The What, Where, When and How of Investing in Southern California’s Volatile Real Estate Markets

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I’ve been writing about the California real estate market for some time and I’ve found it to be quite different than other regions of the country. It is certainly more expensive, volatile and foreclosure prone but the potential to make a real profit has been consistent.

As an investor who has flipped, rented and lent in Southern California; I’ve escaped disaster, survived troubled times and have thrived while others haven’t been so lucky.

When banks aren’t lending money, unemployment is high and the media is full of scary stories, it easy to miss a deal.

I would never suggest jumping in too deep with your family’s savings but doing nothing can also be a mistake.  While searching current inventory, an otherwise savvy investor could be paralyzed into missing a chance to buy property when it is at its lowest.

Following these four fundamental principles will keep you safe during volatile adjustments:

1. When: Real estate is almost biblical with markets adjusting every seven years.  Sales slacken, listing times expand and neighborhood will seem less appealing during slowing economies. Nobody wants to buy and the banks don’t want to lend. While there are proven ways to overcome these obstacles, ‘when’ becomes a considerable challenge. Tip: Look at the 40 year charts for house price movements in California and you will see the median house prices doubled in the 1970s, tripled in the 80’s and more than doubled in the 90’s and early 2000’s. If you find a nice fairly cheap house that gives you a positive cash flow, buy it. You may not be buying it at the absolute bottom of the cycle, but you will be rewarded with a rent check in the mail and as asset that will be worth much more than what you paid for it.
2. Where:  Look for upper blue collar areas to buy investment houses. Pride-of-ownership neighborhoods that are working class and lower priced than the surrounding areas are specifically valuable. These neighborhoods usually produce bargains where the rent income offer positive cash flow and will appreciate the most when the economy rebounds.
3. What: Three bedrooms, two bath homes are the most in-demand piece of real estate in the Southern California market today. A single family detached structure with a two car garage and a nice backyard is coveted by growing families, cramped apartment dwellers and condo residents fed up with homeowner associations.   Additionally, considering home renters are less transitional than apartment tenants, you’ll find yourself with less turnover and cost efficient maintenance.
4. How: Buy cheap. Use OPM. Basically, we all like to buy cheap and use other people’s money. The less you spend the more comfort you have in times of downturn. Many homeowners recently paid a retail price for these “can’t miss” offerings and are now burdened with a toxic investment that is worth way less than what they owe.

Just remember to never pay retail for anything, especially real estate.

Follow these four steps and you will be safe no matter what the market throws at you. Remember, your cash is king so safeguard your funds. Try not to over reach on any one deal because you might find a higher margin on a collection of smaller investments.

Throughout my next several entries, I hope to identify opportunities and provide specific examples on how to tackle the Southern California and other real estate markets. I will tell you how to:

1. Find financing in an illiquid market
2. Buy way below market value when everyone else is paying retail
3. Manage the tenants that provide us with an everlasting cash flow.

Be sure to check back soon as I provide insider’s tips on how to not only survive, but thrive.

Photo: Mike Baird

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.