Affordable markets to invest in california?

Question

Hi,

Since I have a couple of friends studying and living in California I would like to know is there any affordable markets to invest in California?

Johnny Hoang · Answer

Hey Jasraj!

What part of CA? I always recommend house hacking as that's how I started and got my feet wet. In the bay area markets you can house hack and have a pretty good ROI. I've helped many friends and clients down here that has done it successfully.

For example:

Purchase price: 800K

Downapyment: 5% = 40K cash outlay

Monthly mortgage(PITI) = $4,500 on a 3.5% owner occupied 30 year mortgage.

Typically, I will just rent out bedrooms to offset the mortgage cost. There was a Oakland CA property that I just helped my client get into with the numbers mentioned above. It was close to Bart/ public transportation  and the average room rents go for $800 for a room with a shared bath and $1200 for a private bathroom.  This home was a 5 bed 4 bath and had a 1 bed 1 bath ADU in the back that hes going to live in.

He rented out the main house using the room rental model.

2 bedrooms with a shared bath at 800 each = $1600

3 bedrooms with a private bath at 1200 each = $3,600

Total rents: $5,200

5200 ( total rents) - 4500 ( monthly mortgage) = 700 cash flow

700 cash flow x 12 = 8400 / 40,000( cash out lay) = 21% ROI

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But the kicker is when he moves out the following year to buy another one and rents his ADU out for $1500. Then his cash flow will be $2,200 a month. So on year 2, his cash on cash looks like this: 1500 + 700 = 2200 x 12 = 26400 / 40,000 = %66 ROI

Hope this helps! DM me if you have further questions, glad to help!

Dan H. · Answer

There are affordable markets in CA, but they are affordable because historically they have not appreciated like the less affordable markets.   Typically the less affordable markets have appreciated more because they have multiple of the following: population growth, diversified economies, nice climate, housing constrained, rising incomes, large variety of entertainment opportunities, housing shortage, high paying jobs.

Some of the less expensive markets in CA include imperial County, Fresno county, riverside county, kern County, parts of San Bernadino County (not the resort areas).  I an sure there are some more as my list is south and central Ca only.

I would not choose these lower cost areas over higher cost areas unless you are aware of metrics that lead you to believe they are a good RE market.

Cheap does not imply a good value and expensive does not imply a bad value.

Good luck

Account Closed · Answer

@Dan Heuschele  Right.  Anywhere outside of the obvious high demand areas like SF Bay Area and LA, you really need to understand the employment situation, the culture, potential problems (like freeways that are possibly targeted to bypass towns that may no longer be good investments), etc.

Unless you can afford to make a profit in the major job areas, then you really need to know/do your homework on the potential to make money in a way or to a different market than you're used to.  For instance, towns that are mainly Republican cowboy types, or only have one real employer and whether or not it's likely for that employer to stay the duration, or can you handle renting to pot heads in the pot growing areas and deal with potentially really high water bills - you just really need to know and understand the affordable areas and the culture and job market or if it's realistic to expect to rent long-term to retirees, what's the healthcare situation, etc., etc., etc.

Now, if you do your homework, and spend hours and hours of time researching and traveling there to get a feel and understand them, and you have the ability to really converse with people who may not be the class you're used to, etc., or maybe they don't speak English very well or at all - then you can probably find that you can make a profit.

But, anyone who goes into this business expecting to get rich quick without having to do any work is probably going to fail anyway.  It wouldn't matter where they invested.

Dan H. · Answer

Cash flow is not rent minus PITI.  This is clearly cash flow negative currently.   It may even be cash flow negative after renting out the ADU (it may have a little positive cash flow).  There is maintenance/cap ex, vacancy, property management (even if doing it yourself it is a job and should have expense allocated), and miscellaneous.

In addition, single room rental models typically have higher tenant turnover.  This raises vacancy rates and Each tenant turnover has tenant flip expense.  I am pointing this out not because I think it is a terrible investment.  I suspect it may be a fine investment.  He has to live somewhere and if he did not own where he was living, he likely would be renting.  It is also a market with outstanding historical appreciation.  I am pointing this out so that someone reading this does not think rent - PITI = cash flow.  I want the reader to understand rental expenses.  If they do not have a good understanding of rental expenses, they need to use established, reputable cash flow calculators (BP has calculators).  They should understand the 50% rule and why expenses are so high on small unit count properties.

It is a disservice to new investors implying rent - PITI = cash flow.

Jo-Ann Lapin · Answer

the Central Valley is still feasible for investment . Make sure job stability once Covid is lifted is still growing

Johnny Hoang · Answer

@Dan Heuschele

Hey Dan, great points here.

I would have to agree with you if your taking it from a  pure investment stand point. The stance I was answering this question from was getting his feet wet using house hack as a vehicle to learn so he can understand how the overall process while reducing his living expenses. House hacking was the way I started and I found it to be very successful in adding to my portfolio, especially considering in my market it is quite expensive. But if you are taking it from a stance of a pure investment and not counting reducing your living expenses as an ROI in itself then to Dan's point, the reserve requirement and expenses that come with owning a rental property is very important.

Jasraj Singh · Answer

I don't live in the U.S and I'm planning to invest there and that's why I cannot house hack cause I don't have any credit so I most probably have to purchase my first property by paying full amount.If you have any idea's or can help in any way I would really appreciate that!

Thanks a lot for responding!

Jasraj Singh · Answer

Great! thanks a lot for responding! I'll definitely search about it!

Jasraj Singh · Answer

thanks a lot for responding! I don't live in the U.S and I'm planning to invest there and that's why I cannot house hack cause I don't have any credit so I most probably have to purchase my first property by paying full amount.If you have any idea's or can help in any way I would really appreciate that!

Kevin Dehesa · Answer

which cities of the central valley have the best cash flow?

Affordable markets to invest in california?

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