What is your strategy to invest in California?

Question

Hello, I am a beginner invest and trying to buy single houses where I live. ( sacramento) However, whoever I meet, they say in CA it will be hard to get cash flow therefore it is better to focus on appreciation.

so what is your strategy to invest in California?

Are you getting cash flow or you focus on appreciation.

Thank you so much!

so what is your strategy to invest in California?

Are you getting cash flow or you focus on appreciation.

Thank you so much!

Dan H. · Answer

Rates have changed things, but I have good cash flow n San Diego and would have outstanding cash flow if I had not extracted value.

How?

There is poor correlation between initial cash flow and actual long term cash flow. The reason for this is that RE market prices are based on numerous criteria. Some of the big ones are expected appreciation, expected rent growth, and risks. In most markets, the market with the highest rent to price ratio (best cash flow) is the lowest class areas. This is because price reflects the risks, expected rent growth, expected appreciation, and effort to have rentals in that market. The properties with poor initial cash flow often have good/great historical appreciation and rent growth. Rent growth has a strong relationship to appreciation. To use real numbers, Core Logic shows that the average SFH year over year rent increase in my market was $700/month. Imagine how this rent growth improves the cash flow. The better appreciating property is likely to have the better cash flow over a long hold.
2) Some people act as though cash flow is guaranteed. At the Great Recession (GR), there were many markets that suffered increased vacancy and reduction in rents. Detroit, Las Vegas, much of Arizona, etc had actual cash flow reduced due to the GR. In contrast there are many cities that have not had a single 10 year period since the numbers were tracked without appreciation (my market is one such market). Appreciation may not be guaranteed, but it has yet to not happen for a 10 year span in my market. Remember rent growth is tightly coupled to property appreciation.

If you purchase in some mid west market were appreciation has not kept up with inflation (there are many such markets) and hold the property for 10 years, the value of the property has declined in inflation adjusted dollars and the cash flow likely has also declined in inflation adjusted dollars. Compare this to a different market we’re homes have appreciated at twice the inflation rate. What do you think your cash flow looks like after 10 years? According to Rentometer, the average 3/2 SFH rent increase over the last 12 months is $700/month. It does not take a rocket scientist to see how that can improve cash flow.

I suggest all RE investors start local, even those in markets that have not historically kept up with inflation. There is nothing wrong with the Sacramento RE market. If you educate and work it, you can definitely succeed in that market.

As an aside, you indicate the people you meet recommend against investing in CA. Would it surprise you to know CA has the highest percentage of investor owned single family units in the nation and that Ohio is near the lowest? Check the link. Do the CA investors not know what they are doing? I think we know what we are doing.

https://www.corelogic.com/intelligence/total-investor-home-p...

Next look at neighborhoodscout appreciation for any city in CA   Virtually all the coastal cities are 10/10 for appreciation this century. Sacramento is 9/10 (very good but slightly worse than large CA coastal cities)  Sacramento appreciation

Good luck

Twana Rasoul · Answer

To invest in California, especially southern CA in Los Angeles, San Diego, etc...it hasn't been easy and higher rates make it less so.  That said, appreciation is a play but certainly needs to be coupled with numbers that make sense or have a plan to get it to making sense.  To get a property to make sense in this market you need to be willing to be creative and do things such as renting out units furnished, rehabbing, converting garages to ADUs or building ground up construction...that said some areas of town and certain types of properties are better suited for adding value with an ADU.  If you speak to a professional in your market that is an investor themselves and builds ADUs they should be able to walk you through the pros and cons on the above and how to identify properties with potential to hold long term.  Appreciation is great but you need to be able to have a path to make your payments make sense otherwise you will be giving the property back to the bank.

Travis Biziorek · Answer

Hey Sejin, I also live in California but I'm doing two things:

1) I invest in Detroit and have been since 2019. I have a 12-door portfolio there.

2) I'm in the process of building an ADU here at my primary. We're having it white-boxed so we can put in some sweat equity on the finishes. As a result, it should cash flow nicely for us.

If you're wanting to stay in the state of CA for your investment activity you're going to have to get creative and/or do some heavy value add stuff.

Dan H. · Answer

Makes a lot of sense.  Poor historical appreciation likely means poor historical rent growth.  Those are 2 strong indicators of long term RE ROI.

not sure what there is to not understand.  It also explains why contrary to appearances on BP, that Ohio ranks near last in investor owned single family units.  https://www.corelogic.com/intelligence/total-investor-home-p...Historical results does not necessarily predict future results, but in the absence of something to produce a different result, why would anyone expect a different result?

Gordon Cuffe · Answer

@Sejin Kim I live around Sacramento. I buy out of state for cashflow. If you do not own anything in the Sacramento area yet then the first thing you can do is buy a primary residence or duplex to rent out and live in one side. There is going to be a new loan program where a owner occupied person can buy 2 to 4 units with just 5% down. You can pm with any questions about the loan program or other questions.

Calvin Ozanick · Answer

We manage for 5 clients who live in California, but purchased in the southern Wisconsin markets. The price to rent ratios and overall rent growth, coupled with some relatively landlord friendly governments set-up has allowed clients to thrive. If you would like to learn a little more about what has brought on this massive growth here, I would be happy to chat!

Sejin Kim · Answer

Thank you so much for all the comments!

Robert Ellis · Answer

I'm from Toledo and my demolition company does demolition in Dayton and Cleveland as well. I can never figure out how to make the numbers work to add value if your property isn't going up in value like they do in Columbus that allows for you to build complex models that allow for Capex over time keeping up at an affordable level.

Robert Ellis · Answer

I went to a Brad Sumrok event a few years ago and there was like hundreds of LPs / limited partners and they did a macroeconomic high level view of apartment investing. Ohio had the lowest price per unit of any other state in the nation back then on an aggregate of thousands of analysis yet almost none of them were looking here. didn't make a lot of sense to me.

Scott Scoville · Answer

Hey Sejin,

Yes, to invest in most markets in CA, you will have to adjust your strategy. I just spoke at the NorCal Real Estate Mastermind last week and discussed how my partners and I are investing in Class A & B properties, looking for value add and forced appreciation. Fairly straightforward and simple. Find properties with the ability to add square footage or beds/baths. If we could find a property and force appreciate by $100k-$200k, then it's a no brainer in this market. Even in the event of a downturn, we have plenty of space in the deal. I'm an agent and work with investors and would be happy to help if you need it. Best of luck.

What is your strategy to invest in California?

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