First Time Buyer - Now a Good Time? (Santa Monica, CA)

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First Time Buyer - Now a Good Time? (Santa Monica, CA)

Lance Knapp
Commercial Real Estate Analyst · Los Angeles, CA · Member since 2016 · 34 posts · 7 votes

Hi All,

This is my first ever post on Bigger Pockets and marks an exciting time for me. I am a commercial real estate analyst living and working in Santa Monica, CA. For about 6 months now I have been absorbing any educational information I can regarding real estate investing. Also, I have analyzed and viewed 50+ deals in my surrounding areas.

I am mainly looking at single family, duplex, triplex and fourplex properties. Many of the deals I see are cash flow negative after expenses and debt service (principal and interest on the mortgage). I have found a few deals that are cash flow neutral. On these neutral deals, I basically make $0 a month, but I get the benefit of my tenants paying off my mortgage, interest write offs, and the potential for appreciation.

Trust me - I want more than anything to buy an investment property, but I am a bit discouraged by the lack of cash flow and high prices in my surrounding areas. Also, I have my concerns regarding the US economy. One could argue that years of quantitative easing and low interest rates have masked underlying issues that could lead to a magnified and painful recession somewhere down the line.

Can anybody provide me with some advice and words of encouragement OR caution?

Really appreciate the support and help. Thank you all.

Best,

Lance

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Alex CraigBusiness Member
Real Estate Professional · Memphis, TN · Member since 2009 · 1k+ posts · 1k+ votes
10y

@Account Closed @Roger Poulin  I don't know if "on fire" is the term to describe Memphis, but certainly not cold.  Memphis is having their own boom too with over $4 billion dollars in construction projects either just wrapping up, in progress or about to start.  These projects will certainly improve the economy and quality of life here.  When I think of "on fire" I do think of Nashville as the downtown is remarkable-crane's are everywhere. I can't wait for GNR to announce their concert date so I can get up there.  That being said, when a city is "on fire", so are the housing prices.

I have been very aggressive the past 3 years adding to my portfolio that I started in 2007 and took a break early in 2009.  I network with a lot of local investors and we are all doing well.  It is a matter of buying in the right area and managing the property right.  If you need a concealed carry permit and a Kevlar vest, then unless you are some sort of Property Manager Warrior with a thrill for adventure, then you will lose 95% of the time.  The other 5% where you can make money is broken out in 2.5% change the house burns down shortly after you buy it and the insurance payout is far more then you have into it or the 2.5% chance that you get that tenant that has a fixed income and can afford the $595 in rent and is to lazy to move.

Here is the 4 billion dollar Memphis project article: http://www.commercialappeal.com/business/developme...

901-848-9028
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  • Lilia Andrew
    Real Estate Agent · Lowell, OR · Member since 2016 · 33 posts · 11 votes
    10y

    I have no advice for you as I am probably newer than you to RE but I wonder this same thing!  The prices are so high it doesn't make sense to buy right now.  The natural cycle of real estate (from my understanding) there will be a tipping point and then a decline!  But I have no idea if we are peaked yet!  I look forward to veteran investors to chime in.  

    1Reply
  • Chris Collins
    Multifamily Investor · Newport Beach, CA · Member since 2015 · 176 posts · 182 votes
    10y

    @Lance Knapp I've heard both sides to be honest. My CPA is also a broker and just recently sold 6 properties he owns in Sherman Oaks because he believes the market is going to go down from here. But my cousin is a #1 ranked broker in Orange County and he thinks that the way the FED is structuring loans is cause to believe that the market will stabilize and go slightly higher, not drop.  

    I think it makes sense to carefully analyze the locations and go from there. Some markets (CA, SF, SD) will drop more significantly if it happens, others may not take as high a hit (Memphis, Kansas City, etc). 

    I'm impressed you could even find cash flow neutral properties in our area (I'm in the South Bay here in LA), good for you. Those may not be the worst buys if you thought the market is going up. But if you're fearful that it will drop, then you can't count on the appreciation of SoCal like you usually can right?  

    Tough call, but I would think the best bet is to find some solid cash flowing deals, and then re-analyze with a 10-20% drop in rent (which would happen if the market drops out).  Rents don't really drop equally as much as values of properties do in my experience (say a 1M home drops to 600k, the rents don't drop from 2,000/mo to 1,300/mo you know? They may drop to $1600 or $1650.).  If they still cash flow, then you're 'protecting yourself' against a big market drop cash-flow wise.  That's one way to safe-guard yourself and your investments... 

    Good conversation though!

    -Chris

    1Reply
  • Glenn Humphreys
    Real Estate Agent · Laguna Niguel, CA · Member since 2016 · 29 posts · 8 votes
    10y

    @Lance Knapp

    I believe there is good reason to be cautious about the existing market.  On the surface it appears that the simple laws of supply and demand are in play - a growing work force is chasing relatively few properties which is forcing home prices up - nothing unusual there.  However, when you look more closely at the underlying problem of affordability in California, you have to wonder why homebuilders are not fighting each other to make a buck and fill the huge demand for affordable living - they obviously see a rocky economy ahead and have no desire to be caught out like they were when the credit bubble burst.  Globally, China is experiencing its own credit problems in the housing industry and  it also has excess inventory.  If the Chinese housing market were to show any signs of going into free fall, you can guarantee there will be a large ripple effect in the U.S. housing market - just as we have seen in the stock market in last few months with concerns over the Chinese economy.  As investors, buying opportunities might be closer than we think...

    1Reply
  • Nicholas Smith
    Residential Real Estate Broker · Long Beach, CA · Member since 2015 · 39 posts · 27 votes
    10y

    I am in the same boat as @Glenn Humphreys. Paired with what he has said, the market tends to soften during election season. I foresee some slowdown once we get closer to November, and for that to continue onto early next year as everyone waits to see what the new presidents agenda will be. 

    That being said, no one has a crystal ball to look into the future, all we can make are somewhat education guesses. My wife and I sold our house last year and moved to a new county. We plan on renting for the next 2 years until our next purchase.

    1Reply
  • James WachobBusiness Member
    Real Estate Broker · Memphis, TN · Member since 2015 · 1k+ posts · 887 votes
    10y

    @Chris Collins @Lance Knapp I'm a RE Broker in Memphis and specialize in helping out of state investors find, renovate, and manage properties.

    We are a boring town, when it comes to the ups and downs of real estate appreciation. That's why my investors LOVE Memphis!

    Its so predictable! I'm building brand new homes for $127,900 and renting them for $1200 per month.

    On paper the returns are not impressive.

    However, when you look at the savings over the next 15 years for lower repair bills, you may start to consider.

    Brand new roof, hot water tank, appliances, faucets, HVAC, etc.

    it adds up!

    We also buy & reno homes. I have 30 SFR undergoing renovation and 60 SFR fully rehabbed, tenanted, and for sale.

    We can't build or renovate them fast enough to meet the demand of foreign, out-of-state, and hedge fund investors.

    If you guys ever decide to visit Memphis - I'd love to show you around!

    @Lance Knappundefined

    0Reply
  • Chris DawsonPro Member
    Real Estate Broker / General Contractor / Property Manager · Kansas City, MO · Member since 2010 · 395 posts · 425 votes
    10y

    @Lance Knapp I want to first answer your question in the title of this post.  It is ALWAYS a good time to invest in real estate!  The real question is whether or not it is a good time to invest in real estate using your specific investment strategy in your specific market.  This is a very important distinction.  No matter what the market is doing, there is always at least one real estate investment strategy that will be successful.  

    I can't tell from your post if you have settled on an investment strategy.  You mention zero to negative cash flow so it sounds like you are looking at rental property for cash flow.  If this is the case, it will probably NEVER be a good time to do this in a market like LA.  If this is your strategy, then you need to be looking at Midwestern cities to invest.

    If you only want to invest in LA, you need to look at a different investment strategy.

    Let us know exactly what your investment strategy is and then we can help you decide what and where to invest.  

    1Reply
  • Lance Knapp
    OP
    Commercial Real Estate Analyst · Los Angeles, CA · Member since 2016 · 34 posts · 7 votes
    10y

    All, I cannot thank you enough for these thoughtful responses. They are extremely helpful for me. To address @Chris Dawson, my goal is to buy and hold a property with strong rental income and gain some modest appreciation over time - perhaps 3% annual appreciation with a 7% cap rate (if that exists). Your response opened my eyes that LA may not be the smartest market for this. @James Wachob, do you think there could be deals in Memphis that I would be interested in?

    Anyone else have any suggestions for where may be a smart place to invest for strong rental income and modest appreciation over time?

    @Chris Collins , @Glenn Humphreys and @Nicholas Smith Thank you for your thoughts on investing today. It seems like it could go either way. Nicholas - your move to renting may appear extreme but could be the most lucrative choice of your life.

    1Reply
  • James WachobBusiness Member
    Real Estate Broker · Memphis, TN · Member since 2015 · 1k+ posts · 887 votes
    10y

    @Lance Knapp I would almost bet on it!

    I'm working with investors from around the globe, b/c Memphis is on FIRE!

    0Reply
  • Corey Woodruff
    Saginaw, MI · Member since 2016 · 161 posts · 67 votes
    10y

    one rule of thumb is see everywhere is never buy for negative cash flow. I am not necessarily against buying with small cash flow because of the loan pay down, tax incentives. BUT let's say your clearing 50 a month cash flow, buying a house that needs a lot of monthly maintancewill quickly put you in the red. Also if your stuck having it vacant for a few months that quickly will eat away your reserves or savings. I would recommend not to buy there. But find a different market because no matter where you are there are inexpensive markets within a couple hours of every location. Build a nice team in that market and let that team educate you on all the opportunities there are in that market. 

    0Reply
  • Lance Knapp
    OP
    Commercial Real Estate Analyst · Los Angeles, CA · Member since 2016 · 34 posts · 7 votes
    10y

    @Corey Woodruff that is some of the best advice I have gotten. I will look within a couple hours of where I live (likely excluding LA entirely). The higher cap rate areas of LA are dangerous and high in crime. I think you are spot on that there will be a cash flowing market within a couple hours of me. Thank you!!

    0Reply
  • Account Closed
    Investor · Honolulu, HI · Member since 2013 · 3k+ posts · 1k+ votes
    10y
    Originally posted by @James Wachob:

    @Lance Knapp I would almost bet on it!

    I'm working with investors from around the globe, b/c Memphis is on FIRE!

    From USA.com

    Memphis is located in west Tennessee. Memphis is part of Shelby County. Memphis has 315.05 square miles of land area and 8.95 square miles of water area. As of 2010-2014, the total Memphis population is 656,715, which has grown 1.02% since 2000. The population growth rate is much lower than the state average rate of 13.40% and is much lower than the national average rate of 11.61%. Memphis median household income is $37,099 in 2010-2014 and has grown by 14.91% since 2000. The income growth rate is much lower than the state average rate of 22.72% and is much lower than the national average rate of 27.36%. Memphis median house value is $95,400 in 2010-2014 and has grown by 31.04% since 2000. The house value growth rate is much lower than the state average rate of 50.43% and is much lower than the national average rate of 46.91%. As a reference, the national Consumer Price Index (CPI) inflation rate for the same period is 26.63%. On average, the public school district that covers Memphis is much better than the state average in quality. The Memphis area code is .

    House prices have barely kept up with CPI.  James, where's the fire?  Seems like you be better off investing anywhere in TN besides Memphis.

    1Reply
  • Corey Woodruff
    Saginaw, MI · Member since 2016 · 161 posts · 67 votes
    10y
    Originally posted by @Lance Knapp:

    @Corey Woodruff that is some of the best advice I have gotten. I will look within a couple hours of where I live (likely excluding LA entirely). The higher cap rate areas of LA are dangerous and high in crime. I think you are spot on that there will be a cash flowing market within a couple hours of me. Thank you!!

     Thanks glad it helped. 

    0Reply
  • Account Closed
    Investor · Honolulu, HI · Member since 2013 · 3k+ posts · 1k+ votes
    10y

    From USA.com

    http://www.usa.com/rank/us--house-median-value--st....

    High price does not mean profitability but probably means there was a lot of appreciation (FREE MONEY!) and these are based on median prices.

    Whee Hawaii!

    and CA.

    0Reply
  • Lee L.
    Investor · Los Angeles, CA · Member since 2014 · 285 posts · 142 votes
    10y

    @Lance Knapp If you have the money to relocate the tenants in rent-controlled units (usually around $8k - $18k+ per unit), and then fix up the unit, you are free to charge whatever you want to the new tenant. 50% - 100% rent increase is not unheard of in the right location. With this in mind, L.A. starts to make more sense. 

    0Reply
  • Lance Knapp
    OP
    Commercial Real Estate Analyst · Los Angeles, CA · Member since 2016 · 34 posts · 7 votes
    10y

    @Lee L. very interesting Lee. Hadn't thought of that!

    0Reply
  • Janai Douglas
    Cordova, TN · Member since 2016 · 5 posts · 1 vote
    10y

    @James Wachob Excited to hear your viewpoint on Memphis, I'm a born and raised Memphian. I've been wanting to get into real estate investing for years and haven't bit the bullet. Just joined this site to learn and create a strategy Most interested in SFR or multifamily for cash flow.

    0Reply
  • Roger Poulin
    Realtor · Hermitage, TN · Member since 2014 · 125 posts · 93 votes
    10y

    Memphis is cold. The one good thing about that is that there are few buyer to compete with.  Hedge funds are investing in Nashville and driving up prices.  In Memphis you may be the only one to look t a house if it is not a great area.  Find a motivated seller and offer 50% of the current value, take you instant equity or start your play from there.  

    You could go one better, find a run down neighborhood within a mile or two of of a business hub and buy the whole neighborhood.  Rehab a block at a time making it beautiful.  There is a woman in Nashville that is getting $600-$800K for old crack houses.  You could do the same.

    0Reply
  • Alex CraigBusiness Member
    Real Estate Professional · Memphis, TN · Member since 2009 · 1k+ posts · 1k+ votes
    10y

    @Account Closed @Roger Poulin  I don't know if "on fire" is the term to describe Memphis, but certainly not cold.  Memphis is having their own boom too with over $4 billion dollars in construction projects either just wrapping up, in progress or about to start.  These projects will certainly improve the economy and quality of life here.  When I think of "on fire" I do think of Nashville as the downtown is remarkable-crane's are everywhere. I can't wait for GNR to announce their concert date so I can get up there.  That being said, when a city is "on fire", so are the housing prices.

    I have been very aggressive the past 3 years adding to my portfolio that I started in 2007 and took a break early in 2009.  I network with a lot of local investors and we are all doing well.  It is a matter of buying in the right area and managing the property right.  If you need a concealed carry permit and a Kevlar vest, then unless you are some sort of Property Manager Warrior with a thrill for adventure, then you will lose 95% of the time.  The other 5% where you can make money is broken out in 2.5% change the house burns down shortly after you buy it and the insurance payout is far more then you have into it or the 2.5% chance that you get that tenant that has a fixed income and can afford the $595 in rent and is to lazy to move.

    Here is the 4 billion dollar Memphis project article: http://www.commercialappeal.com/business/developme...

    901-848-9028
    2Reply
  • Robert FeolPro Member
    Specialist · Memphis, TN · Member since 2008 · 41 posts · 34 votes
    10y

    Hi Lance

    For us, buying real estate in Memphis can be a HUGE win - Alex Craig is right about being sure to buy in the 'right' areas, and use a provider with a proven track record.  I will say this - for my wife and I, the prices in Memphis were so cheap(we live here) that we started to buy homes and put them on very aggressive payoffs(5 years or 7 years).  This made us do two things - 1) commit to holding the rental properties and not sell them, as we would have them paid off in a very reasonable amount of time, and 2) Use an intermediate strategy which forced us to focus on buying the 'right' houses, with the goal of paying them off and keeping them as a long term source of unencumbered(paid off) cash flow.

    To be clear, the strategy works -  we have paid off three rental houses this year alone, have more paid off in total so far, and we feel very blessed.  It is hard to consider buying and paying off in five years when home prices are 200k+ in various markets, but in Memphis you can get great cash flow and low price points.  Take a look at what is available here and remember - paid off homes are a very achievable, and noble, goal that can be life changing.  It can happen for you, it certainly did for us.

    1Reply
  • Account Closed
    Investor · Honolulu, HI · Member since 2013 · 3k+ posts · 1k+ votes
    10y
    Originally posted by @Robert Feol:

    Hi Lance

      Take a look at what is available here and remember - paid off homes are a very achievable, and noble, goal that can be life changing.  It can happen for you, it certainly did for us.

     Not sure why anyone would take todays money and stick it in a house just to have it handed back at a later date. 

    0Reply
  • Robert FeolPro Member
    Specialist · Memphis, TN · Member since 2008 · 41 posts · 34 votes
    10y
    Originally posted by @Account Closed:

     Not sure why anyone would take todays money and stick it in a house just to have it handed back at a later date. 

     Hi Bob.  I'm a bit unclear on what your discussion point is.  Can you elaborate a bit further for those of us that are less experienced can understand?

    0Reply
  • Account Closed
    Investor · Honolulu, HI · Member since 2013 · 3k+ posts · 1k+ votes
    10y

    Cash flow should come from your business (rents).  If your increase in cash flow is only because you are sinking 2016 (W2?) money into the property then you have to realize the "extra" money coming back in 2026 dollars is your own 2016 money.  Not very financially prudent.

    0Reply
  • Douglas SkipworthBusiness Member
    Rental Property Investor · Memphis, TN · Member since 2014 · 1k+ posts · 1k+ votes
    10y

    Hi, @Account Closed.

    I know @Robert Feol personally.@Robert Feol

    My guess is that he was very prudent and purchased the houses at a significant discount to the current market value.  Further, I bet he had 100% financing and is using the rent to repay the debt, which at $0 invested for him is an infinite return when the debt is paid off in 5 years.  

    I know 100% financing sounds scary, but using it to buy a house at 50% of the conservative market value can be lucrative over the long term.  The only problem is it that is very difficult to buy houses in scale at $0.50 on the dollar.  The good news is it doesn't take many free and clear houses to reach financial freedom if your living expenses are not lavish.

    Investor's Guide to Memphis Real Estate
    View Page
    2Reply
  • Account Closed
    Investor · Honolulu, HI · Member since 2013 · 3k+ posts · 1k+ votes
    10y
    Originally posted by @Douglas Skipworth:

    Hi, @Account Closed.

    I know @Robert Feol personally.@Robert Feol

    My guess is that he was very prudent and purchased the houses at a significant discount to the current market value.  Further, I bet he had 100% financing and is using the rent to repay the debt, which at $0 invested for him is an infinite return when the debt is paid off in 5 years.  

    I know 100% financing sounds scary, but using it to buy a house at 50% of the conservative market value can be lucrative over the long term.  The only problem is it that is very difficult to buy houses in scale at $0.50 on the dollar.  The good news is it doesn't take many free and clear houses to reach financial freedom if your living expenses are not lavish.

     1. Buying at a discount good.

    2.  100% financing good.

    3.  Using todays money for tomorrow's debt bad.

    4.  Cash in hand not sunk into illiquid investment or invested in more properties is true financial freedom.

    0Reply
  • Amit M.
    Rental Property Investor · San Francisco, CA · Member since 2013 · 1k+ posts · 1k+ votes
    10y

    @Lance Knapp the deals you have looked at- are there any rent controlled units you can buy the tenant out at and increase rent?  Especially if unit is renovated and re-rented at top dollar?  Any value added play with basement/garage space to add space to adjacent unit?  Increase parking or storage?  Even non RC buildings, often time an old timer will sell it run down, with long term tenants paying low rent. Easy play there to get rents up,improve the bldg., etc. 

    Can you get a 30 yr fixed rate?  How will that "break even now" property look in 5 years?  Rents higher?- yup. Increase in value?- probably. Pay down of note?- yep. Tax write offs now?- yep.  

    No one knows for sure when the next recession will hit, and how it will impact you little corner of the world. We just had the Great Recession, and most people believe the next one will not be nearly as bad, more a typical cycle.  But if one is a Debbie downer-perma bear, might as well forget RE investing!

    Also some areas will gentrify, others are already costly. In general,  you get more bang for your buck if you can read the gentrification tea leaves and get into theos neighborhoods. I did that several times in SF, and damn that gentrification thing can sure bring some big dollars your way ;)

    As for buying now, that's easy: a good deal is a good deal. Harder to find in hot markets for sure, but they do exist. Just harder to uncover and tougher to get. Off market is golden, when it's the real thing.  (Watch out for faux deals.)

    If I were you I'd much rather play in the LA sandbox than rely on some turn key operator in fly over states. I'm with Bob on this. 

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