California Rental Property Investors

[Scott Doyen]

Hello Fellow BP Members,

I am currently new to the Real Estate game & trying to absorb and learn more about REI. I live in the Sacramento region. When evaluating properties around my region & California as a whole, I have found that it is quite difficult to reach the 2% rule or 50% rule in any properties at a glance. I understand that expenses relative to mortgage amount will & should be a lot less in California than other states. Regardless, here are my questions:

1) When evaluating a property generally in CA (even in Sac would be better), what percentage of monthly rent do you have for:

a. vacancy

b. capital expenditures

c. repairs

d. management

e. other

2) After crunching the mortgage, prop tax, insurance, and these other expenses above, what would be considered a 'good rental property' to invest in, in CA? You can answer in terms of monthly rental income / purchase price, cash flow, ROI, P/R Ratio, etc.

Best,

Scott

[Wes Blackwell]

@Scott Doyen

Here's the thing about the 2% Rule -- it's meant for $50-100k properties in much cheaper states than California. 

Tell me where you can find a $400k property to rent for even 1% ($4k), and I'll buy it in a hearbeat. Especially considering that if I bought that house with 5% down and a 5% interest rate, my PITI would only be $2,850... which kinda makes you wonder why someone would rent it for $1,000+ more in the first place.

Average/Median home values vary from city to city too, all over the state. So what seems like a deal in Sacramento may not be a deal in LA, and vice versa.

What you have to do is consider what the average rate of return is in the area you're considering, and then determine how much better the deal you're looking at needs to be compared to average in order for you to consider it.

Because if you're waiting for the 2% rule property to come around, you're going to be waiting for a reaaaaaal long time.

You might hit 1% every now and then, most likely on a fourplex, but that doesn't mean you want to live in that area if you're house hacking. So there are other considerations as well, not just the math.

Here's what I would do if I were you:

1) Consider how long you plan on being in California, and any other major life changes that may be coming your way soon. Girlfriend who wants to get married, promotion to a different city, parents retiring in another state, etc. If you're here for the next 4-5 foreseeable years without any big changes on the horizon, proceed.

2) Househacking is most assuredly your easiest way to get started, especially if you don't already own a property. Your goal is to lower your monthly obligation to the mortgage through the rent collected by your other tenants, and pay down your mortgage instead of someone else's that you would by renting.

3) If you're a first-timer, I would suggest avoiding out of state investing. Your just learning how to invest, so don't add in the added difficulty of analyzing economies and markets in far-away states you've never visited, only to get lied to by some broker or local wholesaler who tells you what you want to hear so you'll buy, only to have a fire started by the tenant and then need to take off work to fly 5 hours and waste a whole week trying to put things back together. Invest where you know.

4) Work with a local professional who is knowledgeable not only about the area, but about the investment strategy you are pursuing. Not all agents understand investment properties, they only pretend to. Then you can start looking at potential properties and "window shopping" while learning to run the numbers under the guidance of a pro who can double check them, and then pull the trigger when you're finally ready.

Hope this information helps. Please reply if you have any further questions I can help you answer :-)