Would you buy a property that is breakeven in SoCal?

Question

Hey everyone,

I've been doing a lot of research educating myself on REI. I decided to look for a SFH or MFH to house hack and eventually turn it into a full rental property later on. I am looking to buy and hold the property and bank on the appreciation of SoCal market. This will be a long hold. I try to analyze a property as if it's going to be a full on rental without me living in it because with how the market is right now and in the area that I am in, I will never break even just house hacking.

My question is, would you guys buy a property that isn't making any cashflow but also not negative cash flow in Southern California market? In the future, it could cash flow as rent increases as well as when PMI falls off, but it won't generate that much cash flow. The area I'm looking at is Ventura County specifically.

Thank you,

Nitit

Nathan Gesner · Answer

First and foremost, I have to wonder how you are calculating cash flow. If it rents for $3,300 a month and your mortgage payment is $3,000, that is not $300 of cash flow. The proper method of calculating cash flow is all expenses, to include setting aside reserves for maintenance, capital expenditures, vacancy, etc. You can expect approximately 50% of rent income set aside for expenses, then you pay the mortgage and interest, then anything remaining is your cash flow.

If you can break even using the proper cash flow calculation, then I might consider a property based on appreciation. However, even that is questionable at this time because we have been in a growing market for nearly ten straight years with ridiculous growth for the past four. I suspect we're reaching a peak and would be very cautious when betting on appreciation because ten years of growth in a hot market like SoCal can be wiped out in one year.

Storm S. · Answer

@Nitit Chartuprayoon If I were you I would focus on buying a property in your area you’ll get a better deal than trying to find something out of state.

Will Fraser · Answer

Hi @Nitit Chartuprayoon, I would think of this through the lens of a cost benefit analysis.  If I could purchase the SoCal property with little to no money down, that's one thing.  If I took me $60k to buy a breakeven property that might appreciate and someday throw off some cashflow, then I'd keep renting my personal home and invest my $60k in a market like Wichita, KC, OKC, Tulsa, etc.

Jon Schwartz · Answer

Nitit,

Los Angeles investor and househacker here.

First off, take advice from out-of-staters with a grain of salt. SoCal is market unto itself. Appreciation may not be much of a force in Oklahoma, but it's a meaningful driver of wealth here.

Especially if you can force some appreciation. If you can find a 4-bed, 2-bath house that needs a little work, and you can do that work while you're living there, you'll earn a lot more in equity than if you bought and fixed up a cashflowing property in Oklahoma!

Anyway, to answer your question:

Yes, it's okay to buy a breakeven property in SoCal. Keep in mind that rents grow quickly here. A breakeven property this year is earning 5% more next year, then 5% more the year after that, etc...

However, before you buy your breakeven property, make sure the following conditions are met:

- You must underwrite the property properly, accounting for maintenance and capex and vacancy. If your underwriting isn't sound, you may find yourself in a deficit.

- You must be in an appreciating area. If you're sticking with Ventura County, find the hippest neighborhood in the hippest in the county. Then, buy right outside of that neighborhood. Since appreciation isn't a sure thing, you need to stack the deck in your favor that you'll be a beneficiary of sweet, sweet SoCal appreciation.

Good luck!

Best,

Jon

Kelsey T. · Answer

@Nitit, If you plan to live in one of the rooms, I would analyze the deal to take into account the difference in what you are paying for rent currently, vs the portion of the mortgage you would be paying if you lived in the house with roommates. If you are paying $1500/mo rent now, but would only have to cover $500 of the mortgage if you lived in the house, that should be taken into account.

To answer your question, I would definitely consider buying a breakeven house in SoCal. Especially if you were able to buy a deal in which you immediately gain equity or if it's a great location so you can be confident in the appreciation. California appreciation is pretty impressive. Just be sure that you have a lot of cushion to cover your costs, even if you lost your job or something big and unexpected happened.

Forrest Faulconer · Answer

@Nitit Chartuprayoon

If your property is barely breaking even, dumping 60k into a house in hopes of it appreciating sounds like a lot of risk for little reward. Real estate is a great investment, but not solely based on appreciation, especially in SoCal where the real estate market is not as linear as say, the midwest. However, if your property is break-even now, it may earn you cash as you pay down the principal, increase rents, etc.

Abe McLaurin · Answer

Check out the Columbus, Ohio market! Properties have been appreciating 18-20% easy in hot neighborhoods. Great off-market opportunities to owner occupy, flip, or buy and hold. The growing population secures a good flow of renters too. Id love to connect and talk more!

Nitit Chartuprayoon · Answer

@Nathan G. Hey Nathan, I used the 4 square method that Brandon did an example of on YouTube and followed that guideline with vacancy and everything else that he mentioned in that video.

Nitit Chartuprayoon · Answer

@Jon Schwartz

Message sent!

Thank you!

Jon Schwartz · Answer

@Nitit Chartuprayoon, yeah of course! Send me a message!

Best,

Jon

Would you buy a property that is breakeven in SoCal?

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