Investing in California

[Jason Riddle]

Hi, I live in San Francisco. I purchased my first rental property back in Oct 2022 in Texas. I was thinking about purchasing my next property somewhere in California. I'm considering getting a duplex or triplex, and living in one unit while renting the others out. My focus is appreciation, not cash flow.

Here are the cities I'm considering:
- San Diego
- Long Beach
- Santa Rosa
- Santa Cruz
- Los Angeles
- Santa Barbara

- I know with an FHA loan, I can get 3.5% down. However, I'm concerned having to put so little money down. Besides PMI insurance, is there a risk with this approach?
- At least in San Francisco, cash flow is very hard to achieve. However, there needs to be some cash flow in order to pay for the mortgage and expenses. Is cash flow still possible in the above cities?
- Do all of the above cities make it easy to build an ADU? Any estimates on cost per sq ft would be helpful.
- In general, does a SFH w/ an ADU appreciate faster than a SFH without an ADU?
- I've read that California is a pro-tenant state. Do any of the above cities tip slightly towards the landlord?
- There are other external concerns that I have i.e. state budget shortfalls, too much concentration in one job sector (ex. tech), running out of water situation, earthquakes, fires, etc., any thoughts on how others navigate this?

[Dan H.]

Quote from @Jason Riddle:

Hi, I live in San Francisco. I purchased my first rental property back in Oct 2022 in Texas. I was thinking about purchasing my next property somewhere in California. I'm considering getting a duplex or triplex, and living in one unit while renting the others out. My focus is appreciation, not cash flow.

Here are the cities I'm considering:
- San Diego
- Long Beach
- Santa Rosa
- Santa Cruz
- Los Angeles
- Santa Barbara

- I know with an FHA loan, I can get 3.5% down. However, I'm concerned having to put so little money down. Besides PMI insurance, is there a risk with this approach?
- At least in San Francisco, cash flow is very hard to achieve. However, there needs to be some cash flow in order to pay for the mortgage and expenses. Is cash flow still possible in the above cities?
- Do all of the above cities make it easy to build an ADU? Any estimates on cost per sq ft would be helpful.
- In general, does a SFH w/ an ADU appreciate faster than a SFH without an ADU?
- I've read that California is a pro-tenant state. Do any of the above cities tip slightly towards the landlord?
- There are other external concerns that I have i.e. state budget shortfalls, too much concentration in one job sector (ex. tech), running out of water situation, earthquakes, fires, etc., any thoughts on how others navigate this?

 I will provide my opinion to your questions as it applies to San Diego:

1) the high LTV increase the negative cash flow that is present even at 80% LTV when properly allocating for all expenses.
2) in general, all high LTV residential purchases have negative cash flow when properly allocating for expenses. 
3) adding an ADU in most San Diego markets adds less value that the cost of the ADU addition. This results in an initial negative position. After this initial negative position, I expect the a property with ADU will appreciate similar to the property without the ADU.

4) San Diego is extremely tenant friendly (LL unfriendly) area.  It has recently passed rent control legislation in excess of the state rent control.  Evictions are slow. During Covid, San Diego had the most extreme Covid eviction moratorium in the entire country. 
5) san diego economy is very diverse; one of the more diverse anywhere.  Utility costs are high, but this matches the high cost of living in San Diego.  Unfortunately wages do not reflect the high cost of living.  Fires have been a big issue. In 2003 there was the cedar fire which I believe at the time was the largest in state history.  Around 5 years later was the witch fire which was almost as big.  

Good luck