Is cash flow on a first property in SoCal possible?

Question

Hello folks,

I have began reading the bigger pockets book on rental property investing and one of the things that Brandon mentions is to buy a rental property that offers cash flow today.

My situation:

I am looking to buy a 2 or 3 bed condo or townhouse in which I will live in and have tenants. Given the prices in socal it's going to be very difficult to have cash flow from any property I chose to buy unless it's in an awful neighborhood. It seems as if my best options are having my tenants pay most of the rent while I am able to continue to keep working my main job and saving money by not having a pricey mortgage. Is this the best possible option in SoCal?

Thanks for any advice.

Andrew Fielder · Answer

Cash flow is relative to your equity input. The less leverage you have the more likely you will have cash flow. You need to focus more on return on equity rather than cash flow. For me, I want to put my precious capital to work and maximize the return, I don't care about cash flow as long as my return is maximized in my investment time frame. To do this you need to leverage.

I have a condo in OC, at the end of the day I have no cash flow but the value has gone up from $200k to $250k in 2 years plus repayment of principle and tax advantages. In the weaker markets it's the opposite, little to no appreciation and good cash flow.

Steve Jones · Answer

@Jonathan Bo Yes, you can find properties that cash flow, my rule of thumb is 30% down for multi unit properties.

Most of these will require some type of sweat equity.

Please be aware of rent controlled areas, mostly in LA.

Andrew Fielder · Answer

Account Closed I'm sure you've hear of investors saying "Location, location, location". For me I'd rather invest long term in strong markets with good market fundamentals, which long term means capital growth and income growth. In the weak markets you will have lower capital growth and income growth. Just remember total return = income return + capital growth. Long term, strong markets with good fundamentals win.

You don't need cash flow to invest in more properties. You can do a cash out refinance for your down payment on the next property.

Account Closed · Answer

@Penny Clark

Hi Penny,

I meant that I would be house hacking so these renters would be living with me. I guess I focus on cash flow because I am just going off of the rental property investing book but I'm not sure it fits the California real estate market so focusing on appreciation would make sense.

I am definitely working on connecting with more investors in this area, that's great advice.

Account Closed · Answer

@Andrew Fielder

So you focus more on appreciation? Is cash flow needed help you have more funds to buy new investment properties?

Also sorry for the rookie question but what do you mean by return on equity?

David Faulkner · Answer

Not only do prices go up fast, but rents go up fast too ... if you are willing and able to hold for the long term, both your appreciation AND cash flow will be great. Buy a cosmetic fixer (good bones but dirty, dated finishes) that you can get a good deal on and put some work into, so you get a nice short term sweat equity bump and are in a sound financial position to safely hold long term (or sell short term for profit if you need or choose to). After a couple years fixing, renting rooms to keep costs down, and saving, you should be cash flow positive and you can buy your next place and turn the first place into a rental. I built a nice portfolio of SFR rental properties with great cash flow and great appreciation both in nice neighborhoods in SoCal by doing this over the last 14 years, so I know from experience that it works. I prefer SFRs or small multi's with no HOAs if you can pull it financially.

Penny Clark · Answer

@Jonathon Bo, did you mean you'd have tenants or renters living with you (house hacking) or after you moved out? My nephew has a condo in Phoenix area and his two roommates/tenants pay all the expenses.  Also, does your expense list include HOA costs and does the Association allow you to operate it as a non owner occupied unit?

I don't know SoCals market very well except that in many areas it's not priced for cash flow unless it's a major fixer or is off market and owned by a very motivated seller. There are other reasons to purchase an investment property other than cash flow - appreciation in a high growth area. Although many members here insist on positive cash flow from day one, there are other investors here who buy property for equity growth. I would connect with investors in your area and see what's working for them.

Is cash flow on a first property in SoCal possible?

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