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We just recently purchased our first investment property in Dallas, Texas – not exactly the location we had in mind when we first decided to get into real estate investing a few year ago.
We currently live in New York City and had originally planned to purchase our first investment property in the local area. However, after many months of researching, it just made more sense to invest out of state.
So why did it make more sense to invest out of state?
The property costs in New York City proved to be too expensive for us first-time real estate investors with limited funds. While we probably could have found a way to make it work, investing in New York City meant we would only be able to invest in one property and us sinking most of our money on that one property. Talk about putting all of our eggs in one basket.
Rather than becoming discouraged, we started looking outside of New York City and discovered the property costs were significantly more affordable out of state.
Positive Cash Flow
Positive cash flow is when the rental income covers all of a property’s expenses (taxes, mortgage, insurance, etc.,) and still have some money left over (also known as net income).
Due to the high property costs and expenses in New York City, we had trouble finding many investment properties that could generate positive cash flow. When we did manage to find potential properties with positive cash flow, those properties were no longer available by the time we reached out to the real estate agent to inquire about them. One thing was for sure, we definitely wanted to avoid buying a property with negative cash flow since that would mean that we would be paying out of pocket every month even with tenants in place.
While we do have some friends who invest locally in New York City despite the negative cash flow, they do so with the intention of selling within a few years and profit from the appreciation of their properties. We did initially consider this, but decided against it since we wanted to avoid tying up our finances with one property and were also concerned that the property would not appreciate enough to give us a good return.
New York City Is Extremely Tenant-Friendly
Given the population and cost of living in New York City, there are significantly more renters than homeowners here. What complicates things is that there tends to be more demand than supply in New York City housing. So, as a result, there are many laws and regulations in place to prevent landlords from taking advantage of renters.
For the most part, I agree with and applaud the city’s stance to protect tenants from slumlords. However, I have heard many horror stories of bad tenants taking advantage of the tenant-friendly laws and regulations by filing false claims against honest landlords. In even worse cases, there are bad tenants that do not pay rent and end up staying at the properties rent-free for many months while they drag out the eviction court process.
While landlords should be diligent and screen their tenants, some people may look good on paper but turn out to be awful tenants. As first-time investors, we felt it wasn’t worth the risk especially since property costs were already so high and positive cash flow was also hard to find or is razor thin.
After much consideration, it just made more sense for us to invest out of state.
Do you currently own any investment properties or plan to invest in real estate? Let me know your thoughts on investing locally versus out of state.