California market for rentals

[Tommy Mckeown]

My name is tommy mckeown im 19 years old and i live in southern California i want to start investing in a couple years but don't know if California is the right place to invest in. If anyone has any tips on rental property let me know if its to hard to find here or if i should just long distance investing and if its easier to brrrr or traditional rentals. Bear with me im new and been reading books the last couple months

[Joseph P Finkelstein]

For here, that $50K is definitely utilizing a 3.5% to 5% loan. That's just looking at it from a getting started stand point though. Whatever you do renting the rooms out will be beneficial, but the way you structure balance of down payment and loan is going to depend a lot more on you personally, and how comfortable you are with your finances and personal balance sheet. 

The larger the down payment, the closer you will be to breaking even/cash flowing,  so if you need to put down 10-20% to feel more comfortable with the monthly payments and hold on to the property, then that is probably the best option.

The caveat is that there is a concept called leveraged appreciation. A lot of times, what gives real estate the astronomical returns everyone talks about is the leveraged appreciation piece. 

The extremely oversimplified explanation of leveraged appreciation, is looking at the case of a $100 widget that you theoretically know will go up in value at 10% every year and asking yourself how much of your money vs other peoples money you should use to purchase it? 

If you bought it cash, year 2 you would make $10. $100*(1.1)-$100=$10, so you made 10% on your investment.

If you put 20% down, the math for year 2 would be the same, but of the money you put up, you would now have made $10 to your $20, so a 50% return. In this case we know that you will make $10 year 2, you should in theory put $0 down and make infinite returns.

I know that is a bit of tangent, but its just supposed to illustrate that hypothetically since RE is an appreciating asset, the lower your down payment, the harder your money is working for you. 

The reality is finding the right balance of down payment that utilizes the cash flow and leverage appreciation necessary for you to hit your target goals.