Cash Flowing in Southern California

[Wiley Strahan]

Hi All,

I have been looking at properties across LA (Long Beach, Hawthorne, Inglewood, etc.) and I have found that the vast majority, if not all of the properties do not cash flow. I talked with my agent about this and she said it was normal in California to not have a property cash flow especially in the first few years. She mentioned that her other investors buy solely for the tax benefits and appreciation.

 Conversely, I talked with a few others in the real estate community (investor & agent) and they definitely disagree and provided examples of properties cash flowing in those same areas. Those other properties also had rents that were below market which could be a contributing factor. Is this just a matter of the properties I am being sent aren't good deals or should I adjust my expectations for cash flow? I get this isn't the midwest or south, but I was at least expecting some cash flow especially for properties where the rents are below market. Any wisdom is appreciated.

Thanks!

[Dan H.]

Some thoughts:

• So Cal is a big area.  OC, San Diego, and Los Angeles have expensive RE.  However, there are areas in So Cal with much cheaper RE.  Temecula and Murrieta are a little cheaper.  Cities in Imperial county or more remote areas of Riverside county are often much cheaper.
• Whenever I hear cash flow without a reference to a level of financing, I find it a vague and useless term. Virtually everything cash flows with 0% LTV. I know an investor that considers a property as positive cash flowing only if it would cash flow at 100% financing. My view is that it should cash flow at 80% LTV.
• My belief is that finding an SFR at retail that has positive cash flow in San Diego, OC, or LA with realistic expense estimates (vacancy, maintenance, cap ex, misc.) is unlikely (using 80% LTV). Finding duplex to quads that have positive cash flow is starting to get to be challenging but I regularly find them. Most are not properties I desire to purchase for some reason.
• The best deals are achieved by not paying retail. These either take luck or work or the combination of the two. They mostly are not on the MLS.
• The best retail purchases are the ones with big value adds.  Value adds are work.  If I purchase a RE and after the value add and associated refinance have no money into the RE then even a small cash flow is providing infinite return.  This is in addition to the return achieved by the RE value increase due to the value add.

It takes work to find RE that is a low risk and provides outstanding return in San Diego, LA, or OC (if it does not project at least 20% short-term return then I am not interested - goal is getting at least 50% short-term return).  Everyone is seeking these properties.  You either need to work hard and smart to find these properties or expand the search area.

I would not expect most realtors to find properties that are not on the MLS. I would expect most realtors to not recognize the potential of many/most value adds. The more creative the value add, the less likely the realtor will be able to recognize the opportunity. Finding a realtor that recognizes the value of value adds is not easy.

Good luck