BiggerPockets

I'm a young guy (25), and I'm about to sell an asset of mine that through a particular area of expertise I have (and a whole lot of luck) will net me around $60k after taxes. I live in California, and given the horrendous state of the CA real estate market, I'm considering investing in properties.

For the past few months I've been browsing through multiplexes on realtor.com, and have created a fairly extensive spreadsheet detailing numerous properties that look profitable. I'm a bit apprehensive of investing in a relatively poor area (like Merced), so all of the properties I'm looking at are either in Sacramento, the Bay Area (Oakland, Antioch, etc), San Bernardino, or Stockton. Los Angeles has a few good deals as well, but most seem to be in those areas.

I won't be ready to buy for a few months, so at the moment I have only pictures to verify that these properties are not in complete disrepair. However, I'm finding a number of properties that seem like they would net me so much more than the "$100 per unit" after the 50% rule that is so often discussed in these forums, that I can only assume I must be missing something.

For example, take this Sacramento Duplex:
Price: $50,000
Monthly Rent: $1,600
Expenses (assuming 50% rule): 800
Mortgage (assuming 20% down, 30yr @ 7%): $266
Profit: $534 (or 267/unit)

Or this San Bernardino 4-plex (each unit is 3/2):
Price: $100,000
Monthly Rent: $3200
Expenses: $1,600
Mortgage (same assumptions): $532
Profit: $1,068 ($534/unit)

Coincidentally, these properties give the exact same ROI.

Now, I'm certainly not suggesting these properties are everywhere, but I normally find a few new listings like this each month (most last about that long before they're taken down - I assume because someone snatched it up).

However, assuming I'm patient and assuming the properties I'm finding with comparable numbers pass inspection, with a 60k investment, I'd be looking at about $38,400 in profit per year, or a 64% pre-tax return on my investment.

Common sense tells me I must be missing something, but even with pessimistic projections I can't see what it is. Can the CA real estate market really be this bad?

60k at the age of 25 is a lot of money, and my hope is if I invest it wisely I can make something of myself (be it as a landlord, or another business). To those of you with experience, I would be very grateful for your thoughts.

Thanks,

Tom

I agree with Rob about looking out of state. I don't mean to burst your bubble but $60,000 wont get you very far in CA without Private or Hard Money and the right game plan. It sounds like you are looking at distressed sales and if so you will need to factor in $ for the rehab (The few deals that you are finding are priced low for a reason). In the area that I currently invest, $60,000 would get me a SFR outright (including Rehab cost) that would yield a Gross rental income of $950-$1050. Keep in mind that you will need to factor in Property management expenses, maintenance, taxes and insurance.

Tom,

Stop listening to people telling you to buy out of state properties. Yea I would buy out of state if I would live in that states. But one thing I learn from other season investors in my area, which is Orange County, CA, is DON'T GO ACROSS TOWN, WHEN YOU GO ACROSS THE STREET. Tom, have you ever factor in the time you'll put in to buy out of state, the rely factor in prop. management, the facts that you can't see, touch, feel, and drive by your property. That's the reason why we as investors target absentee landlord in the first place. The farther your property away from you, the less equity you feel you have, that's why eventually, you'll receive letters from other investors trying to buy your property. Also, when things break, you have to rely on your prop management to tell you, most of the time, they'll mark up quite a bit. you don't know what kind of tenants you have, and every time something happens, you'll to buy flight plan to go back and forth. IF you have a job, you'll have to ask for leave to go...ect. So, that's something you have to consider yourself. But let me tell you something Tom, you can go as far as you want even with 60k. Real estate works only if you believe it works.

First of all I agree with Tin...I have heard so many bad stories from California investors that bought out of state properties and got there BUTT'S kicked! yes, they are cheap but who is watching them for you? is there appreciation in that area? how is your Property Management company? for a newbie investor I think is a terrible idea...even for the experienced investor.

I like in OC and invest in Los Angeles and Kern County. You can get better deals in your own back yard! If I hear one more out of state guy say you can't buy in California for less then 200K and it doesn't cash flow...I will explode. They don't know what they are talking about!!!

Stay home...everything is better cash flow, long term appreciation, and it's in your own back yard. You can drive by and check it out. Not have to jump on a plane...

First of all the guy doesn't have 200k, he has 60k. If you want to do a flip Tom then you might have enough to cover yourself using a hard money lender/private lender to do the deal. Thinking that deals won't cost you much more in Cali vs. other states is just nonsense. Statistics show it's more costly and many more investors know it than will defend that it's not.
Scott gave the most well rounded advice. I agree as a newbie it may be harder to invest out-of-state because you have to do lots of research and even then you may not get what you thought. I live in Chicago and have owned up to 11 properties out-of-state. Some of the wealthiest people in real estate have bought where the demographics and such are good, not necessarily just cuz they "lived across the street" that's just silly.
I think the point we were trying to make is that you have the ability to buy outright in a great area with great management in ANY state in the country if that is what you want to do. IF THAT IS WHAT YOU WANT TO DO.

For that I can only point you to the forum on "over leveraging". I will point out that you can always leverage that asset later on. I am more of an advocate of leveraging that money to make more now, not cash flow. I'm getting a better understanding of your desires and intentions with it though.

There are smart ways to leverage your money and make it go further. I feel like you know some ways and have some smart people around you to help you do that. Your confidence isn't as high as it should be.

You're going to do fine.

Invest in California and use leverage.

I think a mistake a lot of investors make is they look for the absolute cheapest properties they can find. On paper you might get the best yield, but once you account for personal time invested or managers time invested I don't think it is the best decision especially if you can get 5-6% loans.

I know the San Bernardino market very well and I can tell you a 4-plex that brings in 800/unit will not sell for 100k. That might be a fluke deal or in the absolute ghetto and need substantial repairs.

What city do you live in? Have you purchased a primary residence? A friend of mine recently purchased a 4-plex with a FHA owner-occupied loan, not a concept for everyone but it will work out very good for him. You will get a very good yield for 3.5% + costs down.

If you ever want me to give my opinion on anything in the S.B. area I would be happy to provide some feedback. Good luck.

California is a very big state...its probably not a good idea to generalize the entire state with a few antedoal figures.

In central California it is possible to find great deals. I have seen several houses in good neighborhoods sell for under $50k (fixers for under 30k) in the past year which would cashflow very well.

Tom,

You've received a lot of advice and I'm kind of hesitant to throw into the mix, but what the heck. First of all you have a lot going for you, your family is a wealth of information and I'm sure they love to give advice. Second, you have enough money to make the down payment that most banks will require for you to purchase an investment property. Third you know the area.

So here's my advice, 1. get yourself qualified for a loan asap. Many mortgage brokers will be able to tell you what you'll qualify for based on the assumptions you give them on net income and your windfall. 2. Whatever property you buy make sure you're willing to live in it if the proverbial sh*! hits the fan. I'm a big believer in contingency planning. 3. Consider using part of your windfall on a SFR that you are going to live in, preferably the worst house in the best neighborhood, fix it up while you live there, sell it when the market appreciates and take your gains up to 250K if you're single tax free if you hold the house for 2 years.

Best of luck.

Tamara