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

About Author

Steve is the author of three books, is an invited expert commentator for CNN/Money, CBS Radio, Fox TV and numerous other newspapers and media outlets, has been a distinguished speaker at the Harvard Business School, Harvard Law School and their Graduate School of Design, and teaches courses in investing and real estate finance at colleges across Southern California. He is also an active real estate investor and owns 27 investment houses in Southern California and around the country.


  1. Steve I appreciate this article as I am a resident in Southern California. Thanks for the brief pointers, I look forward to your upcoming articles for more information on smart investments in Southern California.

  2. Great article Steve. All your points are extremely helpful. #1 is especially valuable information as there are so many followers that bought near the peak because everyone was doing it and have paid dearly for it. I have lived in Southern California for almost 8 years, mostly San Diego. However, I focus my investing in OH where I grew up and spend almost half my time now. Much different market as the cash flow is astronomical there but most of your advice applies there too. I do have a buddy who is cleaning up on flips in San Diego, using OPM and in the upper blue collar areas just like you mention for the Where in #2. Good stuff, dead on accurate!

    • I have investment houses in Oklahoma, a very stable market like your Ohio market Ryan. I get cash flow and appreciation in in Oklahoma City, an area that has one of the lowest unemployment rates in the country. Some will disagree, but I tihink that a portion of any real estate portfolio need to have hi potential for growth, and that is Southern California. We are at the low point in one of the richest regiions of the world with positive cash flow houses thrown in. Its like buying a stock that is paying a high dividend.

  3. michael meyer on

    Really good article reminding us to continue to search for the right kind of cash flow properties. In Ohio we are quickly transitioning to long term buy and hold. We are having tremendous success in Ohio with Lease Option Deals. The tenant-buyers treat the home like their own, we still get our tax benefits ,and don’t have to worry about basic home maintenance. We are getting much higher rent on lease options and more money on the non refundable option fees than ever. I highly recommend this strategy during times when you have very motivated sellers and the banks just aren’t cooperating. Item #1 discusses “when”. I think we all agree now is the time because no one can time the bottom perfectly.

  4. Steve,
    I appreciate your insight into the Southern California Real Estate Market. I agree that SoCal property values observe a more violent ebb and flow than other areas in California, especially when compared to the Bay Area. You have also made some good observations regarding blue collar neighborhoods, the pride of ownership and care taken to keep up their dwellings.

    I would add that these blue collar communities are oftentimes levered to the job market where California has not been excelling in even the last 4 years since your article. It’s true that we have seen a rebound since 2010 in the Southern California real estate market but I would attribute the rise in property prices, (especially in blue collar neighborhoods) to the Principal of Progression, and all cash buyers dipping their tow in the Southern California Real Estate Market. All in all a great article.

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