There’s the infamous debate about whether it’s better to buy with all cash or to leverage. There’s the debate about whether monthly cash flow or appreciation is more financially lucrative. There’s the debate about whether wholesaling is really a form of investing at all (oh wait, maybe that’s just me that argues that one). There’s the debate about whether a note that pays a higher percentage than a rental property is actually more advantageous than buying the rental property. And lastly, here’s one of the biggest ones: Is it better and safer to invest in your own backyard than to buy investment properties non-locally to where you live? I think this one and the one about paying all cash versus leveraging probably take the cake for the longest-running debates — with no end in sight — that will forever keep appearing on the BiggerPockets Forums.
Well, what are the answers to each debate, you ask? To help you weigh the answers to each, I’d have to start talking through financial calculations, risk assessments, process explanations, and pros and cons lists of each, but instead I am going to give you only one answer for now. Yes, I understand this isn’t going to help you try to learn about each side of each of those debates in order to be more educated in finding your own stance, but all of that is for a separate article and not the point of this one. This one is geared towards just the single answer, which is:
No decision made in real estate investing should leave you feeling uncomfortable!
For this context, I’m not referring to potentially sketchy deals. I’m not referring to comfort in terms of working with a sleazeball or not. I mean just general comfort, presumably with good deals.
A Real Example of Sanity Issues Using Local vs. Non-Local Buying
In order to explain more about comfort levels, I’m going to use the debate of investing in your own backyard versus investing out-of-state.
I’ve used an example in past articles about buying a rental property in Atlanta versus a rental property in Los Angeles. I am tempted to use the same example because I know the actual numbers, and it plays into this point about comfort and sanity quite well. I’m hesitant, however, to use this example because there is the factor of appreciation potential with properties in Los Angeles, which could highly skew the decision as to which property to buy. In layman’s terms, Los Angeles is a hot spot for buying for appreciation potential, which some may argue can be more financially advantageous than buying a property for monthly cash flow. For now, let’s just focus on the cash flow aspect of rental properties in both locations and I’ll bring in the appreciation potential to some extent as we go.
When I was buying my first investment properties in 2011-2012, I was living in a townhouse in Los Angeles. I knew the owner, my landlord, and she and I had talked numbers on that townhouse. She paid $460,000 for it, and I was renting it for $2,250/month. It was a really cute townhouse, about 1,000 square feet with two bedrooms, two and a half bathrooms, and two stories. At the same time I was living there, I was looking at investment properties in Atlanta. One of the properties I ended up buying was a 2,200 square foot house with four bedrooms, three bathrooms, and two stories. The purchase price on it was $95,000, and it was rented out at $1,300/month.
Let’s look at these two properties:
- Atlanta Property: Purchase for $95,000 and rental income of $1,300/month
- Los Angeles Property: Purchase for $460,000 and rental income of $2,250/month
Without going into the nasty depths of running numbers (but if you want to understand better how to calculate rental property numbers, check out “Rental Property Numbers so Easy You Can Calculate Them on a Napkin“), I can tell you that the Atlanta property would leave money in your pocket each month, and the Los Angeles property would not.