Looking for LTR opportunities in SoCal. Good or Bad Idea?

Question

Hello,

I am a newbie in the REI world. My wife and I live in Irvine, CA and are looking to purchase our first rental property. We make ~450k per year and are mainly interested in investing in a property nearby. We're looking at a down payment of ~ $150k.

Since our goal is to cash flow eventually, I don't want to invest in a property in Irvine which has higher home prices and Mello-Roos.

Questions:1. Which areas in Orange County or surrounding counties are primed for appreciation and have the ability to cash flow

2. What parameters should I be looking at when evaluating a market? Are there any particular sources that you like better than the others? Parameters that I have in mind are along the lines of HOA fees, school rating, etc.

Yu Liu · Answer

I have a friend that invests in the Inland Empire markets and it does pretty well according to her if you wanted me to connect you two!

Jason Kudo · Answer

I know that cash flow is highly emphasized on BiggerPockets but with Southern California real estate, you really need to factor in the appreciation play as part of your LTR strategy. A property may not have earth-shattering cash flow immediately but you can still win with appreciation and the cash flow will improve over time so it really depends on your time preference. If your time preference is high, Southern California may not be the best place for you but if your time preference is low and for the long haul, there aren't many places that will do better than Southern California, for the most part.

Jon Schwartz · Answer

@Harsh Chawla, I suggest looking into Long Beach and San Pedro. They're both in LA County, but not far from Irvine, and they're the only decently priced coastal areas in SoCal (as far as I know).

Now that I think about it, actually, also look into Costa Mesa in OC.

Your $150K down payment is really going to cripple you, though. As an investor, you'll be required to make a 25% down payment, so you're limiting yourself to a $600K purchase price. That won't go far in SoCal!

Have you considered house hacking a multifamily property?

Best,

Jon

Bonnie Low · Answer

Is there any particular reason you want to stay in So Cal? Do you intend to manage the property yourself? Your money will go a lot further if you invest outside your area or even out of state. Speaking as a CA investor who invests out of state, it's very doable. Full disclosure: I also have LTRs in northern CA.

Peter Mckernan · Answer

I agree with @Joe Homs! The rentals in SoCal will not cashflow, but you can save big on investments for your tax saving strategies.. If you have LTR, you can Cost Seg them, and STR/MTR. Those will save you a ton and can kick your current income down to half, or even more depending on how many properties you have and hold. Also, just know that it means you will not be as good on income to buy another one due to showing you are not making as much but there are ways around that situation (DSCR loan is one of those options).

You want cashflow quickly, or bigger cashflow from where at lot of people area when they buy a rental and let it sit to collect the rent. Buy something and then value add the property, which could be an ADU, adding SF, or adding a room within the same living sf you have on the property. These can add value as in equity and income. The other option is buy a SMF property and rent one unit, or all of them out as MTRs to net more money. Run the numbers as it was a LTR, not the MTR to make sure it makes sense!

Joe Homs · Answer

@Harsh Chawla

1. Which areas in Orange County or surrounding counties are primed for appreciation and have the ability to cash flow.  Probably none if you are a true investor.  You would want "Cash Flow" and will not find it around here.  With your income you should be looking at multi-family and cost segregation.  Playing the tax game.

2. What parameters should I be looking at when evaluating a market? Again, "Cash flow", but remember if its positive then you are paying taxes.

Are there any particular sources that you like better than the others? find someone who knows what they are doing.  Have done it for themselves.

Parameters that I have in mind are along the lines of HOA fees, school rating, etc.  A true investor does not take these into account.  Its all about cash flow.  Invest in a "D" are if it make you more money.

Good Investing...