Am I making a mistake investing in Southern California?????

[James Allen]

I'm here in Southern California, I invest in the Antelope Valley and I've got my first Direct Mail campaign that just arrived as of today. As I was reading one of the bigger pockets articles, I noticed that Los Angeles was rated the 3rd worst place in the Nation to invest right now as of the end of 2016. Everyone I have been talking with in Cali talks about trying to find a 1 % rule for rentals (1% of the purchase price in monthly rent) where as other states talk about a 2% rule with there being much better rent to value rates in other states. I started looking around on Zillow last night and found that right off the bat that there are better deals out of state available even just online for buy and hold. As someone who would love to acquire multi families and have plenty of units with cash flow down the road through the BRRRR process, am I wasting my time trying to invest in southern California when there are great deals out of state??

[Dan H.]

I show that link shows LA as 8th worse but it also shows San Diego as 9th worse.  I am not an expert on LA but know the San Diego market well.  The appreciation rate listed for San Diego is lower than any source that I can find.  Zillow shows my investment zip code (which is not all of San Diego) as over 10% and neighborhood scout shows San Diego as 8.3% which it lists as 9 out of 10 appreciation in america.  Three years ago San Diego appreciated over 20% and over 8% the last 2 years.  So I question the BP appreciation source and question how a location that ranks 9 out of 10 in aporeciation in the US for last 12 months can be anywhere near the bottom (9th worse) when financed.  Note if I finance with 20% down a 10% appreciation is a 50% return on investment if the rent only covers the expenses (I.e. Without any cash flow). 

It is my belief that most experienced RE investors leverage their money and therefore will typically choose to finance even if initially purchased with all cash. 

I am a big fan of So Cal investors investing in So Cal. All you need to do is look at 10 fastest appreciating markets for last decade and compare them to the national average. So Cal not only would have been a superior investment but it would not even be close compared to the average locale. Of course past performance is not necessarily an indicator of future performance. However, One thing to note about So Cal properties is the supply is finite especially in coastal urban areas. The demand seems to be infinite.

I have purchased a couple of times near market highs but both those properties have done great.  In 1991, I purchased a property at $167k.  It depreciated to maybe $140k.  Today it is worth about $540k.  In 2003 I purchased a property at $741k.  It fell in value to low $600k (maybe $620k).  It is worth north of $900k today. My point is that if a property depreciates but there is  no need to sell when depreciated historically you will do fine. 

So here is my case for So Cal:
- Advantages of local including expertise, cost to get to property, able to self-manage if desired (typically ~10%). The family had an out of state property hit by 2 hurricanes. Even though we hired contractors, because we were not present we were the property getting the least attention with the slowest work.
- Appreciation: Do the research. Use your own knowledge of the supply/demand. It really is simple Econ 101. I am not stating that it is certain to appreciate like it has but econ 101 tells me that excluding something catastrophic it is likely to continue to appreciate.  Historically San Diego has always appreciated long term. 
- Prop 13: My family suffered from this big time on a property on Gulf Shores Alabama. The taxes went up faster than the rents (until the hurricanes). We sold this property even though it was awesome (on the sand).
- I have no problem finding cash flow properties in my chosen area in So Cal. These properties cash flow using a $300/unit per month cap expense and 5% vacancy (our vacancy rate is less than this) and 5% maintenance expense. This cash flow does not include equity gain from making the payment which is in effect additional cash flow that can be obtained with a little effort. They may not cash flow with other parts of the country but the effort is less than out of state and so far the appreciation has more than made up for any reduced cash flow (Each property I have owned at least 3 years has gone up at least $100K - I have one property that has been owned only 1.5 years and is probably up $50 to $60K).
- The equity gain for rehabs is larger than many other parts of the country. Nice properties are greatly valued over neglected properties. This implies that I can purchase neglected properties, rehab, and have additional appreciation (more per unit than many other parts of the country).

Good luck where ever you choose to invest.