Out-of-State Investing Guide for Commercial Real Estate Investors in Los Angeles, California
Posted On April 2, 2021
Isn’t real estate supposedly one of the best investment class categories in the world? People always need a place to live, right? So why does it seem almost impossible to invest in real estate in California, which is known alongside New York and Florida, as one of the best places in the world to invest in real estate, unless you have a few million dollars? It is because they are densely populated and in the case of Los Angeles they have already increased dramatically not only in the last six years by 40% but have quadrupled, 400%, in the last 30 years. (S&P Index LA) Those are great returns for an asset that is considered safe and moderately growing. So what should a person do today if they live and grew up in Los Angeles and want to invest in real estate but don’t have a million dollars to invest? The solution is simple, invest out of state!
Many people think that it is difficult to invest in a state like Texas. You have to manage the property, collect the rent, and make the right long-term investment decisions in a state you’re only somewhat familiar with at the moment, right? Well let me explain why it is good for someone to think otherwise, and how a great agent can acquire a property for you in another state in a deal where the tenants, those who use the property’s space, manage the property. for you. And even paying property taxes! Not only that, but they are institutional companies that guarantee the money they promise you for periods of up to 10-15 + years, by contract. This is just the beginning of my explanation of how investing outside your comfort zone with the right advice can benefit you and your family.
How about the security of these investments? I don’t want to lose my hard-earned dollars. You neither. So why would you invest in something outside of Los Angeles or the California region? A region that has proven its worth for decades and shows promising signs of growth in certain areas. These are definitely valid points in the eyes of an avid investor, but maybe it’s time to reconsider. I already mentioned that property prices in Los Angeles are expensive, which is one of the main reasons to invest elsewhere.
Haven’t you noticed that many people who have been living in California are moving to surrounding states where it is much cheaper to live and to places where new and old commercial industries are beginning to flourish? I personally know some people who have moved. Texas alone has added more than 5 million people to its population in the past thirteen years according to the Texas Department of State Health Services, and it is still growing. With that in mind, doesn’t it seem like a great deal to acquire commercial property in a state where you can buy commercial real estate for around $ 150,000- $ 300,000 down payment? You couldn’t dream of that in Los Angeles unless you wanted to buy an old dilapidated building.
Are you beginning to understand how easy it can be to invest outside of your state and why it is more lucrative? If it does, that’s great, if not, here’s another way to understand it in a situational scenario with numerical figures.
My friend Jack has $ 500,000 right now that he wants to invest.
Here’s what would happen if Jack invested in a Los Angeles commercial property between 2015 and 2020.
Suppose Jack does not apply for a loan and buys a flat fee commercial property.
$ 500,000 x 4% annual interest = $ 20,000 of income / year (before taxes) x 5 years = $ 100,000
During this time period, the property’s value amounts to $ 600,000 for 2020, and Jack sells his property to Jenner. That generates a profit of $ 200,000 before capital gains and income taxes.
Now let’s say Jack stepped out of his comfort zone and decided to buy property in Texas.
$ 500,000 x 8% = 40,000 income / year (before taxes) x 5 years = $ 200,000
During this time period, the property’s value goes up to $ 750,000 and Jack is now showing Jenner how easy it was to invest out of state due to the structure of this deal. He told Jenner that since Starbucks managed his property and paid him on time without question every month, this made it much easier for him as an investment. Now, Jenner wants to buy this investment from Jack, because she sees the benefit and Starbucks wants to sign again for 10 more years with a rent increase.
Jack just won another $ 250,000 from the increased property value.
In total, Jack has now accumulated $ 450,000 before taxes during the last 5 years investing in Texas. Get it ?! Do you understand the benefits and financial rewards? It’s not to say you can’t have these structured deals in Los Angeles, but remember they offer half the interest in a market that’s already up 40% in the last six years.
Jack has made $ 450,000 investing in Texas vs. $ 200,000 investing in California with the same amount of money. That’s an additional 125% increase in earnings, giving you an even staggeringly greater amount of money on your next big investment!