What are your thoughts in the California real estate market?

[Tim Chen]

Every investor I meet, I like to ask them about their thoughts on where the real estate market is headed, specifically in California. People seem to give me answers from both ends of the spectrum. Recently, I spoke with an investor with half a billion dollars in real estate holdings and right now, his thirst for real estate is greater than ever. He anticipates hyper inflation. 

In the market where I work, Pasadena and Alhambra, the cap rates are so compressed. Buildings are selling at GRMs over 20x and Cap rates of 2-3% actual and 4% pro forma. Recently we brokered and closed the sale of a 7 unit apartment building at $440k a unit and $650 per sqft. It set a record for the area but I'm not really sure how the market can get any higher than that. I personally feel like we're due for an adjustment but what does everyone else feel? It seems the only thing preventing the multi family market from blowing up is the lack of inventory. The small escalations in interest rates haven't seemed to faze any investors. 

I'm curious, what are everyone else's thoughts?

[Aaron Mazzrillo]

I recently closed a duplex and a 2 bed house all on one lot here in SoCal. The appraiser claimed I'd never get what I told him I expected to get in rents. I put the house and one of the units up for rent online at around 11pm. By noon the next day I had more than 40 people contact me via email. My phone rang all day to the point I shut it off because I got sick of people asking me the same stupid questions (not one question was asked that wasn't covered in the ad). I decided to do an open house so I emailed everyone on my interest list the date and time which was convenient for me. I showed up promptly 30 minutes late. I figured if they really want the place, they have to be willing to jump through a few hoops. 

I opened both properties up and let the prospects show themselves around. They certainly don't need me pointing out where the kitchen is or the bathroom. If they do, I most likely am not going to rent to them anyway. I sat on the porch of the house with a yellow pad of paper. 

Once people were done looking and wanted an application, I took down their email address and said I would email it to them. They would have to print it out, scan and email it back to me. Again, another small hoop to jump through. I sent out one mass email to all of them with simple instructions on what I expected.

Out of the pack, I found two well qualified tenants. I then told both of them to meet me at the property where I would do the lease ups together. I further informed them I had so much interest in the property, the rents were not going to be as advertised, but higher. The properties are now rented at 1.24% of what I paid including rehab. AND, since I bought the property at a wholesale price, I have plenty of upside even if the market takes a dump or I could sell it today and pocket an easy 6 figures.

Deals like this can be found all over SoCal and hard working investors are sniffing them out. The PROBLEM is most people are just too lazy to look for opportunities and put good deals together. Instead, they look east where houses can be bought for about what a good car sells for. Shopping in the MLS, looking at Homes & Land magazine and talking to Zippy the Idiot real estate agent are not going to get you cash flowing properties in this market.

On another note, I recently sold a 4 unit I bought out of state 8 years ago. Over those 8 years, it only cost me about $8,500 for the pleasure of owning it. I sold it for about what I paid for it. (At least there was some amortization to enjoy!) 8 years with negative cash flow and no upside. But hey, I'm sure some other investors do just fine with their out of state stuff.

So, if California market swirls the drain great! Everything I love to buy will be on sale again. If it keeps going up or stays flat great! They are not building enough houses to meet demand which means landlords (who didn't buy in rent control areas) will keep driving up rents and enjoying more cash flow. If your'e worried about making a bad deal, buy something in the coastal communities. You know what they say about beach property - they ain't making any more of it!