You Ask – We Answer
I got a question from a (SF) Bay Area investor the other day and, (because I am ALWAYS looking for something that I can write about), I thought I would flesh out my response for the benefit of both my readers…
“Would it be advisable to buy a rental property close to where you live so you a check on it. We plan to have a property manager. Just want to understand if we should be constrained by location.”
We manage properties for people in town, just outside town, loads in the Bay Area, and, (literally), around the world.
Is one better than the other?
That is really going to depend on the individual investor and their comfort level, and I can guarantee you that your tolerance for the “increased risk” of distance will change as you gain experience. Our bay area investors normally invest in the Sacramento region because the market is reasonably priced, (compared to the Bay Area, what isn’t?), and it isn’t too far away so they easily can come see during the purchase phase, between tenants and have a look at what is happening during renovations. It’s a way of “easing into” distance investing I guess. Many have also invested out of state or just, <sigh>, sold their Sacramento investments when the market turned and took their profits to other markets in the Midwest and South. Though we hate to lose the inventory, the fact is that every investor needs diversity in their portfolio, and regional diversity is one of the most logical in the real estate investing business; the best regional landlord in the world can be taken down by acts of God, (think New Orleans and that Hurricane Katrina), or politicians, (is it too conservative to advocate that one’s portfolio should eventually include properties that are above sea level, or in areas that might view landlords as vital contributors to the public good?).
Frankly, the biggest pain we have seen for our investors from the Bay is the type of tenant you are likely going to find in a lower cost market. A leasing agent in the Bay area can make a great living and never speak to a tenant prospect that makes less than a six figure income: these are folks that are accomplished and successful, but the prices to purchase in the Bay are so crazy that they will rent forever.
I frequently hear stories of Bay area tenants affecting their own repairs and not bothering the landlord about it because they can afford it and they don’t want the landlord to raise the rent at the end of the lease. Of course, this doesn’t describe all tenants in that market, but the prices simply drive lower income folks away.
If you are used to this kind of tenant, you will have a big adjustment to make when you buy, a, (or several?), much lower priced property somewhere else. Folks that live in sub $1000 rental properties, (in Sacramento for instance), have every intention to pay their rent and live their life without drama, just like everyone else. The difference is that when a life event occurs, (sick child, fender bender, bad transmission in the car), the dominoes start to fall which CAN result in issues with rent payments. That’s why the returns always look so good on low priced properties, the increased risk that comes with more drama at that end of the market makes it attractive if you have a strong stomach, thick skin and like roller coasters…
Certainly crunch the numbers on your prospect properties, but also overlay things like safety, quality of local schools and overall appearance of the neighborhood, (the things that responsible people care about). These criteria will likely drive you to neighborhoods that have higher acquisition costs, but if you can buy there, you will have shorter vacancies with increased stability.
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