“California Dreamin” – Real Estate Investing In High Dollar Areas

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HIGH DOLLAR MARKETS – DO THEY MAKE SENSE FOR YOU?

When the real estate market crashed we left the area where we had done business for over 30 years and moved to southern California.

The area we moved from had an unemployment rate just under 20%, and the prospects for the future of real estate seemed bleak. Without buyers working, they couldn’t qualify for the loans on the new homes we were building.  Having been through a few recessions in our time, we knew that southern California would be the first place to rebound, due to the overall strength; and diversity of the economy.

I know that many investors on BP got their start by taking advantage of the foreclosures, buying up REO’s fixing them up; and reselling or holding as rentals. It was a great opportunity.

Our original thought was we would relocate to southern California; and get in on the fix/flip market buying REO’s.  We were wrong. That market evaporated quickly. We soon realized that with all the hype, there were huge numbers of investors jumping into the market; and often bidding up prices far higher than the markets justified.

At the same time, we noticed that rentals were in high demand in certain areas, and they were bringing very healthy prices.

To us, it seemed like ideal conditions to start new construction. Following is a partial list of the things we took into consideration, which help drive the demand for real estate. Though the list is specific to Orange County, you can look for the same in your local markets.

Area, Demand, Values, Economy, Appreciation, Etc.

  • The economy in Orange County is a low 4-5%, and is broad based (from retail to high tech)
  • Southern California is popular with people from around the world
  • Aside from the economics, there is perfect year-round weather
  • Orange County has some of the highest valued real estate in the country.
  • There are world class educational institutions, state of the art medical facilities, amusement parks, cultural offerings, shopping, major sporting events, natural resources, etc.
  • Anything you want to do can be found in southern California, meaning high demand and top rates for short term rentals, as well as long term housing, and commercial space.
  • Though the demand is high for all types of housing, new construction (not in a planned community) is rare, meaning less competition.
  • High demand in an area creates rising appreciation.

Related: New Tax Developments for California and California Related LLCs

Having been involved in real estate development for many years, we knew that these conditions were the perfect storm. Southern California will always be one of those areas that draws people, equating to long term future demand.  Though prices in areas such as Orange County, CA may be high, they may never again be as low as they are now!

If you are in an area such as southern California, or another high dollar area of the country (Texas, New York, Virginia, Washington D.C., etc.) you may not want to rule out investing until you look at all of the options available to you.

There’s several ways to get into higher priced markets, and earn a very high return on your investment dollars, even if you aren’t a builder, broker, or ability to do it all on your own. Sometimes investing in an area you are familiar with and know, though more expensive, may be the best choice for you.

Here are a few ways you can participate in higher priced areas:

  • Participate as a lender in a new development
  • Joint Venture a project or property with another investor or builder
  • Rather than a home, consider a condo (possible vacation rental by the beach) or possibly a mixed use unit (live work, retail, etc.) that have lower entry prices than SFR.
  • Participate with other investors and pool funds in a syndication, allowing you to get in on a larger property and share long term ownership, or to remodel a property and sell, etc.
  • Crowdfunding of local real estate projects

Related: The Missing Ingredient to Wildly Higher Prices

The point is, in areas where there is strong demand and a good economy, there are many opportunities to get involved. When the economy is strong in an area, people can afford higher rents, qualify for loans, and support local businesses, creating opportunities for investors in many niches.

As always, before investing your hard earned dollars, thoroughly investigate the project, those involved, and seek advice from your attorney and accountant.

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About Author

Karen is a partner in a family owned real estate development company, in Orange County CA. The company specializes the building spec projects (SFR, MFR, Medical Office, and other types of properties), designed to meet the needs of both investors and owner/users. Licensed in both real estate and construction.

12 Comments

  1. Douglas Larson on

    Great points!.. another good article!
    One more unique and positive aspect of higher-end markets is the spread between a fixer-upper and a gorgeous remodel or new construction. In nicer areas, people have high-dollar jobs and they don’t want to swing a hammer. They will pay for turn-key! That gives the re-modeler and spec builder a much higher income per project. I have seen investor/re-habbers fight over ugly homes with an ARV of 150K and a net profit of 15K. In the 500K-plus market it is not uncommon to make 80K to 120K net on one deal. The million-plus market has usually been beyond my resources but I see net margins of 250K to 400K on flips and spec builds.

    A final note is that you don’t have to be in SoCal to have a mid to upper-end. I have flipped 4 homes in the San Diego area and 5 in Maui, Hawaii, but some of the best net deals I have done have been in the resort town of Park City, UT and the East Bench of Salt Lake City. Most towns have an exclusive area or two where the right conditions can bring big rewards.

  2. Doug, you’re right, people living in these areas, especially coastal cities, like their locations, but very often are in older homes that need upgraded. In high dollar areas, homeowners can afford high end remodeling, and it’s a great niche for contractors.

    Another thing is that in high end areas some of those older homes may be on large lots, and rather than remodeling the one house, developers purchase those older houses, tear them down and can build 2-4 houses or even more on the lot, creating pocket neighborhoods.

    You’re also right in that there can be some very healthy profit margins on the deals! At the same time, those profit margins allow builders to bring in partners and split those profits, with both still doing really well.

    San Diego is so cal to me, having come from northern California (the real northern California, not the bay area) And Hawaii … that would have had to have been tempting to keep!

  3. Douglas Larson on

    Sharon, You make a good observation and that is exactly the point I think Karen wanted to make in her response. Even in the so-called “affordable states” there are opportunities to tap into the mid to high-end market, especially because it is less competitive and often overlooked. There are very swanky markets in Austin, TX and Dallas that rival anything in CA or NY that give great opportunities to fix & flip investors or spec home builders who can play at that level. Karen also lists ways that less affluent investors can come up to that level by using partnerships and other people’s money.

    I see lot’s of individual investors trying to make 15K per renovation flip on ugly, cheap homes when they could do a partnership on a nicer home and net 80K in the same time period. Newer investors tend to step over a dollar to pick up a dime. Thankfully, not many investors understand that or my business edge might not work!

    • Hey Douglas. I totally understand what you’re saying and the point of Karen’s article, but again, it just seems really odd to see Texas listed as a “high dollar state.” It may have pockets of high dollar home areas where this strategy can be undertaken, but it most definitely is not a high dollar state, esp. compared to the others she mentioned. That was my only point (and maybe I’m being overly picky, sorry if I am, it just stuck out like a sore thumb to me when I read it, so thought I’d mention it).

      I did really enjoy the article, though, Karen, and it just proves in real estate, there’s so many different ways to be profitable, you just have to have open eyes and an open mind.

  4. Sharon, if you’ll re-read the post I mention high dollar areas, not states. The point I was making is that every state, has areas where there is extremely high priced real estate, and areas where the real estate is very affordable. Even within a county, such as Orange County, CA there are areas where homes sell for millions of dollars and other areas where they can be bought for $300,000.

    My goal was to get people thinking about the overall market in areas, how the economy, demand, and even weather play into values. Sometimes people get so focused on pricing, or cash flow, they fail to see the many other factors that affect value, and may be missing out on some incredible opportunities to invest in areas where they may get solid appreciation and gain much more over the long run.

    • Yes, Karen, you did say areas, but then you gave States as your example. I completely understood the entire premise of your article. Anyway, don’t want to beat a dead horse. Thanks!

  5. Hey Douglas and Karen, I agree. I’m selling my place in San Francisco and looking to take my profits and buy and filps in the outer edges of the city SF were it’s still bit ruff but people are looking. This market is very hot with low inventory and mulit offers.

    I could go out 1.5 hr and find homes at 120k but the return will not match the money you can make with a filps or do short buy and holds .

    Love to get your thoughts

  6. Andrew, as builder/developers our thoughts are always towards looking for opportunities to build new. We personally like new construction over fix and flips (if it’s possible in the market) because no matter what you do to an older home, it’s still an older home (and often shows up as such on records no matter how extensive the remodel)

    In regard to your situation, it’s much like here. If we move away from the coastal areas we can find houses that are a little rougher, in the 300k range, but the area doesn’t appreciate anywhere near what the more coastal areas do. The coastal areas allow us to market to investors that like short term rentals or long term For instance, on condos close to the beach, many buyers rent their places out for the summer, and either live or put a more long term tenant in for the rest of the year. The best of both worlds. In those situations you can actually get a property to cash flow!

    If being closer to the city for you means significantly more profits, maybe you can partner with other like minded investors, or participate as a lender or ? on those deals, and there’s always the crowdfunding that’s growing now. (Be sure to check out the threads on BP on crowdfunding sites) Good luck!

  7. Abel Vazquez on

    Great article Karen and I agree in all the points you made. I am soon to purchase my first rental here in South California and it seems like the prices here are just over the top compared to other states but also the demand for housing here is also over the top it seems like pretty soon we are going to run out of space. Well again great article and thank you.

    Abel

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