Invest in Southern California?

Question

I live in Simi Valley - about 40 minutes NW of Los Angeles, so real estate isn't cheap around here.

I'm a new member, and have listened to about half the podcasts.  Fantastic info for sure.  However most of the time, the numbers they talk about aren't remotely relevant to my area.  The 2% rule for a rental!  Not even close!  A basic house around here costs about $500,000.  There is no way it would ever rent for anything close to $10,000 per month.  Closer to $2200-$2400.

As far as flips, its a similar situation.  You might be able to find a run down 3/2 for $350,000 in a ghetto neighborhood.

So my question is, as a newbie, is it possible to be a successful investor in Southern California?  I'm sure it IS, since there are a ton of properties being rented out everyday, so someone is doing it!

Is anyone on BP doing it, and staying in or near the bigger cities?

I know I could find less expensive properties as I get farther from Los Angeles, but I'd like to stay as close to home as possible.

Any input would be welcomed!

Thanks,

Trevor

Kenneth Z. · Answer

I concede that I did not outline all the details for the property. That being said positive cash flow is and can be factored for repairs. You also don't outline your negative cash flow values. The 50k appreciation that you have combined with a negative cash flow offset by a tiny mortgage reduction over a time frame such as a year. Would brings you in at less than 50k plus closing cost, realtor fees, escrow and title fees. Not to mention you intention is to offload after a year per your previous example. In one year on a $500k house estimating at a crazy 10% appreciation rate (Market dependent) to make your 50k. You lose 6% on average to real estate agents 30,000 + inflation rate 2-3% a year + escrow title and carrying costs then take the economy into factor  does your market take a down turn or go up . With your business model I don't see how you could even expect a consistent rate of return. I'll commend the FHA purchase idea if you get approved but for you to consider doing a single $500k purchase for an appreciation return after 1 year I don't see it being feasible. The lower income property's do run into similar issues but most of the time they are cash financed or private money allowing for better terms than FHA. They are also bought for buy and hold over a longer interval 5, 10, 15+ years providing a consistent rate of return that is not crazy but can weather the average whim of a market if purchased correctly.

Ewa Reza · Answer

Sorry @Kenneth Z. but you're only right in theory. Practically buying 2-4 unit $500K property in LA using FHA is not the same as buying 10X $50K properties out of state. You'll be out of pocket $$80- 90K more!

And you don't take into consideration costs of operating/maintaining these properties out of state which will be much higher.

Just as you don't consider way higher tenant turn over out of state. When I have a vacancy in LA I do one open house on weekend and have multiple applications. I don't even have a break between tenants to paint the place. I do improvements/ repairs AFTER new tenants move in. That's a very unlikely situation anywhere else, even Temecula :)

Kenneth Z. · Answer

@Ewa Reza undefined

In LA you'll buy multifamily for let's say $500K. You're out of pocket $3K after a year (negative cash flow) but your property appreciated $50K!

This is by no means a proper calculation. A lot of investor buyers I work with can't get over that negative cash flow and simplifying things this way makes them realize the pictures is much bigger.

I would not advise anyone on doing this method of investing. I understand what you are saying and the numbers do appreciate and if you can accept that if your numbers bottom out your bankrupt then go ahead. Buying an expensive home feeding the cash hippo and trying to bank on appreciation is a super risky business model. One market shift while your chips are on the table and you can lose way more than you calculated in gaining. The reason your investors friends can't get over the negative cash flow is because you are playing the lottery with the market on your purchases.

Let's look at this from another stand point. If your investor friends take the 500k you spent on your big purchase split it between 10 properties and made them all positive cash flow they make 200 - 300 a month as you illustrated they make in actuality 250 * 10 =  2,500 positive cash flow a month. This is also spread over a large property portfolio with risk mitigation due to spread loading there cash. Even if the market dips on one market the other properties wont or if they all go under they are out the same amount of money as your investment (not as likely) but retained the positive cash flow of 30,000 a year.

Leonard L. · Answer

I have Los Angeles set for a key word alert seeking wisdom from those who do it successfully, so I am not the guy to give you the magic formula for LA investing.  I can tell you from being on these board a while (1) those typical BP ratios do not work in high value areas such as LA, NYC, Wash DC, etc. and (2) people invest in those areas anyway, not for cash flow as much as the anticipation of appreciation.

I personally invest in Inland Empire.  You hint you want to eschew the ghetto areas, but ghetto means different things to different people.  Most of South LA is a little hardcore for me to invest in comfortably, but there are parts of Riverside, Lake Elsinore, Menifee, Wildomar and other blue collar Inland Empire neighborhoods that can generate much better cash-on-cash returns than core LA markets while still participating in that sought-after California appreciation.    IE is closer to OC where I am than North LA like you, but maybe there is an area closer to you that provides similar dynamics to the IE market (Palmdale/Lancaster or Oxnard?).

Ability to get good returns also depends on how and of course when you buy.  I was lucky to start buying in 2010/2011 when returns were very good.  The deals I buy nowadays tend to be complicated, hairy and/or distressed properties (usually off market) or in one case a result of a yellow letter campaign.  As a real estate lawyer, I can untangle complex deals.  The good deals are out there but much harder to find.  I do this full time so I have time to find deals that others probably do not.

Steve L. · Answer

Trevor, there are pros and cons about being in Southern California.

SoCal has are hundreds of thousands of opportunities (houses and commercial properties) for investors to buy.  We also have tons of professional flippers and investors.  Banks and hard money lenders are easy to find and very aggressive.  Lastly, SoCal offers some of the best low cost training available.  I think @Ellis San Jose runs a FIBI in Westlake Village area?

As far as rentals, you might need to venture west or north to find properties that will produce cash flow.  I would suggest you don't buy anything that has a 0.5% rent to cost ratio.

You can also look at some of the challenges of SoCal as benefits.  If you find a great deal, there is likely going to be a bidding war from investors who would pay you a premium for it.  If you find a good rental, lots of people want to live in this area so it should be easy to find tenants.  You probably won't have to winterize a house or shovel snow.  California is a tenant friendly state, so maybe there will be some distressed Sellers who would rather allow you to handle the eviction and sell you their house at a discount because you can take care of this?

Ewa Reza · Answer

@Trevor Jones

How much cash you have and what do you own? You can be very successful investing in LA but the trick is to focus on appreciation. Cash flow in good neighborhood is like a white unicorn. It can happen, but not immediately, not the first year or two, sometimes longer. I'm a huge advocate of buying 2-4 units. There's not many good ones out there. In the markets I watch closely there's usually 1-2 properties a month that pop up on the market that I would consider. If you pay 20% down they can slightly cash flow. If you don't own anything yet and can use FHA financing, these properties in today's market will will cost you a few hundred $ a month to own. That's not including maintenance and bills (water, sewer, etc). BUT just because you're out of pocket for few years (sometimes as little as 1 or 2) it doesn't mean it's a bad investment. The prices of real estate go up so fast here...

To give you an example...

A lot of podcasts talk about NC or OH... You buy $50K SFR there for $50K, you make $200-300 monthly cash flow. After a year you maybe profit $3K in cash flow and and maybe another $5K in appreciation.

In LA you'll buy multifamily for let's say $500K. You're out of pocket $3K after a year (negative cash flow) but your property appreciated $50K!

This is by no means a proper calculation. A lot of investor buyers I work with can't get over that negative cash flow and simplifying things this way makes them realize the pictures is much bigger.

Danielle J. · Answer

I agree with @Leonard L. about investing in the IE! I am in the process of purchasing my first fourplex in Redlands, CA which is approximately 1 hr from LA. My family lives in LA so I always commute there with no hassle. LA is just way too expensive for a newbie investor in my opnion unless you can catch a short-sale with a cash offer, but again for most newbies like myself this is not always an option starting out.  The upside of buying an expensive property in LA is that you can charge a lot per unit for mutlifamilies, around $1250 per unit even in some of the ghetto neighborhoods that some avoid.   Other cities that are nice to invest in are Beaumont and Murrieta. I would explore all of my options nearby, before narrowing in on LA.

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