find_comfort_level_real_estate-702x336Have you ever really looked at some of the debates that go on among real estate investors?

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.

Read The Rest On Bigger Pockets.

Comments
  • kevin
    Reply

    I am not an investor, yet. However after getting burned by my own house (Chicago sub-burbs, bought in 05 for 207, made some material mistakes/unexpected surprises during rehab (roughly 85k total) Sold it last summer for 186. Good idea? absolutely not, however sometimes stopping the sinking ship is the best and worst idea at the same time. Rent wouldn’t have covered the bills and I did not fore see it climbing higher in value in the next 5 years as new construction prices would continue to weigh on mine. How would you advise sometime to buy back in after that. Granted it is very different when you buy to live in (liability) vs buy to rent (asset). Back story is only there to provide perspective, many people caught it much worse through that ride.

    • Ali
      Reply

      Good question Kevin, and I appreciate the back story!

      Best advice- be super educated on how to buy profitable rental properties (numbers, markets, risk, etc.) and be smart going into buying a straight investment property.

      • kevin
        Reply

        I apologize, I did not phrase my question very well. Ok I didnt actually ask the question I wanted to. What I meant to ask was, do you think playing it safe with a low price/ low risk/low reward property (think 30k short sale (in good shape )condo) net profit 250-300 a month after costs) with little chance of appreciation but cant really lose much more value or is this more of a property that would be nice to get your toes wet but not much else. And thanks for the reply, I enjoy reading the site lots to learn still.

        • Ali
          Reply

          Sorry Kevin, I guess I would need to see more info on that deal. Anything in the $30k range, and especially something that you say has lost all of it’s value already, doesn’t land itself in the “low risk” category. I’d have to see more info though to confirm.

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