Is it a good time to buy rentals in Long Beach?

Question

We have been looking to buy a rental property in Long Beach despite the negative cash flow and high prices. (I know, we kinda have to) and our budget is around 280k-330k. What I have noticed is that the inventory is extremely low, all the condos for sale are rehabbed and the sellers are mostly investors and the properties won't stay on the market more than a week! I would like to get advice from the experts that what is really going on?! Who is selling, who is buying these days and is it really a good time to buy investment properties in Long Beach? Thank you!

David Faulkner · Answer

You are better off flipping or working as a RE agent in this market ... the time for buy and hold in CA will return, just not today IMO. B&H COULD work IF you find an excellent deal, and I'm not saying you should not buy if you find such a deal, I'm just saying that realistically it will be very hard to find in this market and if you don't find it don't try to force it. I remember feeling the same way in 2006 (not saying this market is that crazy yet) wanting to buy another property to rent, but I could never make the numbers work back then, so I kept looking and studying but did not try to force anything ... then the crisis hit, and I had a pile of capital I had been saving to invest, I had been studying the local market, and educating myself on REI analysis and strategy. It worked out great for me, and if you are patient and diligent I'm sure it will work out for you too, even if not necessarily in the same manner. Good luck and happy investing.

Kevin Miller · Answer

@Mike Halim - I'm a Commercial lender and investor and saw my borrowers experience more problems in Big Bear area / Lake Arrowhead than locally. Anytime you invest in a vacation home or 2nd home market, those are the first homes that get sacrificed when things get inverted. Whatever you do, ensure you're in an area where rents will carry you through another cycle if values turn; maybe invest with a partner if you don't have the capital to get LTV below 50% yourself...

David Faulkner · Answer

Never done vacation rentals in Big Bear nor known anyone who has ... the two issues I see with it is they are management intensive and far away, so hiring a PM would likely eat your profits. If you were going to move there, self manage, and house hack a vacation rental or something like that it could work. The other issue is that the appreciation up that way is not as good. Empty land is more plentiful so if/when prices do go up they would build more and put a ceiling on it, and when a recession hits vacation would get cut back I'd guess making demand go down.One comment on making the numbers work ... when you analyze deals in SoCal I'd advise analyzing ALL the numbers ... long term cash flow (with typical rate of rent increases), forced appreciation, market appreciation (long term historical average, not extrapolate out the last few years), mortgage pay down, and tax savings. The best way to combine them is with IRR ... if you just take day 1 cash flow and ignore everything else then spoiler alert you will never ever buy anything in SoCal, and that would be a real mistake IMO. Having said that, running all these numbers I agree buy and hold is really tough today ... flipping usually makes more sense but is still not easy. RE agents may have the best gig around at present because they are taking advantage of high prices without risking significant capital, but that is a J-O-B. And I'd just as soon flush money down the toilet than to send it out of state in RE ... if I'm going to give up complete control like that in a market with weaker supply and demand fundamentals (which is why it is cheaper and cash flows more day 1, BTW), that I am unfamiliar with, that may very well be just as over priced compared to its own historical pricing, and that I have to pay all these middle men to make (hopefully) or break my investment, I'd just put it into the stock/bond market index fund where it would be much more passive, more diversified and likely more profitable. There are no easy answers as prices are high just about everywhere you look and you will get no free lunch ... sorry if that's a downer, but I'm just not that into selling fairy tale dreams of puppy dogs and ice cream looking through rose colored glasses ... plenty others around here that would be happy to do that, though :)

Jeff B. · Answer

There's NO REASON to attempt to "force fit" - - that's a formula for sure disaster!

Ali Boone · Answer

Hey Sara. It's not just because of rate increases....Long Beach has been booming like that for at least a few years now. Most of LA has the same bidding wars going on and high prices, but Long Beach especially has been more up-and-coming for awhile. You mentioned acknowledging the negative cash flow and high prices but that you're stuck buying there? Why stuck there?

Ray Dipasupil · Answer

It's always a good time to buy & it's always a good time to sell. Depends on your investment thesis, liquidity, & time horizon with investments. Long Beach typically has nicer caps & ROI than other metros in LA county (vs anything 5-20 miles from DTLA). A lot of foreign investment is scooping up SoCal properties.

Kelly O'Quinn · Answer

I strongly recommend against buying in LB right now. There is a big fight for tenants' rights, including city-wide rent control, making credit reports valid for 90 days for screening tenants (meaning if a tenant has a credit report from 3 months ago, you as the landlord would not be able to run a new one on them for screening purposes - there is a LOT someone can do to ruin their credit in 3 months!), REAP (info at the link below), and many other ideas that are fantastically beneficial to tenants and seriously damaging to landlords. They even have their own tenants' union, "Housing Long Beach." The reason rental property owners in LB are selling is likely partly due to their distaste for the local politics and the potential legal and financial implications for their business (plus, the market is hot and values are up!) Check out the Better Housing for Long Beach website for more info on the current happenings.

David Faulkner · Answer

Cashing out from you CA properties and investing it out of state is just about dead last on the list of things I would advise you to do. Giving up complete control over your investments in a market you are not as familiar with, not easily accessible, 100% reliant on others, and thinking that just because it is cheaper means it is somehow not overheated as well is far scarier and riskier to me. No need to be scared, just disciplined ... in and out fast on new acquisitions makes the most sense to me in this market ... if that still scares you then work a part time job in RE (agent, etc.) to earn while you learn, risk little, yet be ready if/when the market turns. Either that or sit tight, study up, save up, keep looking, and prepare yourself for the next phase.

Mike Halim · Answer

Really appreciate the thorough advice! All the research and studying I have done has always excluded the SoCal market and is more based off of purchasing 100k investment properties somewhere midwest..... I try to take all things into consideration, but I think what has really held me back is not wanting my first deal to steer me away from RE for ever. I am looking forward to really digging deep into BP and immersing myself with well versed individuals like yourself. Thanks

Mike Halim · Answer

Well said David, I am looking for my first......yes first. I am stuck in the position of "forcing it to work", but it just makes no sense at the moment. Every "deal" I come across, the numbers don't make sense and miraculously it sells the next day.....I still don't understand it. I think I am just going to watch the market and wait for the collapse, sad to say. That being said, I am steering away from Long Beach at the moment and I came across Big Bear as a vacation rental, what are your thoughts about that?