5 Reasons to Invest Out of State
While California may be a great place to live, investing in real estate in California is not great at all. When I first started investing in real estate I didn’t have much money. I grew up in the San Francisco Bay Area and wanted to really invest in my local market because I knew it so well. I tried to invest locally for about two years but it became virtually impossible for me to find any cash flowing assets in the Bay Area that I could purchase for cash flow. Therefore I transitioned my whole business to invest out of state. There are five reasons why I love to invest out of state and why that is all I do now.
Investing out of state allows you to buy properties from $50,000 to $100,000 that are cash flowing from day one. In the Bay Area you may buy a million-dollar home that rents out for $5,000 a month. The cash flow on the California home will not be as great because of the debt service and large amount of taxes and insurance. Investing out of state allows you to get into real estate investing with just $15,000 instead of $250,000, which is what you would need as a down payment on a home in California.
While in the Bay Area you can buy one house for a million dollars, out of state you can buy 10 houses for $100,000 and have them all cash flowing. When one property is vacant you still have nine other cash flowing properties. If your million dollar home in San Francisco is vacant, then you have zero percent occupancy and have no cash flow coming in.
So using that same amount of money out of state, it’s affordable and it also allows you to diversify. You could also diversify in the different product types. You can buy duplexes or triplexes or quads. You can buy single-family homes. You can also diversify in the markets. You can buy properties in Memphis, St. Louis, Cleveland, Akron, Birmingham, and many other properties in the Midwest which are also great for cash flow.
This helps too because you’re not putting all your eggs into one basket. Let’s say that a million dollar home in San Francisco completely depreciates for whatever reason, the market crashes, all that cash you have, all that equity you have in that one deal completely goes down. But if you diversify your equity and your cash into many properties, then if one market tanks you still have the other ones to help keep your portfolio afloat.
Lower Property Taxes
Especially in California, the property taxes are incredibly high. Some of these states, like Alabama, have the lowest property taxes in the United States. Memphis, Tennessee, St. Louis and Missouri have very low property taxes as well.
California in general has very strict tenant laws, which means they are on the tenants side, which can then leave a landlord in some hot water. If the tenants play the game right and know how to use the system, they can stay in your property for six months or a year, and if they plead bankruptcy they can ride the wave to stay in your property for a very long amount of time. Each month that the tenant is in there not paying rent, you’re losing money in cash flow.
These states in the Midwest are landlord friendly states. They favor the landlord instead of the tenant. For example, we’re able to evict tenants in Memphis, Tennessee, within a couple of weeks, instead of a couple of months which would be here in California. We’re also able to do it for a much cheaper cost. It costs us $500 to $1,000 to evict the tenant if everything goes smoothly, whereas in California it can be much larger dollar amount than that.
Exposure to Up and Coming Markets
If you’re so focused on investing locally and what’s around you and markets that you can drive to, you’re really limiting yourself to changes that are happening around the USA. There are up-and-coming markets every year that are making changes, that are progressing. We love to be a part of that change. We love to be a part of those markets that are changing for the better and have new things coming.
These are just a couple of reasons why we like to invest out-of-state. If you’re interested in seeing the properties that we currently have available view our current inventory. If you would like to talk to us and ask us more questions, feel free to schedule a call with us.