curious about SoCal investors are they finding any cashflowing long-term properties?

Question

I need help analyzing a duplex I've found a recently selling for ~800k and renting for $4100/month. I've calculated the mortgage payment to be around $5500/month with a 6.6% interest rate and 20% down so that means the property will be in a negative $1600 without even counting capEx, vacancies and other fees.

I'm new to California and I know the state is not landlord-friendly so I think its hard to raise rents to market value (max I can do is 10%) is that right?

anyone would think this deal could work with the limited information I've provided :) ?
I'm curious to know if anyone is finding properties that cashflow in the area especially with the current mortgage rates?

Eric Gerakos · Answer

I have great cash flow in California and where I invest there is no 10% rent increase limitation. Tell everyone investing in California is terrible though, less competition that way. Ohio rules!!!!!

Robert Rixer · Answer

People don't buy multifamily in SoCal for cashflow, they buy those $800k duplexes because they think it will be worth $1.6M one day. They're minimally leveraged, if at all so they may actually make a couple of bucks a year, but they're buying on speculation. Unfortunately they drive the prices up to a point where sound, logical cashflow investors like yourself have no shot.

Bjorn Ahlblad · Answer

My wife and I invested in Silicon Valley for thirty years. Never really made a nickel from CF, but a humbling reward when we finally sold! If we were still in Ca I would look into multiple ADU's on the same property like what is going on in San Diego. Worth some research.

Dan H. · Answer

Your rent ratio is a little above 50%.  This is common in San Diego and as you were able to conclude the initial cash flow at high LTV will be big negative.  Experienced investors seek a better ratio.  Prior to the recent rate hikes 0.75% ration produced positive cash flow for virtually every property with conservative underwriting.  Today I am unsure that 1% ratio would reflect positive cash flow with my underwriting.  This is because interest rates have more than doubled.  In additon, prices keep climbing in San Diego.

However, the idea that cash flow is not possible for long term hold in San Diego is naive.  Every property I have has over a 1% rent ratio.   If I had not extracted value I would be rolling in cash flow.  Instead, I have tons of extracted wealth that is tax deferred ((owed when I sell).  If I 1031 I get to further delay the taxes even upon sale.  If I die, the property gets a stepped up basis and no taxes will ever be paid on the gains.  I choose to extract value over the cash flow.

The reality is this is a challenging RE market.  Not only in San Diego but everywhere if using leverage.  If you plan to purchase a rent ready property off the MLS to LTR the entire property, it will be a while before it produces a positive return.  value adds, flipping, alternate rent models such as STR, MTR, rent by room  can help with the return.  None are passive.  None are even as passive as LTR residential which is not passive.

Good luck

Samuel Diouf · Answer

If you're looking for cash flowing deals, there are some great opportunities in the Ohio markets. Many investors from California are investing in the mid-west because of the yearly cash returns making more sense in these lower priced markets. I moved from Florida to start investing in Columbus.

Twana Rasoul · Answer

The Southern CA market and the San Diego market specifically is very misunderstood even by more experienced investors across the nation.  People are not simply buying here for speculation and I am also an investor myself and there is tons of data going back half a century or so to rely on when making a purchase.

This market is not for everyone and certainly not for those looking for "passive" investment as it takes work to make the numbers work here.

Cashflow is often misunderstood here as well.  While initial cashflow might be difficult without a ton of value add through updating and/or adding ADUs, long term cashflow is incredible here due to historic rental appreciation.

Also, yes it is a tenant friendly area but that is also a bit overblown since evictions are very low here in san Diego, last I checked it was less than 1 out of 100 and in areas around the country where evictions can happen practically overnight, some of those areas can have extremely high eviction rates especially a lot of those areas with high poverty rates.

Nicholas L. · Answer

@Taha Tekreeti

if it "could work" I think depends on your financial situation and your goals.  so i have no idea if it "could work" for you.

it would probably make a good house hack.

do you live in CA?

Timothy Hero · Answer

I've been in mortgages since 2019, and since I only do DSCR loans, I don't bother marketing to California because cash flow is non-existent.

$800k for a duplex is already ridiculous, but the cherry on top is $4,100 rent.

If you want to invest local but are willing to do out-of-state, you're better off taking your money to WA. It's not the best cash flowing state, but it's the best nearby. A duplex will go for $600-700k and rent for $4,500.

Account Closed · Answer

What is your expected IRR on these? in SD deals only work if you put over 50% LTV and at that point there are so many other assets that IMHO give a better risk adjusted return.

Joshua Christensen · Answer

I lived in the LA/Ontario area for a few years and personally would only buy speculation out there.  Fix n flip.  There is too much risk involved in tenant friendly laws and no cash flow to cover damages and non-payment.  Evictions are tough.  There are plenty of other places that have cash flow and better landlord support.

In ABQ, we do deals with ok cash flow initially, and much better by year 2 and beyond.  Prices are still somewhat affordable around 90-150k per door depending on the area of town.

We look at the longer term 5 years and beyond in our UW to make sure the deal will cover expenses in year 1 and create residuals after that.  It helps offset the expenses of the property.

I don't typically look at anything smaller than a 4unit due to the challenges with cost vs rent ratios.  4 and above do better for us.

Based on the limited info - back of the napkin says not to go any further on the duplex you're looking at unless you have deep pockets to carry it while you wait for the capital gain.

curious about SoCal investors are they finding any cashflowing long-term properties?

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