Is SoCal just bad to invest for cashflow over all?

Question

I just started to learn about the BRRR, had an investment property in SoCal sold it.  As I learn more and more, looking to start building cashflow portfolio.

The more research i do the more it suggested that California does not suit for our investment strategy of generating cashflow.  I know I'm new to this, am i doing my math wrong?

As much as i would like to build portfolio locally, with understanding of it all come down to whether the number make sense, i am starting doing my research out of the state.  Would be great if some of you with more experience can share some thoughts!

I am also looking for recommendation of CPA to work with that understand the real estate investing.

Dan H. · Answer

Historically coastal California has produced outstanding cash flow for long term holds. It also has had great appreciation Note great property appreciation typically results in great rent appreciation.

Case Shiller shows the top 3 residential RE markets for this century are all coastal California cities.

There is a poor relationship between initial cash flow and actual cash flow over a long hold. This is not happenstance. The RE market is efficient. RE prices are being numerous parameters but a primary one is expected appreciation (property and rent appreciation). Many of the markets with the best initial cash flow has the best initial cash flow because the market does not expect it to have much appreciation (rent or property appreciation). This implies this initial cash flow is not expected to increase as much as other markets.

NeighborhoodScout has every coastal CA city that I am aware of as 10/10 for appreciation this century. In contrast, NeighborhoodScout shows no major Ohio city as average or above average for this century (highest I am aware of is Columbus as 4/10).

My market had over 20% rent appreciation for each of the last 2 years according to ApartmentList.com.  Imagine what this does to the cash flow.

Prop 13 basically makes the CA property tax fixed cost. This helps CA long term cash flow. We have a property that if purchased today our property tax would be ~$20k/year more than we are paying. That is $20k additional cash flow due to it being a long term hold.

Good luck

Nicholas Coulter · Answer

@Xiao Xiong Its not easy but its possible! I would suggest getting creative with value add and also think 5+ years out. Typically rents have their largest increases in California and 5% over those years turns average deals to great. Not to mention the continued appreciation you will see. You can also get very creative and rent out things by the room with larger homes to inject more cash flow!

Brandon Patrick · Answer

I grew up and lived most of my life in California. The only property I ever owned was for my primary. I Owned investments 1 in Virginia, and 4 in Arizona. Yes California has tons of money, but I just don't think there is much to be made for new investors. Just my opinion, It's hard to break even for what you pay in today's prices. All your profits will go to property tax and interest. Unless you have tons of capital for cash pruchase and renovations. Let's just say you pay $500k for a 2-bedroom home. Your payment will be at least $3000 with the ridiculous property tax and interest. If the home is renovated you might get $2500. $500 out-of-pocket cost for investment isn't the worst, that is if you don't get a squatter. California has the most relaxed squatter laws. My wife's hairdresser found a good deal on a property with current tenants. Thought they were buying their forever home for their growing family at a deal. After closing as new owners they assumed the tenant's current lease with 4 months remaining. Needless to say, the renters never paid. Two months go by the lender now wants their mortgage payments. 3,4,5,6,7 months go by. 6 mortgage payments and $15k in lawyer fees. Covid hits. Care act goes into place. 17 months go by and behind on mortgage payments they end up selling it to an investor. Stray far away from single-family investments. Unless you get the Unicorn for a rehab complex or commercial property. California can be a great state, but just not to new investors. I am a Loan Officer so I run numbers. Never made sense to invest heavily in California. You will have better luck purchasing a coin laundry in the right area.

Xiao Xiong · Answer

Thanks for the info, thats very encouraging!

Douglas Larson · Answer

Generally, yes, compared to other markets in the US but I bought a rental in San Diego North County last year and cash flow is awesome! You just Gotta keep looking and making offers! I know one landlord with a house in Oceanside near the beach who rents bedrooms for $1500 each and does very well!

Peter Mckernan · Answer

@Xiao Xiong I may have some bias towards CA because I invest here; however, I agree with Dan and Nicholas that there are areas and possibilities to make the money. You have to think outside the box and get lower cashflow at first (keep higher reserves) then build up. You can do it and with the changing market you can really enjoy a large amount of cashflow when you buy right! There are plenty of people that own tens of thousands of units in CA and do amazing.

The least resistant path is a good one too if you want the lower cashflow and appreciation. Either way you cannot go wrong. Do your homework and work hard to get property ran like a business. The challenge that people/investors face in CA is that they do not run it like a business then are forced to lose money due to bad screening processes, bad checks for tenants and bad purchase which puts them into a place with no ability to have money for repairs. Just need to make sure you are prepared!

Xiao Xiong · Answer

Thats exactly what i find when i run the number for most of the properties i looked at :(

Xiao Xiong · Answer

Thanks Dan! That does make sense i havnt thought about the points you mentioned regarding to the cashflow over time, i will do more research and learn about the cashflow appretiation

Nicholas Coulter · Answer

You could with 20% down. A strategy that I see work best is get a SFH with a low down payment live in the property and rent out the spare rooms!

Thomas Higgins · Answer

First rule of real estate investing is not location, location, location. It is: invest based on cash flow and don't bet on appreciation. There are a lot of amazing markets in the US. I would look for greener pastures! Happy hunting.

Is SoCal just bad to invest for cashflow over all?

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