experienced real estate investor. It does not involve ownership of properties and thus the maintenance is virtually nil. For the person who is frugal and has excess funds to invest, it can be a good way to go.
I think you are right about Modesto and Stockton. The prices there have escalated greatly in the past couple of years from strong demand for houses. This is mostly from refugees of the San Fran Bay Area who can not afford houses in the bay area. But part of it is investors moving over, as you are comptemplating.
I predict continued strong appreciation in those areas.
If you take this approach, you might also look at Merced County, as well as San Joaquin and Stanislaus Counties. Also, there are a lot of other places in the foothills and the central valley that are still cheaper and, I predict, will appreciate dramatically in the next 5 to 10 years. Madera County, Kings County, maybe Fresno County. Butte, Yuba and Sutter counties. Amador, Calaveras Counties, perhaps Tuolumne and Mariposa, and more.
Yes, pretty far away. It is possible to work with property managers, although that cuts down the income and also makes it harder to do a good job of selecting renters and maintaining the properties. One compromise is to invest where you have friends or relatives who could cruise past your properties from time to time and, in a pinch, perhaps help you out in other ways. Or, in an area where you go anyway sometimes for recreation or visiting people.
I have not been buying in the Bay Area for about five years. Prices are, as you point out, too high to make sense on a cash flow basis. I was buying properties in the Sacramento area, about an 1 and 1/2 hour drive for me. I may do so again, but don’t have any plans to do so right now. For the past three years, I have been buying rent houses in OK, near OKC and one in Lawton. Prices are cheaper and the ratio of rents to property value are so much better than in CA. And I have been trying to not pay full market value. I have been buying on the tax resale auctions there–a type of foreclosure.
It is much harder to make money with real estate in CA than in vast streches of the rest of the country, I believe. There is a lot more competition for potential investment properties. There are a lot of people here with lots of money. There is an excitement about houses that you don’t see so much in other parts of the nation. I attribute that to the spectacular appreciation in CA, especially Coastal CA, but happening in other areas now also. In the Midwest and the SouthEast, and in parts of the SW, there has not been so much appreciation and most of the local folk don’t think much about making investments in real estate.
It is interesting to go online on realtor.com and check out the number of properties for sale in CA cities versus similar-sized cities in other states. Fewer properties in CA. That is because of growing demand and lagging production of new housing. This leads to the great appreciation which can make you, as a CA real estate investor, rich but also gets the excitement level up, producing the increased competition. I expect no or minimal appreciation on the properties that I own in OK. But, I get good cashflow.
Sorry, it is now harder to make money with real estate in CA than in the past, especially with the hold and rent approach. But, when the going gets tough, that’s when the tough get going. That’s why my “going” has been to OK.
Good Investing***********Ron Starr****************