Should I get a CA Vacation Rental or Multifamily?

Question

Hi, I've been following this wonderful forum for a while but it's my first time posting. Thanks for all of your great insights.

I've been owning a condo in NJ for about 2 years (owner-occupied) and I'm thinking of selling it and relocating to California (the greater Los Angeles area or Palm Springs for personal and professional reasons). I've been wanting to get into real estate investing for a quite some time and I thought this would be an opportunity to start. However, I've been struggling with:

1. Being an out-of-state buyer in CA while coordinating a move from the east coast, does it make sense to explore a vacation rental option in the area of Palm Springs with the intention of buying a 3-bedroom and renting out the rest 2? I found some turnkey properties that are in the Cathedral City area around $300k. Of course the numbers need to work, but am also curious if anyone has experience with getting positive cash flow in Palm Springs?

2. As a first-time investor, does it make sense to explore getting a fourplex in CA? I've been reading up on it - fully aware how challenging it can be to get financing, finding inventory and all the management involved but also intrigued by the cashflow if the deal is good.

Sorry if any related questions have already been answered! Thank you!

Rob Massopust · Answer

Well selling your condo in NJ you most likely get any gain tax free as owner occupied. So that gives you some freedom and options, you do not have to do a 1031 so less pressure.

Depending on how much you make on that determines what you do once you get to CA.

I would simplify your life and move to CA first and rent, dont buy anything until you know and are clear on your objectives.

An average 4 plex in So Cal is hitting $1.5m - really tough to make that work. 4 units in LA is really out of whack.

And do the "rent where you live and buy where you rent" much better approach than trying to buy $1m dollar shack in LA.

Palm Springs is interesting and you can find some decent priced properties and some work as an AirBNB so that is interesting but I would run you calculations on standard rents and not base it on Short term rentals. Also it is ungodly hot in PS in the summer and the vacancy rates go up because its the snowbird effect. People go back up north when it gets so hot.

One thing to explore and is an idea that is rocking right now in LA is the concept of an ADU [accessory dwelling unit] or guest units, people are adding guest units and doing ADu conversions - this allows you to take a SFR and add or convert it to a legal rental, as opposed to having to rent out an extra bedroom and deal with roommates, you can take that same bedroom and add a kitchen and bath and you have an ADU that can rent out for a premium. Its the only strategy that makes sense right now. The cost per sq foot for 2-4 units is about 25-40% higher than SFR.

Find a decent sized SFR that needs work, buy as owner occupied with 95% LTV rehab loan that pays for rehab and conversion. Buy, fix, convert, rent, refi - hold on for equity and repeat.

This new law is permitted in all of CA and each city has its overlay issues but you will have to research it.

http://www.hcd.ca.gov/policy-research/AccessoryDwellingUnits.shtml

https://static1.squarespace.com/static/58e4e9705016e194dd5cdc43/t/59b33bc749fc2b50d07ec8ed/1504918476849/09-05+_+ADU+Booklet.pdf

Keep us posted

Wendy Schultz · Answer

Yes! I've been investing or looking to invest in FL (Disney World, Gulf Coast, and Panhandle)and looking to invest in Gatlinburg TN area. @Avery Carl and @Lucas Carl are the gurus there. There are a lot of places that are STR friendly (think vacation spots that have been doing this for a long while). And the places that tend to not be as friendly are ones that have traditionally been residential neighborhoods. Reach out to me, if you'd like to have a bigger conversation!

Tom Murtagh · Answer

An area to consider investing is the Hi-Desert/Morongo Basin.  The towns of Morongo Valley, Yucca Valley, Landers, Joshua Tree and 29 Palms.  Yucca Valley and 29 Palms specifically have clarified the permitting process and the ensuing steps for vacation rental properties. Both cities seem to welcome the tax revenue generated by vacation rentals.  Proximity to Joshua Tree Nat. Park drives over three million visitors to the area per year, creating demand for getaways. As does Instagram Nation.   Joshua Tree has gotten a bit pricey and it is unincorporated, unlike 29 Palms and Yucca Valley.  Prices are rising in the area but there is still the opportunity for cash flow if deals are chosen carefully.

Wendy Schultz · Answer

I echo the others in caution when buying a property intended for short term rental in a market that isn't a traditional STR market. While there is great money to be made in many of these areas, it's a lot more risky because you don't know what's coming down the pike in the form of regulation, occupancy requirements or outright bans. There are a lot of places that are STR friendly and you won't have to fight an uphill battle. You don't need to live where you invest if you have a good property manager so live where you'd like and invest where it makes the most sense.

Enrique Huerta · Answer

@Stella Guan, in general the inventory will be limited but a quick MLS search yielded 18 potential properties below $350,000 in 29 Palms, Cathedral City, and Palm Desert.

Part of the reason for the limited inventory is the lower price point. While the desert region is more affordable, it is still California and most inventory will be north of $400,000.

If you need help finding some properties, feel free to inbox me. I can introduce you to a few brokers in that area who have multifamily units and/or get you MLS access.

Best of luck.

Stella Guan · Answer

@Enrique Huerta Thank you for your advice! I think it makes a lot of sense to rent in CA first and get familiar with the area. I find that inventory for fourplexes is hard to find - I found some but they are very limited. I've been mainly going on the popular listing websites like trulia, zillow, realtor.com etc. Is there a local MLS that's better at finding listings? I tried searching on Google but didn't find much else.

Enrique Huerta · Answer

@Stella Guan

Personally, I’d look Into buying a multi-unit in the Palm Springs area. LA will be tough for less than $800,000 or so, but as someone mentioned you can find more cost effective properties in that desert area.

I wouldn’t do short term rentals but only because I wouldn’t want to deal with the management and its regulations.

Buy 2-4 units, live in one, rent the rest.

And it’s not that difficult to finance, manage, etc. Don’t let the articles you read scare you. Main thing is find good tenants and that can be done with screening qualifications:

-income 3x the Rent

-minimum FICO score

-minimum reserves

-positive references

Be disciplined with screening and you should be solid. Best of luck.

Also, you should Rent first before you buy. Short term 3-6 month lease until you learn the areas and find a good deal.

Someone else mentioned that too and I agree.

John D. · Answer

You might be able to find a 3 or 4plex in the desert, keep one unit for yourself, and rent the rest together as a large vacation rental, with those having access to a pool in the back.  So long as your accessing your unit didn't interfere with the renters private use of their space, you could likely cashflow in that manner.

Tom Murtagh · Answer

Stella,

Finding good cleaning and/or maintenance is a challenge in all markets. It's true that in the Hi-Desert some properties are very remote and may present an additional challenge. Others are minutes away from downtown areas and may make a smarter choice.  No matter where you buy, in state or out of state, it is important to get to know that area well and understand its pros and cons.  You must try to form a local's point of view even if you are not an actual local.  So spending some time in that city is a smart investment, IMO.

There are cleaning and maintenance workers available in the HI-Desert. I can give some references in that regard. An an investor, I would want to meet such contacts before I bought a property. Talking to tradespeople is educational,  whether in the Hi-Desert or Trenton, NJ.  I don't think you can know too much about your location and its quirks. Due diligence.  Etc.

Stella Guan · Answer

@Tom Murtagh Thank you! I have heard of people investing there and prices still have good potential. One concern I've seen people raised is - will it be difficult to find a reliable cleaning crew in the Hi-Desert area? Given that it is in the middle of the desert and less populated than Palm Springs, I'm curious if maintenance would be a big headache.

Should I get a CA Vacation Rental or Multifamily?

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