Is it really not possible to cash flow in the Los Angeles area?

Question

First, it has always been my dream to be able to move my family out to Santa Monica. Our family has always loved the area. Which is why it concerns me when I read how its impossible to cash flow in that given area.

I've heard from many places that it's just about impossible to cash flow in the very populated California cities. I did a little looking through zillow and rental websites to determine market rents in the area and I found this triplex that seems to cash flow from year one. ( https://www.zillow.com/homes/for_sale/Santa-Monica... ) [Mortgage of only $7200 with rents $8900 and to me it appears the rents are even a bit below market.]

I've seen many properties that seem to have cash flow like this or better in this area - even at the asking price of the seller- and feel like I must be missing something.

Obviously I know I have no way of knowing what all of the expenses are for this property, but it appears at first glance like these properties do in fact profit. Nevermind the fact that it may be a low cash-on-cash ROI due to it's very steep purchase price, which doesn't matter for me if it means achieving my goal.

Does anybody more experienced than me have any input? on whether I am crazy and just miscalculating or is it actually viable to find cash-flowing properties in this area?

Alex J. · Answer

South la still cash flows

Probably putting more down cash flows

You are not crazy

Aaron K. · Answer

Some things to consider for that purchase price, that will hamper your cash flow, Property tax which will likely be 1% or higher, property management (if you aren't self managing), insurance, for a property that size could be over $1,000 per year.  Plus you will have to consider repairs, the farther inland you go the better your returns will be, but it will be difficult to achieve significant cash flow in the LA metro area.  It may be there but you will definitely have to dig.

David Faulkner · Answer

I've been cash flowing quite well in SoCal for the past 15 years, so I assure you that it is possible ... and my cashflow increases every single year with rent increases, which is another thing to consider. However, you also need to be aware that many places in SoCal (like Santa Monica) are under rent control. While I prefer to invest in areas of LA that are NOT subject to rent control, if you study and understand the ordinances then often times not every single property will be subject to rent control even in rent controlled areas. For example, single family homes are often exempt. Much of Orange County and I believe Riverside and San Diego Counties are not rent controlled. Also realize that the underlying reason places put in rent control is because rents are very high and increase rapidly, so while I am no fan of rent control, I am a big fan of the underlying market conditions that cause it to come into being.

Aaron K. · Answer

Completely agree. By the way your podcast is my favorite.  Cash is king, especially in competitive markets too, which Santa Monica is.

Russell Brazil · Answer

Nearly all properties in all markets will cash flow if purchased with all cash.

Carlos Altamirano · Answer

@Jacob Barnhart

Hello Jacob, any property can cashflow depending on the tenant you are trying to serve. Lots of people are cash flowing premium real estate here in Orange County by renting on a short term basis to tourists, business people, families, nurses etc. Converting a single family home into an assisted living facility or sober living will most like  cashflow. The key is understanding your customer, and serving  them well. One single family home can service many types of tenants. Personally, I like the midwest class B and C buildings for long term rentals servicing blue and white collar workers, and even section 8 tenants. Good luck!

Dan H. · Answer

Property tax at 1.25% (typically a little conservative) would be almost $2k month.

I would place cap expense on this RE at more than $500/Month (but use $500 for calculations below).  Many people will think I am conservative with this but I do not agree.

Vacancy at 5%.

Insurance: I have no units in Santa Monica but I will use $150/month but I am sure others could provide a more accurate number.

Maintenance: I have no units with this mix but I think $150/month might be close.

Utilities for laundry room and ?: Maybe $50/month if they are not separately metered (more if separately metered).

8900 - 7200 (PI: using your number but not sure what interest you used on what down payment to know how real this number is: non owner occupied has small rate premium) - $500 (cap ex) - 445 (vacancy) - 150 (insurance) - 150 (maintenance) - 50 (utilities) = 405/month if self managed.

10% Property management: would provide 405 - 890 (PM) = -$485 using a PM.

So it may have cash flow if self managed but not a lot.

Good luck

Aaron K. · Answer

Another thing that you should think about, is why is it your dream to move to Santa Monica specifically? If it is the beach, there are cheaper beach cities. If it is the city, there are cheaper areas of the LA Metro.  Just some things to consider.

Maksym Logvin · Answer

Three hours drive to work? This is how much you need to earn to spend every day on the road for almost 6 hours?

Max Gradowitz · Answer

Right now, trying to buy a rental property in LA and similar densely populated cities in California that cash flows well is nearly impossible.  But, if your plan is to move here, the good news is that some cities within reasonable driving distance from LA (1-3 hours away) that do cash flow and are not expensive to purchase in.  Some people I know buy properties in Kern County and Northernmost LA County for these reasons, both for investments and their own residents.

Is it really not possible to cash flow in the Los Angeles area?

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