California has a very unique economy. Unlike the rest of the country California is a “Pacific Rim Nation”. We are more exposed to the world than most of the country. This effects our economy in many positive ways. New York, San Fransisco, Los Angles are unique cities in that the prices on Real Estate are not as stable as the rest of the country. Because they are such huge business centers and coastal the Real Estate in these cities has more investment potential than the rest of the country and most of the world. Why can you buy a home for $14,000. in most of the country and that’s not even a down payment in the big three?
To sell investment Real Estate, sellers know investors must make a profit. The first place to look for profit is income. Rented Real Estate generates income. The more the income the more they can sell the property for. The best properties have income and potential. In the three big cities there is not only income but the value of the properties increases. This is the major difference between the rest of the country and the big cities I mention. Because of the potential, the income is lower. But these properties sell fast with low income because of the fact they will double or better in value over time. Something the rest of the country doesn’t do.
In many states like Ohio, Michigan, Georgia to name a few prices are very low( Houses are around $10,000. ) and the return is pretty good. The bad news is the prices of the properties almost never go up. Because of this if they want to sell, the price must be cheap, so the return is good. So some investors see this and know they can get in cheap and make money on the income, but don’t realize the bigger profit is in the potential to sell for a lot more.
This is true and a good way to go except some major pitfalls. In a perfect world you invest your money and make a great return no problem. But in this world, when you have a problem and you can’t get there in less than twenty minutes you are trusting other people to do the right thing for you. This is not always the ideal situation. I have been to court more than once to help clients resolve these issues.
Another issue is economy, these states are really struggling job wise and often the tenant base suffers this poverty and makes it tough to collect rents. In states with low income/tough economy Real Estate is cheap because it has to be.
The better the investment, usually the worse the immediate return. Units in a great neighborhood/”Trophy Properties” command a better price than those in a weaker area. But the income from the weaker area is better. Why? To give an investor motivation to buy in a weaker area.
I came to Los Angeles in 1969 houses were selling for about $14,000.. Now the same houses are about $600,000. Similar houses across the country are still about $14,000. So if you buy in Los Angles or any of the big three and I am sure there are a few more, not only will the higher income tenants buy it for you, but at some point the value will probably double and you don’t get that in very many places.
As an example if you want to buy in the San Fernando Valley where I work you can get a building South of Ventura Blvd/the better area for a negative return. Not only won’t you make money at first, you might have to invest every month for a few years. But these properties tend to have tenants that are easier to deal with and a location where the value goes up a lot more than others.So in the end you will have fewer problems, ut will be easier to raise rents and a much greater return when you sell.
As you get farther North of Ventura Blvd the area gets a little worse/lower income families and the income/return on the building gets better to tempt the investor to buy. As you go further North the income goes up and the neighborhood gets worse. Properties across the country in weaker areas have to offer higher return on investment monthly because raising values don’t happen in those areas and investors won’t invest without some return.
Another issue on distance is, if it’s close you will drive by occasionally and know it’s ok. If there is a problem you hire the contractor and it’s someone you know and can watch him or her work. Not have to hope someone else is doing it right or at all.
So if you are lucky enough to live in one of these great metropolitan areas take advantage of the potential and don’t get fooled by good income without that potential.
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