Finding Affordability in Unaffordable States

People often ask me questions about “the housing market.” It’s always something like this: What will the housing market do this year? Is it safe to invest in the housing market? Like so many things related to money and investing, the answer is, “it depends.” It’s a difficult question to answer, because the term “the housing market” is used as if it’s referring to one thing. But there isn’t just one housing market in the U.S. – there are literally thousands, and they’re different in every state, city, and neighborhood. In an eagerness to simplify the conversation, a lot of real estate investors and pundits have made sweeping generalizations about where to invest. They’ve looked to states where there are a high influx of new residents, which is understandable. They’ve also picked up on the fact that a lot of people have moved out of California and New York in the past year and have decided that there’s nothing worth buying in those states. While investing in more expensive states has its own unique challenges, I wouldn’t tell investors to rule out entire states.

Ultimately, the state where you buy your investment property is irrelevant as long as you’ve done your numbers, you know that it will cashflow, and you have major employers and a strong job market in your community to attract renters. The popular wisdom right now says not to buy in New York or California, but if you already live there or someplace as expensive, the good news is that there are still investment opportunities nearby. You just need the willingness to travel outside of your immediate surroundings to find them.

So here’s where the conventional wisdom is correct: I would discourage you from buying in major urban centers like New York City, Los Angeles, San Francisco and Silicon Valley. All of those areas have seen rental incomes drop in the past year, so you would probably need to wait a couple of years to see rents return to their previous rates. If you’re based in Los Angeles, for example, it doesn’t make sense to buy there right now, but there are attractive alternatives nearby. One such location is Winchester, California. Winchester is located about 80 miles away from Los Angeles, and that distance really makes a difference when you look at the prices. The median home price in Winchester is $494,000, a full $1.1 million less than Zillow’s average listing in the Hollywood Hills. The median rental in Winchester is about $1700 per month, so there’s still an ample opportunity to cashflow. If you’re on the fence about renting out your place to year-round tenants, Winchester offers an attractive Airbnb market. The average Airbnb in Winchester yields a 17.58 percent cash-on-cash return and an 87 percent occupancy rate.

New York City is a nearly impossible market for finding cash flowing properties.  Once you do, the buy-in can be prohibitive. In upstate New York, however, there are still plenty of opportunities for investing. One example is Ithaca, New York, which is home to prestigious Cornell University and offers affordability that the Big Apple doesn’t. With an average home price of $293,000 in Ithaca, the threshold for investing is much easier to cross. While the year-round population of 30,000 may not sound like much of a market for renters, the additional student population of 30,000 creates a strong built-in demand for renters.

While it definitely takes more research and a willingness to drive a couple of hours outside of the big cities, there are still opportunities for investing in the states that the so-called smart investors are avoiding.


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