Have the primary markets you invest in changed over time?

Question

I'm curious to know if your perspective on your ideal markets to invest in have changed over time from when you first began investing to present day?

Gregg Watkins · Answer

My ideal market is California, specifically San Diego.

The main negative changes have to do with increased regulation over the past few decades.

On the positive side, California and San Diego have continued to grow.

If it were a country, California’s $3.1 trillion economy would now be the fifth largest in the world. And it’s close to surpassing Germany for the fourth spot. That’s an incredible fact.

That economic power translates to ongoing job opportunities AND real estate opportunities.

There are challenges here – including a higher cost of living and higher income taxes. But our property taxes are on the lower side when compared to other states, and the overall total return on real estate investing remains strong.

Short term initial cash flow here is generally poor due to the high cost of entry. But long-term total return is strong. And shorter-term strategies are viable as well.

In my opinion, San Diego continues to be a beautiful place to live and is an attractive location to invest in real estate.

Thai Chau · Answer

Hi @Jesus Morales! Since today is my "official" beginning, I can't really say what's changed over time, but I embrace change. You know what they say if "you fail to change...".

Side note: I'm not trying to start any flame wars, but I truly don't understand the hate for California(ns). Especially since I know very few people who actually were born and raised here. Most folks I know are from other states, coming to CA for the lifestyle and opportunities. We Californians benefit because we see all types of cultures, values and overall diversity. Now other states are also experiencing what we've enjoyed and probably take for granted. Let's embrace each other and not complain about people just trying to survive however and wherever they can. Lastly, I believe the change in laws/regulations are brought up and voted for by their local administrations/people...not necessarily new residents from other states.

Love and peace, from California.

Jason James · Answer

@Jesus Morales my ideal markets have changed as I have continued to learn and shift strategies. initially starting out I was focused on Cash flowing areas with lower entry points. Then shifted to  small multifamily and now mid term rentals.  That led me from Michigan to St Louis to Chicago. Now I'm evaluating other markets where there is strong opportunity for Mid Term rentals.

Jonathan Klemm · Answer

Hey @Jesus Morales - Chicago has always been my primary market and will be for a long time.  My long-term goal is 10,000 units on the southside and then building a rent-to-buy program that helps tenants become financially savvy and turn them into buyers!

I believe you can make money in every real estate market...It's just important to understand which strategy works best in the market you are looking at and most importantly that you can develop a rock-solid team.

Nothing is more important than your network and team!

Anna Strausbaugh · Answer

I think your question was whether or not what you look for in an ideal market has changed, not so much if your ideal market has changed over time (ie. the examples of how CA changed other states, like it has changed Idaho). I'm in the Boise market and it has changed significantly over the years. With that change, yes, I think some of the things I initially looked for in an investment have changed. I used to pass up properties that didn't have the highest cash flow, even if they were in a great area because I was chasing cash flow. But eventually we pivoted our strategy to focus on nicer neighborhoods that will hold their value, appreciate well and will be easy to sell when the time comes. These are also easy to rent and have higher quality tenants, but less cash flow on a monthly basis. Don't get me wrong, I still want to buy cash flowing properties, but I've changed my perspective on what a good deal is and what isn't. Boise (and surrounding areas) is still my ideal market because of the population demographics, growth prospects and fewer regulations than many markets of it size, which makes it more landlord friendly.

Gregg Watkins · Answer

FYI, I believe AB 1771 – which would have created a 25% tax on the capital gain produced by selling a residential property within three years of buying it – failed to pass.

They initiated the effort back in 3/22, and the current status of the bill is Inactive / Dead.

https://leginfo.legislature.ca.gov/faces/billStatusClient.xhtml?bill_id=202120220AB1771

Dan H. · Answer

I agree with the sentiment but will point out that for the average person the income tax paid is low.  A large percentage (~37%) of the state pay no state income tax.  The trick is to be a 1% and minimize the state income tax.

As for the regulations:

- It is more the politicians than the electorate that are anti RE investors.  I will point to two items: 1) There was a state wide rent control initiative on the ballot that the voters of the state struck down.  Shortly after it was struck down at the ballot, the elected politicians enacted their own statewide rent control.   2) the city of San Diego passed an anti-STR regulation.  Signatures were gathered to place the initiative on the ballot.  The voters were going to get the opportunity to vote for this anti-STR initiative.  The politicians fearing it would lose at the polls, pulled the regulation so that it would not be defeated at the polls.

- San Diego county (included all San Diego cities) had the most severe Covid eviction moratorium in the country and it is still in effect.  The only eviction was for health and safety.  You could not evict for non-payment or lease breakage.

- San Diego city just recently enacted STR quotas.  You could have had a legal STR for decades paying all taxes and you could no longer be able to have it as an STR.  I have unit in this category: STR since 1999, was able to show to the city that bookings, rate, and taxes paid going back 5 years (maximum duration city requested) that did not get selected in the lottery (in spite of having maximum entries).

- There is state wide rent control.  It provides a couple reasons for no-fault eviction (the rules term as it is not really an eviction as it is really a lease termination): 1) Move family into unit 2) a rehab extensive enough that tenant cannot reasonably be able to reside in unit for the rehab.  Cost to the tenant for the no-fault lease termination is 1 month's rent.

- Chula Vista just expanded upon the statewide rent control by placing a $40k/unit minimum to get the no-fault lease termination.  I do not see how this will work as any abatement issue the tenant cannot reside in the unit.  Abatement fees start significantly under $5K (I think the lowest I have had is less than $4k).  The cost to the tenant for this no-fault termination is the higher of 2 times the rent or the market rent.  This it to remove the tenant when their lease is up.

- There is a CA proposal that if you sell in less than 3 years, the state tax on gain is 25%.  This is an anti-flipping ordinance.  When has it become bad to rehab a property and improve a neighborhood?  Crazy.  Does the flipper not deserve to be compensated for the effort and risk?  I say this and we are not flippers (never sold a property in less than 3 years).  I look at flipping as work with risk and feel they deserve to be compensated for both.  I believe rehabbed properties benefit the neighborhood and that the neighborhood benefits.

- Evictions are taking many months (not sure of the current timeline but even before the Covid impact, it was ~4 months for an eviction if nothing went wrong (so that was the minimum time)).

In summary, there is a lot of anti RE investor sentiment in CA especially from the politicians.  California RE has historically produced great return.  Case Shiller has all 3 of the highest cities for residential rental returns for this century (cash flow and appreciation) as California cities.  NeighborhoodScout lists virtually every large coastal CA city as 9 out of 10 for the nation for appreciation this century (I believe there was only one that was 8 out of 10, but I do not remember which city it was).  Basically, you take the bad (the extreme anti-RE investor sentiment from the politicians) with the good (the good return on long term holds).

Dan H. · Answer

I think your reasons listed are why people leave CA.  however the high taxes is more fiction than fact.   This is especially true of those that leave for financial reasons. Also the liberal attitude and weather increases the homeless issue.  Many/most homeless move to So California.  I know one homeless man that his family put him on a bus to San Diego for the better weather (right before one of San Diego’s wettest winters ever - we gave him an umbrella and cheap rain poncho) and assistance provided to the homeless.

I preferred the state of old to the state of today, but I would not choose another state to live.  We are over crowded and over regulated. Not perfect, but San Diego is a very nice place to live.

Bill B. · Answer

Not at all an Insult to many/most Californians, I’m sure there are good people there. Maybe it’s only the ones that can or have to leave.

More adults in Las Vegas were born in California than in Nevada, (hence the term California east) so maybe I do know more than even some Californians about Californians. Or at least the kind of Californian that’s willing to give up the state they spent the first 20-50 years of their life in. They’re obviously not moving for the weather or the best jobs in the country.  USUALLY it’s the taxes, the regulations, or the cost of living created by those taxes and regulations. I’m sure there are other reasons, but those are the reasons I hear. But it could be the crime, the traffic, or the neighborhood decline (homelessness, graffiti, the bar wire on the fences or the bars on the windows) since most of them are from LA.

The question was simply what’s changed in your market. This is what’s changed in my market. I couldn’t find a way to say immigration to the state without sounding like I meant immigrants from another country. Many of whom are some of our best citizens. A strong work ethic combined with a live and let live attitude.

Ps. I understand California should really be 2 or 3 states and almost all my interactions are with the southern 3rd of the state. That being said. If San Diego wasn’t in California I’d live there today, it is a beautiful place.

Bill B. · Answer

Vegas is becoming California east. More and more laws/regulations/protections. Each one making rentals more expensive so they can then step in and solve the problem, with more rules/laws/regulations.

They flee the the mess they made and instantly starting messing up the new place. I apologize in advance to the people of Idaho, Colorado, Florida, Texas or Tennessee. I’m sure if I flee the ex-Californians to one of those places they will surely follow.

Have the primary markets you invest in changed over time?

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