How's the SoCal rental market?

Question

First of all -- I'm brand new to investing. I'm trying to build a portfolio of rental properties and since I've lived in SoCal my whole life, I thought it'd be best to start in my backyard.

But, I'm seeing that the properties around here just don't reach the 1% rule. How do you feel about the rental market here? Does anyone specialize only in rentals here?

James Paine · Answer

Radhika M. - I have a ton of rentals in San Diego and bought most of them during the downturn.  My opinion is that right now they don't work.   I believe in cash flow not the guess at appreciation.

David Faulkner · Answer

Welcome! The SoCal market is really difficult right now for acquiring new rentals. The cash flow generally gets better the further East you go, but even there you'd be hard pressed to find anything that meets the rules you mention. Buying distressed assets at a discount and then adding value via remodel is another important way to get better returns. This is a great way to go since it makes helps the cash flow and gives you an equity cushion which opens up options for alternate exit strategies (like sell at profit) and insulates you from downturns.

Finally, my observation from doing this over the last 12 years is that we are in a highly cyclical market and sometimes buy-and-hold is not the best, or even a feasible strategy. That means you will either need to sit on the sidelines from time to time and wait until buy-and-holds make more sense, be fexible and adapt your strategies to the changing market conditions (eg: transitioning from buy-and-hold to flips, and back again), or seek investments out of state. A lot of newbies pursue out of state investments, but I've been there, done that, and strongly advise against it ... that leaves you the first 2 options to consider.

Good luck and feel free to reach out further if I can be of assistance (I'm not selling anything, just giving away advice for free).

Kevin Wong · Answer

Good luck finding strong cash flow around Diamond Bar Radhika M.! I grew up in DB & Walnut, so I know the area well. Property prices are too high to enter in that market for rental. I'd recommend looking around Moreno Valley and some parts of Pomona. Some of the small multifamily properties I see there still have decent cash flow.

Jared Vidales · Answer

If you have to ask, you cant afford it.

Kurt Pourbaix · Answer

Hey David,

Sorry to hear about your bad experience investing in Phoenix.  I would like to find out more about your Property Management Experience.  Who were the bad companies, and who did you end up with that was halfway decent.  I invest in the Phoenix area from out of state and it really is important to have a Property Manager you can trust, and I am going through that evaluation process now.  Sure would like to learn from your experience.

David Faulkner · Answer

Two words: Property Management. I bought nice 2 B-class SFR rentals in Phoenix, they hit 2% rule at the time of purchase, because you could hit those numbers back then, rents $800-900 each, owned them free and clear (no mortgage). Should've gushed cash flow, right? I made about $21k TOTAL cash flow in 5 years. Why? Poor and dishonest management. Blew through 5 property managers, so this was by no means an isolated incident. I had 10 years REI experience when I bought, so I wasn't a newbie. I researched online, got referrals, looked at rentals currently under management, did my due diligence, and this was the end result. I still bought right so was able to sell at a profit, but if I had mortgages or bought in a high market (like today), I surely would've lost my A$%. It is just not that easy as some (who sell this product) would have you believe. Couple this with the fact that I've had far greater profits and cash flow from my "expensive" home market due to price appreciation and rent growth than I did out of state, even if I would've found good management out of state, and there is absolutely no reason for me to look out of state in the 1st place. I have nothing to sell and no incentive to steer you one way or another, this has just been my personal experience investing both in state in an expensive market and out of state in a less expensive one for the last 15 years.

Jennifer Nguyen · Answer

Can you tell me a bit more about why you would strongly advise against out of state investments?

Dan H. · Answer

I can find positive cash flow properties virtually every day in San Diego.  I am still a strong buy for San Diego for buy and hold investors.

I posted my rationale in this thread:

https://www.biggerpockets.com/forums/311/topics/277902-best-most-profitable-region-for-rentals?page=2#p1817640

Good luck

David Faulkner · Answer

If you want to learn about flipping, I'd advise talking with @Joe Homs. Many other experienced flippers to chat with in SoCal too (but I'm not one of them) ... challenge for you will likely be financing as most really good deals can only be purchased all cash (or via hard money loan).

You may need or want to partner to trade some sweat for experience. Either that or try a live in flip that needs less work that you can finance without cash or hard money, do yourself while living there as time and money allow to keep costs down. Good luck!

How's the SoCal rental market?

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