Choosing a Starting Strategy in California Markets

[Daniel Young]

Hello BP Community,

My name is Danny, I currently live in the Bay Area, and I am a beginner looking to get into RE investing. I've been on Bigger Pockets for a while, learning as much as I can prior to doing my first deal. I'd like to share my personal situation and see if any veteran investors might share your opinions on what you think the best plan of action might be or what you'd do in a similar situation.

I currently rent in the Bay Area and just recently signed a new lease which will keep me renting through 2021. My GF and I have been planning to move to the Sacramento Area to buy a small multifamily unit to house hack but, with the current economic uncertainty and the fact that we both have been lucky with stable employment, we decided that we wanted to stay put and continue to rent here for at least another year. I have been in the learning phase for some time now and would consider myself in somewhat of an analysis paralysis situation. I am eager to get started but am unsure if now is the right time to being starting as a beginner. I would prefer to use the long term buy and hold strategy to build a portfolio of properties that provide additional cash flow(either locally or OOS) but would also be open to getting into flipping as well. From what I've read I think investing for cash flow, especially in these uncertain times, is the smarter way to invest.

Here is my situation and the options I am currently considering. I am currently renting with a stable job here in the Bay Area. I have around $100,000.00 - $120,000.00 to invest. Here's what we are thinking...

1. We wait and save as much as possible until our lease is up at the end of 2021 and purchase a small multifamily place in the Sacramento Area to house hack. The positives with this being a safer starting strategy, gaining experience with less risk than there might be investing OOS, and the Sacramento Area being an appreciating market over the long term if we are able to keep this property. Downsides with this would be that most of our savings would be spent on an initial down payment preventing us from investing OOS for better cash flow and that the Sacramento market doesn't necessarily cash flow well (or at all) until much further down the road.

2. Start the process of choosing an OOS market and building a network in that market (we've been looking into Pittsburgh, PA among others) and start investing while we are still renting here in the Bay. In this situation, we would ideally start investing OOS at a much lower price point, start building positive cash flow, and be able to save enough for a down payment on a SFR in Sacramento to live-in-flip when we decide to move up there. We could even purchase the SFR while still down in the Bay and rent it out until we are ready to move up there. Not sure if owner occupied financing is enough of a reason to avoid buying anything in Sacramento before we are ready to move up there.

Any insight or advice would be greatly appreciated. I am open to other strategies as well if anyone thinks there might be a better way. These are just the two that make the most sense to me at this point. It feels like I am reading something different about the future of the housing market everyday and I think opinions from some more experienced investors would help me narrow down a gameplan.

Would love to start networking more and meet other investors. Please reach out if interested.

Thanks

[Franco Montano]

Hi Danny,

I'm a fellow investor here in the Los Angeles market and just thought I'd share my thoughts and my current strategy. I recently sold my primary residence after substantial appreciation at a premium due to my property having multi family zoning in a fast growing part of LA. Similar to the Bay Area, Los Angeles has started to increase dramatically in price. What I did next was run through my possible scenarios similar to yourself. 

1) House hack, use the proceeds to put 40%down on a triplex or fourplex but in a C- type of area (sold property was in a B neighborhood), and have a larger amount to invest OOS to build a larger income portfolio. This small multi family would still be a negative cash flow in my area but a lot less than buying a SFH on its own. A 5 cap in my area is considered a good deal so it's really hard to cash flow in my market.

2) House hack, Buy a duplex in an A or B neighborhood with about 40% down and invest a smaller amount OOS to build some cash flow to maximize proceeds.

3) Rent and invest a majority of the proceeds out of state and build a large amount of cash flow. 

I went with option 2 and ended up buying a light fixer upper in an A neighborhood with a newly built fully permitted 1bd/ba ADU that I'll rent out in the back. Now it really comes down to your comfortability but I felt buying in a quality neighborhood with some rental income to offset my mortgage and expenses was perfect. I also have a lot of equity in it so I could always use my equity line to juice up the funds I invest OOS. I also have the option to BRRRR it and get another property.

I didn't like option 1 because the CA eviction moratorium was a bit of a concern for me. LA is actually even worse than the state because I can't evict for Covid reasons 1 year after the emergency declaration ends. I just didn't like the risk that brought with having several units to cover expenses for over several months. I know some investors that have tenants that haven't paid for several months and they can't even start the eviction process because of the moratorium. I also wasn't crazy about moving my family to a C- neighborhood. 

I almost went with Option 3 but being able to buy a light fixer and having equity right away in a good neighborhood is really rare in my area so I grabbed the chance right away. 

I think the biggest issue you may have house hacking in northern California is finding a deal where the negative cash flow makes sense for you because prices are pretty up there. The only reason it worked for me was because I was able to roll money from a property I sold and I found the right deal that made sense for me. I'm not as familiar with the Sacramento market but if it's anything close to SF I'm pretty sure it may still be expensive so the deal that makes sense for you is key.