Is California SFH investing really just speculation?

Question

I have read through several posts on real estate investing.  This site has a lot of helpful information.  I am currently a stock market investor and want to evaluate investing in real estate.  I am based in California, and there is some suggestion that it is best to start investing in an area close to where I live. I don't mind managing my first investment to gain the valuable experience.

I would first like to evaluate a 3 bedroom purchase, in a middle-class neighborhood, in the $150k range.  But from what I read about the 2% and 50% rule, rentals in California (at least my area) do not seem to support cash flow.  So do investors in California's middle-class neighborhoods really just rely on speculation?

Will Barnard · Answer

If landlording is what you are after for RE investing, your better bang for your buck is to loacte cash flow markets in other states such as TX, IN, and other midwest states. Las Vegas has also now become a cash flow area (assuming you buy right).
Wanting to invest in your own backyard is certainly reasonable, but if your local does not support cash flow, why spin your wheels?

The investments I do in CA right now are flips and they can be done if you have the right contacts and perform the proper due diligence.
See my blog post on this topic here:
http://www.biggerpockets.com/blogs/63/blog_posts/1548-rehab-flipping-in-southern-ca

Patrick H. · Answer

Great comments.  Thanks.

Lee V,  I am curious what the retail price of your property was, and how much repairs are you estimating.  I saw that 70% is what some investors look for.  The $1,200 rent sounds like a middle-class neighborhood.

Ralph Scott, its interesting that the tax advantages are not used to access the benefit of the specific investment.  But I now understand that even though a property may show positive cash flow after taxes, it is not related to that specific property.  It is best to get a property with a better cash flow and the tax advantage is an added benefit.

Jake Kucheck · Answer

If you are looking at rentals that don't cash flow, you are looking at too "nice" of an area.

I'm going to go out on a limb and say you can find some nice cash flowing rentals in Northern CA, given how hard certain places have been hit.

If the name of the city makes you cringe or go "ewwww", that is probably a good place to start.

Stephen McKee · Answer

I buy/hold/flip in SoCal. The Inland Empire is basically a no risk area right now. My self and several other clients are buying and holding. Meeting the 50% rule is not a problem. If you want details PM me.

Ralph S. · Answer

Maybe you should take "One Step Back."   :wink:

Read the post previous to your last.

There are opportunities in your area, even in your desired middle-class neighborhood if you are willing to do the work to find them.

The 50% rule is a cash flow measure.  It does not take into account depreciation or tax brackets, which are personal tax items, and non-cash.

Good or bad is subjective, and I think the majority here would pass.  There are better.

Lee V · Answer

Stockton/Sacramento/Modesto area are really good right now. Price seems to stablized over the pass 2 months or so, but then again, Im sure the banks are just regulating how many properties to release during certain times to control pricing.

Here in Stockton, in the good areas, a house priced right doenst last a few days on the market with mulitple offers.

There are a lot of deals here that will work with the 50% rule. Im purchasing one right now for 71k, needs very little work and should rent for 1200, but then again, I just look at the numbers and dont pay attention to any 50% or whatever rules out there.  **Not bashing or saying you shouldnt follow it**

Patrick H. · Answer

I prefer to start with an investment in a middle-class neighborhood to ease the amount of work that may be needed and hopefully attain a very reliable renter.

If I just do a simple calculation (and a simple investment scenerio):
Price: $150,000
20% down: 30,000
Loan: $120,000
Interest Rate: 6% (if it is really available)
Rent = $1,300
Loan Payment = $719 (based on online calculation)

I believe this comes to a break-even using 44% rather than a 50%.  I assume the 50% takes into consideration the tax benefits (depreciation, interest, expenses, etc which is dependant on the tax bracket).

So even if the home is less than 10 years, a 44% ratio would still be a bad investment, for a middle-income home less than 10 years old?

Steve L. · Answer

We buy properties in California and we have bought 5-8+ this year that meet the 50% rule... 3 or 4 meet the 50% / 2% rule.  But we are buying quite a bit under market value.  All the properties need extensive repairs.

The no brainer, that I am a little discourage I dumped... 45k purchase price, the guy we sold it too had it rented at 950/mo within 7 days and after $1k of repairs.  In a pretty good neighborhood.

Previous Sales:
01/19/2007:  	 $280,000
09/14/2004: 	$180,000
05/31/2002: 	$100,000
05/05/2000: 	$76,000

In my opinion this property will see solid appreciation.  But if it meets 50%/2% rule appreciation doesn't really matter.

I assume in your area Sacramento and Stockton have a lot of properties that can cash flow.

Rachel H. · Answer

As an investor and a business owner, one of the things you may also have to look at is the state's own economical situation including the tax situation and cost of doing business in CA. I hear CA may be increasing taxes in the future due to their own deficit situation. It is a nice place to live, though. Hope that helps!

Chris F. · Answer

Can you find deals if you look hard enough? Yes. They won't near the coast. They will be in poor nieighborhoods.. I don't mean "middle class neighborhoods" either.

That aside, if you're willing to eat a monthy negative cash flow (when taking all expenses into accout per 2/50%), and you are confident in a long position (very long). Then it's feasible.

I hear GM stock's pretty cheap.. you should buy that too (little stock humor..cough)

Think Vegas (maybe) or pretty much anywhere you can buy a house for under $100K, such as the midwest.

Is California SFH investing really just speculation?

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