Buying in Norther California
Napa, CA · Member since 2013 · 11 posts · 3 votes
Buying in Norther California
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Jay HinrichsBusiness Member
Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ voteson another thread one poster asked how to amass wealth or great wealth, with great wealth being described at net worth of 5 to 10 million.
The point the CA investor makes is that it is wholly possible to get to the 5 million mark buy buying Passive CA neutral gear to slight negative gear properties. My point that I made was what I know growing up in Cupertino in the 60's and buying my very first home in Milpitas for 70k.. during the 60's and 70's you could buy a home for the same price in Palo Alto as you could in Kokomo Indiana or anywhere else in the mid west ( were Quote un Quote Cash flow homes are bought ) And if you say bought 5 of them in Palo Alto and kept them for rentals long term One they would have cash flowed like crazy after 10 years or so. And 2 they would be worth today 7.5 million for 5 of them and you paid 30k for them back in the 70's same with ?Cupertino.
Now you could have paid 30k for a home in KC, Memphis, Indy, virtually any of the soup de jour cash flow towns.. same time frame same price points. Well those homes today are worth... Yes maybe 60k and they would not have cash flowed over time anywhere near the CA properties.
So what I tried to point out is this is just regional and in a lot of ways was just luck and passive investing to the extreme.. Just happened to live in one of the greatest place's on earth and the market took you for a ride.
@Account Closed
Bob what would you have paid for a Honolulu home in the 70's that's worth 500 to 1.5 today... I know one of my bizz partners just bought a fixer for 1.5 over on the other side of Diamond head.. right across the street from that crazy Japanese billionaire that owns all those ocean front places that sit vacant.. I heard Baldwin bought all of that for 100 mil or so..
Out of state is fine for some but as Bob points out its not a big money game its a slow cash flow game and your cash flow can go backwards on you very quickly if you don't have the right teams in place. or you guy low end C property and live in CA and expect it to perform like A or B.
One thing about CA.. the market will take care of bad rental situations over time. Bad rental situations in the Mid west cash flow market ( IE bad tenant loss of value because of trashed home or what Ali described as she lost money getting her rentals straightened out) Can in many instances never be recouped.
One must always remember that in the foreclosure epidemic half of the foreclosures came from Land lords that failed... And logic only dictates why would a land lord fail... and let a property go.. 1. because its not performing ( biggest reason) 2. strategic default property so far underwater and rents don't cover the investor walks..
I know of one Terrible turn key outfit out of Salt Lake that I did a few HML with back in 05 and then saw what they were doing with the long term buyer and I stopped after 2 or 3 loans. But someone else funded it and the owner of the TK was also a mortgage broker and they did about 100 homes in this one town ( all in the lowest price ranges) Many never got rented all of them had conventional loans on them and ALL went to foreclosure over the ensuing years as investors just walked.
Out of area investors Need to proceed with Ultra caution and make sure those they work with have impeccable creds.. And then choose the high end of the market not the low end.. Low end is just plain tough and a Huge Risk in my mind.
56 Replies
- Investor · San Jose, CA · Member since 2012 · 2k+ posts · 3k+ votes12y
Kristi,
To echo what Matt Mason said above, buying real estate in Coastal California might look expensive now, but they will look so cheap in the future. Not only would you be set for life, but your kids and potentially your grand kids would also be set for life.
There is no right or wrong answer to your questions. It's a matter of comfort level. Coastal California real estate is known to be cyclical. Therefore, timing is crucial. With that said, it might be a mistake by not investing here. Have you met any older folks who wished they hadn't bought real estate in the Bay Area? As the old saying goes....... history repeats itself. Those that don't understand their history tend to repeat it.
Happy Investing and Landlording.
- 12yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
agreed out of state ownership involves a certain set of patience discipline and trust.. then throw in some luck and choose wisely.
- Napa, CA · Member since 2013 · 11 posts · 3 votes12y
great advice, I knew I would get it here. We grew up in Des Moines, Iowa and know it well. It is just not comfortable for Midwesterners to wrap our brains around the price of property here! Our primary resident was days away from foreclosure when we bought in Napa in 2010. Looking back we should have been scooping up all in sight.! My Midwestern conservatism has re-entered my subconscious and I am worried about a bubble. Our property alone is worth 30% more in three years...... Thanks to my Nor Cal friends who have commented on this post, I understand the strategy here- thanks!
- Investor · Los Angeles, CA · Member since 2013 · 231 posts · 260 votes12y
Timing is def. important in CA. 2005 and 2006 hurt some people in many parts of the country. A couple other things I meant to mention are that property often trades hands a little less often and many of these older owners have tiny basis and prop tax and may not be charging market rents because there isn't as much incentive to given that they are making good money anyway and why deal with turnover.
There is also a hybrid between flipping and holding. In other words fix and hold and in the right situations this can be quite effective in CA.
With that, cash is king so I find it nice to have a mix of high cash flow investments and some longer term value add plays.
- Multi-family Investor · Dallas Texas · Member since 2014 · 8 posts · 1 vote12y
Living her the Bay Area of Ca, finding any type of cash flow property isn't easy to capture. There are areas of Sacramento that still have potential for this.
As far far as, the speculative investing (investing for the pay day) when values increase, is for some just not us at this time. I much prefer the immediate cash flow, and appreciation is just the icing on the cake.
I'm sure there must be future-based thoughts around the wave of more foreclosures to come and how might that impact the speculative investment...
Wouldn't that devalue or lessen the price of homes around the surrounding area? Further compounding the issue are the vast number of those affected by the job market, thus making it harder to purchase a home. Obviously positioning is key to any investment, but just wondered thoughts around this subject.
I am new to investing with just a few properties acquired out of state which are generating cash flow now, but just wondered about the questions above.
- Real Estate Agent · Lincoln, CA · Member since 2014 · 225 posts · 43 votes12y
Originally posted by @Joe Bertolino:
There were plenty of properties that cash flowed in Nor Cal fairly recently. There are 2/1's in Yuba City that were going for $45k and renting for $850. You can find similar deals all over the Central Valley.Ive seen those. There are gang problems in yuba so you have to be carefull. Also they all need work to get them in a rentable state. But im new and my risk tolorance is low & experience low, so by no means should my comment be truly trusted
- Real Estate Investor · Redwood City, CA · Member since 2012 · 272 posts · 399 votes12y
@Bruce N, immediate cash flow is great and I have invested, and continue to invest, out of state for easy cash flow. But truth be told cash flow, be it out of state or in the Bay Area, is a pittance relatively speaking. The real money comes from the equity you build via appreciation and by your tenant paying off your mortgage. And this return just gets magnified every year. As Einstein said, compound interest is the most powerful force on the universe. In my opinion, it is the cash flow that is the icing on the cake.
While I'm no fan of buying for appreciation while bleeding money, it is all relative. I see why people do it in a market like the Bay Area if they can afford to. If you buy at a discount or in the trough of a market cycle would you be willing to lose $500/mo in cash flow on your average $1 million Bay area property? If you get even 6% appreciation you're making $60k/year (and more over time). That's like getting a 10:1 match on a 401k and its not even accounting for principle pay down. And you don't have to wait until you're 59 1/2 to take your gains as is the case with that fictitious 401k with the 10:1 match. Hell, you don't even have to pay taxes on the gains if you refi later and pull out your equity or sell via 1031 exchange. Ahhhh......real estate.......but I digress.
As far as that wave of foreclosures bringing prices down is concerned, don't worry about that because that wave broke long ago. The banks learned their lessons well. They are not in the foreclosure business and would rather renegotiate terms and keep getting paid or sell the non-performing notes.
Happy Hunting!
- 12yJ. MartinPro MemberRental Property Investor · Oakland, CA · Member since 2011 · 3k+ posts · 2k+ votes
@Jeff Pollack , I second your opinion about appreciation. I'm getting about 10% cash flow on my income properties in Richmond, and projected on the vacant units on my recently closed 4plex in Oakland.
But I've already got $150K in appreciation on my Richmond 4plex in last year and a half, a bit less on my SFH, and will have lots of built-in equity in my Oakland 4plex. Multiples of any CF (although won't increase at this rate forever..)
It's hard to have conversation on BP about appreciation, but when you talk to Bay Area folks like @Account Closed
, @Amit M.
, , nd others, they know.. Keep it up!
- 12yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
Oh No you blew it you could have bought some mid west properties that make 100 a month and will never go up in value or will probably go down in value.. bad call buying CA rentals... not sure you know what your doing... LOL
- 12yJ. MartinPro MemberRental Property Investor · Oakland, CA · Member since 2011 · 3k+ posts · 2k+ votes
lol @Jay Hinrichs - totally! I could be rolling in $50 bills right now in the Midwest managing 100 SFR's as a "prudent" cash flow investor!
Not knocking it.. Good for whoever is making money there. And here.. And wherever.. But there's definitely some people out there that think appreciation is dirty word, or highly speculative. It just is what it is. And amazing part of RE and leverage..
Thanks for bringing in the big guns to back us up Jay! Didn't mean to leave you out of my Bay Area investing shout out! I just forget, all the way out there in the woods! lol
- Rental Property Investor · San Francisco, CA · Member since 2013 · 1k+ posts · 1k+ votes12y
@J. Martin , etc.
LOL :) :)
Yeah, I read this thread yesterday. The usual fly-over-states-$100-per-door-cash-flow vs. costal California debate. Frankly I'm not that interested in convincing more local investors to invest in my markets. So go where the wind takes you!
- 12yJ. MartinPro MemberRental Property Investor · Oakland, CA · Member since 2011 · 3k+ posts · 2k+ votes
@Amit M. , sorry.. I thought you were already on here. Must have been on a different forum talking about appreciation vs CF lol
Fair enough. Some minds will just never change. And we don't need any more competition! lol
But I like your quote:
.."where the wind takes you.."
There's all sorts of money to be made in all sorts of different investment styles. To each their own.
- 12yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
funny thing about all these different areas.. Most folks would not know that Richmond, Vallejo and many parts of Oakland there are inexpensive homes as the neighborhoods tend to be on the rough side... Yet the locations just because they are bay area command nice rents and lack of housing.
They are indeed the Bay Areas war zones.. Same with parts of East San Jose, East palo Alto East Menlo the projects in SF and on and on. Same theme different price points... I have seen homes sell in Oakland for under 50k
- 12yJ. MartinPro MemberRental Property Investor · Oakland, CA · Member since 2011 · 3k+ posts · 2k+ votes
There WERE small houses in Oakland, Richmond, Vallejo selling for under $50K. But no more! Can't find under $100K! (Or send them to me if you know where they're at!)
I just bought a 4plex in E Oakland for about $110/ft, that will be around 7ish GRM, 8-9% cap, and 10+% CF - same situation and demographic as my prior purchases in Richmond. $50-100K built-in equity. Nice street in a bad, but improving neighborhood. Rents are high and increasing, with rents in surrounding neighborhoods 2-4X higher.. My Richmond 4plex is up about $150K, and doing cash-out financing from FHA to conventional just a year after purchase.
There's tons of cash flow & appreciation to be made.. Vallejo.. Prices are still cheap. But rents and rental demand relative to supply are not as attractive as they areas in the core of the East Bay that has no buildable land, and relatively quicker freeway and BART commutes to SF, Oakland, WC, and South Bay/Peninsula. Plus the bankruptcy, taxes, and bad schools still hang over Vallejo's head - and commute isn't great unless you make a lot and ride the ferry..
But there's money in them thar
hills!hoods! - 12yJ. MartinPro MemberRental Property Investor · Oakland, CA · Member since 2011 · 3k+ posts · 2k+ votes
@Kristi Miller , to answer your question, many people do buy with leverage in the Bay. But you either have to wait for rents to increase to get the CF, or you have to buy something beat up or a turnaround situation to get good cash flow. I'll be banging out 10%+ cash flow in Oakland and about $50-100K in built-in equity on the 4plex I bought last week (yes there are still some deals out there). But I'm putting about $40K and a lot of hours into 3 vacant beat-up units to get it to that level.. Others might do condo conversions, zoning changes, tenant buyouts, tear-down and build, etc.etc.
So to answer your question, you are correct that there is no or hardly any cash flow in the Bay if you want to buy a "turn-key" property already in good condition, that needs nothing done to it, and has great tenants.
Then, as @Account Closed said, you have big NW borrowers who can get crazy cheap financing rates for financing they often don't even need. ( as low as 2.75% now for 5/1 ARM on Multifamily for VERY well-heeled borrower). So that's why MF is so hot right now, on top of the rock-bottom vacancies and increasing rents in the Bay.
- 12yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
Hoods are hoods are hoods... be it bay area or Detroit difference is the bay area like you said has no land and has jobs.. In my day running Langer mortgage in Oakland we did hundreds of rehab loans in all those neighborhoods... along with san leandro heyward etc even some high end SF remodels One on Green street I remember fondly
- San Jose, CA · Member since 2011 · 160 posts · 167 votes12y
I think a better way to look at "cash-flow vs appreciation" is the timeframe you want to access your money. With appreciation you can't (easily) live off the equity gain. Cash flow on the other hand you can pay bills with today.
So if you have a good, stable source of income now and don't need that $100/door income a Midwest rental nets you, it's better to "save" that money in appreciating market and grow your equity base. Later on, near retirement or whatnot, you can sell those expensive houses in CA and deploy that big-*** equity to Midwest and buy your cash flow. You can do the math. This strategy allows you to buy way MORE cash-flowing doors than a straight cash-flow play from the get-go. I learned that strategy in "The Real Estate Guys" book and did a 180 on my own investment thinking.
- Investor · Honolulu, HI · Member since 2013 · 3k+ posts · 1k+ votes12y
Originally posted by @Manch Hon:
I think a better way to look at "cash-flow vs appreciation" is the timeframe you want to access your money. With appreciation you can't (easily) live off the equity gain. Cash flow on the other hand you can pay bills with today.
So if you have a good, stable source of income now and don't need that $100/door income a Midwest rental nets you, it's better to "save" that money in appreciating market and grow your equity base. Later on, near retirement or whatnot, you can sell those expensive houses in CA and deploy that big-*** equity to Midwest and buy your cash flow. You can do the math. This strategy allows you to buy way MORE cash-flowing doors than a straight cash-flow play from the get-go. I learned that strategy in "The Real Estate Guys" book and did a 180 on my own investment thinking.
Well that's possible....but it's not "cash flow vs. appreciation", it's "immediate cash flow vs. appreciation". Now I've never bought a property that cash flowed when I bought it but all have cash flowed after a few years because properties that appreciate greatly also have good rent growth. Now I did apply that cash flow to cover another property that hadn't started cash flowing yet and on and on. So you really are only non cash flowing for a few years on one property and then each property takes care of the next unless you are acquiring properties quicker. Now I can start pulling money out of the properties through loans using the growing cash flow to pay off the new mortgages.
I am retired and probably will not acquire more properties unless I'm 1031'ing to another property IN Honolulu or CA. The thought of giving up my 9-11%appreciation AND my 6-7% rent growth AND my LOW LOW Prop 13 tax bases to get some "more" cash flow now by investing in the mid west with all the pitfalls that that entails is just is not attractive to me. I'm looking at 30+ years of retirement and possible LTC needs so I don't think many CA retirees will be doing what you suggest.
Now the heirs I'm sure will have a hole burning in the equity pocket unless they have experience in CA investing. But I see them squandering the family legacy (probably) for more "immediate" gains and see them turning over to their heirs a lot less than they'd have if they'd kept what they'd inherited. I think I speak for a lot of CA boomers.
- San Jose, CA · Member since 2011 · 160 posts · 167 votes12y
@Account Closed If future cash flow from your CA properties gives you a comfortable retirement already, then sure, no need to sell in CA and buy in MidWest. That's just one of the many options available later, *after* your equity base has achieved critical mass.
First thing first, grow your equity base.
- 12yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
@Account Closed @Manch Hon
and in many cases keep
your day job so you can keep saving and building up cash to invest with.
I know the mid west looks appealing with the no money down scheme's or little down.. but there are land mines most West coast investors just don't or can't fathom.. just like LA is not Norcal things are different and in the mid west they are really different. at least from my experience. So in my day here is how it went.
LA promoter and there are plenty on this site.. they promote and sell properties for turn key companies throughout the mid west and south east and rust belt.
Hard money lender puts them into title .. then the buyer gets a rate term refi and has no money out of pocket and is counting on his or her 100 a month cash flow and they buy their max say 4 props because they can't afford anything in CA.
So now the cash flow does not materialize as advertised and the properties are negative cash flow ( happens more times than not) remember they bought the properties through CA based marketers so they are in essence paying the very top of the market they have put little or nothing down so they have max debt.
So now the houses are negative 100 a month each and or there is a major turn over cost say 5 to 7k very common and the no money down deal became out of pocket deal and a money bleeder and they will never amass any truth wealth as the houses on top of it all do not appreciate as even those that sell them will agree....
So bottom line if your going out of state you MUST be ultra careful not to fall in this trap and buy top quality property you buy low end dogs and you will be living with the dogs over time:)
from my point of view people that live in high priced areas like CA need to do whatever they can to first buy a home to live in. That is what is important to pay it off over time then your really have something for retirement.
But the dream of no money down and or low down positive cash flow is a strong one and put that together with very good sales folks and there you have it.
- Rental Property Investor · San Francisco, CA · Member since 2013 · 1k+ posts · 1k+ votes12y
@Jay Hinrichs as you hinted, there is a reason all those turn key sellers come to pitch their junk in CA- because there are plenty of people in CA who already have made plenty of money in home equity! If heard too many of these turn key pitches. F*ck if I'll put my investment destiny in the hands of some middle man! I've basically given up on most RE clubs, as they have proven to be a waste of time. (BP meet ups are still cool though :)
And I must agree with @Account Closed again! (+1 on the daisy chain concept too btw.) Additionally, I have zero interest in exchanging my SF condos for Midwest cash flow. A- I'm already getting great cash flow from my appreciated condos (in value AND rent). B- I want to sustain my super low property taxes (thx prop 13!). C- I expect more appreciation in the future. D- it's much easier managing things locally. E- I can easily keep tabs on the market, politics, etc. locally as well.
@J. Martin tell me a bit about your rehab plans. Kitchens and baths only? New plumbing and electrical? How much you plan to spend per unit, and how quick do you think you will be ready to rerent? Alternatively, drop by the mission district sometime and let's do lunch!
- 12yJ. MartinPro MemberRental Property Investor · Oakland, CA · Member since 2011 · 3k+ posts · 2k+ votes
@Amit M. ,
I have you on my reminder list to call to meet up. I've just been running around making sure these 3 units get completed quickly and the way I want them, and marketing the units. Mostly just cosmetic fixes. 1 unit that needs most of a new bathroom, and cabinets/countertops. Some plumbing work. But 1 was in good shape, one decent shape, and one that needs work. We refinished the hardwood floors under the carpet in 2 units. They're looking great.
Have 2 requests for inspections in on 2 units for Section 8 (exempt from rent control), and a qualified renter who's ready to put down a deposit on the unfinished unit, shortly. One unit is done tomorrow, then next week, then 2 or 3 weeks from now.. Rents are in my target range for good CF - about 10% after expenses & maintenance.. That's leveraged about 4X..
- 12yJ. MartinPro MemberRental Property Investor · Oakland, CA · Member since 2011 · 3k+ posts · 2k+ votes
@Amit M. ,
Only about $40K total in rehab. Btw, if you have about $20K you want to put to work short term (1%/mo?), I'm trying not to tied up my credit.. I have about $80K in availability around 4% annually, but I'm trying not to float this part on my credit report right now due to FICO impact during refi of an unrelated property..
Are you saying I should have already bought a primary!? :-/ Have been back and forth.. I was looking, but these cash flowing properties were just too tempting.. And not having the extra CF, from investing in a primary instead of investment properties, would have put a pretty big road block on future loans.. I guess I'm hoping the CF, increased asset accumulation, and appreciation from these investment properties will more than make up for me not purchasing my primary earlier.. Almost $1MM in gross assets now, and >$100K in gross rents..
But I could imagine going through a few primaries, before I end up in something totally different later in life.. (actually, my first one was already in Richmond..) We'll see how it goes ;)
- 12yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
good points.. I think most people need to get started with a primary before they think of income properties.. But either way works in some cases. my comment was I think someone in the bay area or west coast should do everything they can to get a primary before they launch off into buying mid west rentals that can go upside down pretty quickly if they choose poorly to begin with.. And unfortunately they don't know what they don't know living 6 states away and only taking marketing messages as their due diligence.
and I guess I just look at my own situation.. I started in Milpitas at 18 buying my primary.. 8k down 8k send HM for a 80k shapel home did everything I could to save that 8k back then .. Sold it in 18 months for a 60k gain.. then stayed in the next house in N cal and sold it 4 years later for a 110k gain.. then Palo Alto I bought in 83 for 185k sold in 91 for just shy of 500k then up to the napa valley bought for 400k and sold for 850 9 years later.. and of course this was all tax free gains..as opposed to income properties were one would have to keep rolling up a 1031 to avoid tax at the time. and by the middle of this progression I then started to buy land and develop and sell lots and do some fix and flips.. If I look back I wish I would have and or could have bought some san jose rentals at 60k and I flipped half a dozen east palo alto homes in the early 80s bought them for 5 to 8k and sold them for 15 to 20k but hey making 8k on a flip in 1981 was all the money in the world. So In that sense yes I think buying a SFR in bay area from my personal perspective is priority one.. got to live somewhere and if you hold through the cycles your bound to make money.. as opposed to buying mid west properties that no one on the planet thinks will appreciate and thinking your going to actually amass any real cash.. Only way to do it is with huge scale and mass. Like I did last 3 years were I bought 350 of them. but when I rolled out we only did as good as if I had bought 3 houses in Cupertino in 09 and sold them this year and because I was buying them TRUE WHOLESALE not through TK operators.
- 12yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
and as I think about it in my 12 years here in Oregon I have bought 5 primary residences.. first one I was in 6 months it was perfect timing bought just after 911 and market mini crashed sold it 6 months later on the rebound and made 50k.. then was in my next home 5 years and sold it and made 250k then moved into a rental condo that I had and over improved it and sold it and lost 60k sold in 2011 ish before market rebound but the next home was in a track of 14 I built and moved into that one and I have it on the market right now and will make about 175k on it tax free as I have been there 2 years.. and now living in a new home in Lake Oswego that I just custom built... So if I think about this... over 30 years probably made close to 1.2 or 1.5 mil in tax free money just on my primary resi's.. and that for a fact cannot happen in most mid west markets save the prime areas of Chicago, ny , DC, Charleston etc etc. won't happen were investors are buying 40 to 80 rentals end of that discussion.
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