I've lived in the Antelope Valley (Palmdale) since 1994, so I know this market like the back of my hand. I wouldn't recommend it for buy and hold cashflow, but it is prime (again) for appreciation.
Go to the Midwest for buy and hold. Use an Excel buy and hold investment model analysis file to calculate your costs (mortgage, taxes, maintenance, etc.) versus your rental income and your calculated ROI based on your cash investment. You should run this analysis for every single property you are looking to buy. Once you set your criteria (maximum cash investment, buy and hold period in years, and minimum ROI) the rest is easy. Follow these steps:
Find markets where the monthly rent to market value of the property is greater than X%. This is where the 2% rule comes into play. This is actually a great rule of thumb, but I use a minimum of 1% because I also look at appreciation (I don't look to buy and hold forever). This is where you will spend most of your time; doing research to find your markets.
Once you find your markets, get with a local real estate agent and ask them to search for properties that meet your criteria: X bedrooms, Y bathrooms, Z,ZZZ square feet with a maximum price of AAA,AAA in areas that have an average monthly rental rate of BBB.
As your agent feeds you properties, you feed them into your analysis file to see which ones meet all of your investment criteria.
Start making offers on those that meet your investment criteria.
Remember to constantly tweak your model based on your experience. I can tell you that when it comes to buy and hold investment, you minimize your monthly costs by going with interest only loans. You need to seek those from private money lenders who are interested in getting monthly interest payments. Think of them as equity partners who share in the monthly cashflow of your property. You can finance 100% of your property purchases with a 100% interest private money loan at 70% LTV and bring in an equity partner to put up the remaining 30% (second mortgage). There's nothing like get cash each month without putting any of your money in the deal (or at risk).
Hope this helps you think outside the box. Bottom line, I wouldn't purchase buy and hold properties in CA. You would be amazed at the cost of homes and rents in the Midwest areas, such as Detroit or Memphis. Do some research and don't be afraid (and you don't need to personally see each property. That's what a good real estate agent is for).
What returns are you looking for? In our area of central valley our $220kish rents for 1600-1800 a month. Although that doesn't follow any of the BP rules but the houses are class A properties, less than 10 years old and mostly professionals. It is a military area so you often can get a 3 year lease. We are class A investors because we self manage our properties when my husband is transferred.
I'm about sold on not buying anything in california at this point.
I have a fourplex, it breaks even (great tax write off) but I only put 3.5% down and it exceeds the 1% rule.
BUT... rentals SUCK here for cash flow so much! I mean honestly, how do people own 200k homes and expect $200 a month... at this point in the cycle it seems like a losing bet to me. It's like betting on Germany to win the world cup after they decimated Brazil, the odds aren't good anymore, yeah you might make a tiny bit of money but everyone who bet prior to the Brazil game is who is getting rich.
Just me, but I'm exploring states that deliver better cash flow, I'm not after appreciation I want money each month.
Yeah we're dabbling with out of state too, we just don't feel completely comfortable doing that given it's our first experience. We're both smart people and will do all our analyzing before actually buying, but the not being able to see the property first hand is a bit of a deal breaker.
Thanks! Hows that for my 1000th post, me whining about california rentals...
I'm a midwest guy originally, have family in Texas and NC so I'm going to go explore a little.
I deal with sellers all day long who own these $300k homes getting $1800 a month in rent and my head hurts. I've got $350k getting me $3900 a month and I'm not satisfied with that.
My ultimate goal is a trailer park. I will admit if you are W2 earning, and make under 150k a year a write off rental isn't a bad idea. If you earn over that you must be a real estate professional to claim any deductions. Once you are off W2 pay you want cash flow, and homes here just don't deliver that. It's painful to see that amount of money earn that little if you ask me.
Have you looked in Fresno? I've heard some people talking about cash flow properties available there. There's always the high desert cities like Palmdale and such. Vegas, watch out for vacancies. Just out of curiosity, what about being able to drive to a property makes you more comfortable? Will you be landlording yourself rather than using a PM?
@Ali Boone I think our main concern about driving there is we want to see the property first hand. Also if we were to buy a property that needed rehabbing it would be good to have the option of driving out there if there's any problems. Plus also meet all the people involved in person. These I guess are only initial concerns, but yes we will use a PM, so longterm we won't be needing to head out there very much.
And yes the Fresno area is now on our list as @Chris Williams and @Elizabeth Colegrove comment about $1800 a month for rent on a $300k property is insane. I guess in this situation the buyer/seller is relying a lot on appreciation, which seems to be the only way to make money in CA at the moment?
Palmdale Lancaster is going to be the easiest to drive to. Vegas would my 1st choice if the drive is kosher for you. Bakersfield is 3rd choice. I dont see any reason to go farther than those 3 options for drivability. I would consider not using a PM on just one drivable rental and that could help reach your flow goal.
Bakersfield is dealing with some issues that right now in some of its largest industries. It will be interesting to see how it comes though. The drought has created a major water shortage for farmers (bit part of the counties economy) and there is a moratorium on fracking which is affecting the local oil industry. Both of these could be temporary issues but there is no guarantee of the outcome.
Overall housing prices are up pretty dramatically from the bottom. I have heard Bakersfield is up 30% and the anecdotal evidence I have seen backs that up.
There are rural areas of Kern county where the prices are still near the bottom. They historically lag the bigger cities so they may be a good deal from a speculative perspective.
I actually don't think Bakersfield is "unsustainable" in terms of water. The central valley receives the run off of the Sierra Nevada mountains which is currently experiencing the worst drought in recorded history.
For central CA ag to be unsustainable I guess you would have to think the drought will be here to stay. I don't think this is the case. When things are pushing records I tend to think they will likely revert back towards the mean rather than keep pushing historic records. 2006 real estate prices is good example...when every record is being broken...its likely not going to continue on that trajectory much longer.
If someone was to make me an over/under bet comparing this next winters snow-pack to last winters...I would love to take the over bet.
In terms of water...Cities like LA, San Diego, Vegas, Phoenix, etc are much more unsustainable IMO.
Water is just part of the issue. The fact is that that the central valley has some of the best farmland in the world...I don't really have long term worries about Bakersfield's ag economy.
Fracking is the bigger unknown to me. It is very unpopular and likely to be the target of many lawsuits and moratoriums for many years to come. On the flip side of the issue is there is major exploration occurring in the Monterrey Shale, much of which is located in western Kern County. As technology changes, the oil industry might have a massive rebirth. There are so many facets to the issue...its impossible to predict how it will play out in the future.
Bakersfield RE was dramatically overbuilt in the last run up, and a good portion of the local economy was directly related to home building. When housing crashed, prices got hit very hard and unemployment shot up as home builders quit projects. There was some really great deals for a couple years. The hedge-funds started buying up just about everything at the courthouse steps. Inventory got so low, price increases were inevitable. The price increases are slowing now as the market has really worked it way through the bulk of the foreclosures. The "low fruit" is gone, but the area still has some good deals especially when compared to most parts of CA.
The most recent moratorium is on the re-injection of waste water. I think it was on the state level. Overall the county and city are supportive of oil. I don't know all the details but I know its been big news in Kern county and a lot of projects are on hold.
The most recent moratorium is on the re-injection of waste water. I think it was on the state level. Overall the county and city are supportive of oil. I don't know all the details but I know its been big news in Kern county and a lot of projects are on hold.
Coolio. Understood. I heard of politcal rumblings but I think that got killed. I assume each community can decide to ban if they like. Bakersfield/Kern would be the last I imagine. Too many jobs, too much money, and too much dirt to explore/exploit.