Winning strategies for Southern CA in 2023

New to Real Estate · Santa Barbara, CA · Member since 2019 · 20 posts · 9 votes

I just have a question for anyone active in SoCal; Are there any areas in southern/ central California where long term rentals cashflow, or is that impossible now with today's interest rates? Most of the deals I see the numbers don't quite add up, or break even at best. I've been told that the working strategy in SoCal is to break even after all expenses, and the appreciation and equity is where the money is made. Rather than other areas of the country where property might cashflow but not have as much appreciation. Is this true? Looking at 2-4 unit. Thanks for your help.

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Joe HomsBusiness Member

Flipper · Mission Viejo, CA · Member since 2014 · 2k+ posts · 1k+ votes

@Jordan Futch nothing really cash flows in California, unless you would like to try your hand at AirBnb in Big Bear or other areas like that. I would not buy anything right now "Hoping" to capture appreciation in the future. I have lived through three real estate cycle crashes and not to encouraged about what I see.

Good Investing...

[email protected]949-625-4533

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Joe HomsBusiness Member
Flipper · Mission Viejo, CA · Member since 2014 · 2k+ posts · 1k+ votes
3y
@Jordan Futch nothing really cash flows in California, unless you would like to try your hand at AirBnb in Big Bear or other areas like that. I would not buy anything right now "Hoping" to capture appreciation in the future. I have lived through three real estate cycle crashes and not to encouraged about what I see.
Good Investing...
[email protected]949-625-4533
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Tim Ryan
Investor / Mentor / Contractor · Arcadia, CA Buying Out of State · Member since 2015 · 654 posts · 622 votes
3y
@Jordan Futch I agree with @Joe Homs you will not get cash flow in Cali. Your theory is suggesting that Cali is for appreciation and other areas probably are not. I'll agree other areas (meaning out of state) will not be as high in appreciation, but I have been getting amazing appreciation for years out of state. Many areas OOS only get cash flow, the key is to find the growth areas that supply both cash flow and appreciation. I am not feeling I'm missing anything by not investing in rentals in Cali (although I do develop and flip) but that's a different business.
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Eric FernwoodBusiness Member
Realtor · Las Vegas, NV · Member since 2014 · 994 posts · 1k+ votes
3y
Hello @Jordan Futch,

We've operated a one-stop investor services business in Las Vegas for 15+ years and delivered over 480 properties to over 180 clients worldwide. We've also completed over eighty 1031 exchanges with most coming from California followed by Portland, Seattle, Florida, Indiana, Oklahoma, and Texas. My point is that I’ve actively worked deals for several years and been through a few financial cycles.

Today, most of our clients are from California. The most common reasons people choose not to invest in California are:
- Rent control: Rent control laws limit how much landlords can charge their tenants for rent. While this may protect tenants from steep rent increases, it can also make it challenging for landlords to turn a profit. Additionally, evicting tenants who are not paying rent becomes more difficult under such laws.
- Anti-landlord regulations: There are many regulations in California that make it challenging for landlords to operate their businesses. These regulations can include tenant screening requirements, eviction laws, and building codes.
- High property prices: Property prices in California are very high. This can make it difficult for investors to afford to buy properties, and can also make it difficult to sell properties for a profit.
- High taxes: Property taxes in California are notorious for being very high. This can significantly reduce the profits of landlords and make it harder for investors to afford buying properties.
So, the difficult of finding properties that cash flow is not the only reason Californians invest out ot state.

@Jordan Futch - On you comment on real estate crashes.

In 2005 I did extensive research on selecting the right tenant segment to target for income reliability. We've targeted this tenant segment for over 15 years. Our results:
- On average, our tenants stay over five years.
- We've had six evictions in the last 15+ years (over 1,000 tenants).
- 2008 crash - Zero decline in rent and zero vacancies. Properties prices plunged, but our clients buy properties for income replacement, not flipping.
- COVID - Almost no impact
- Eviction moratorium - Almost no impact
So, if you target the right tenant segment, you can achieve income reliability. However, nothing can protect you from national crash events. If your goal is a reliable passive income, you can achieve this with the right tenant segment. If anyone is interested in rental income reliability, reach out.

@Jordan Futch - Airbnb

Short-term rentals rely on vacationers, so occupancy is dependent on the economy since vacations are optional. This is why there is a lot of interest in mid-term rentals. Mid-term rentals solve a business need. For example, traveling nurses.

Another differences between short-term rentals and mid-term rentals is the amount of personal time investment required. One of our team members owned four short-term rentals and described them as, "purchasing another full-time job." She 1031 exchanged some of her properties and converted others to long-term rentals.

With mid-term rentals, there is cost effective property management available. Also, our approach is to purchase excellent long-term rentals and use them as mid-term rentals. This provides a fallback position if the market changes.
[email protected]702-358-8884
FERNWOOD Team, KW VIP Realty520 Reviews
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Michael SmytheBusiness Member
Real Estate Agent · Metro Detroit · Member since 2023 · 4k+ posts · 3k+ votes
3y
@Jordan Futch
We think the Midwest is a GREAT place for OOS investors to consider!

YES, we may be a little biased, but check out our blog here on BP comparing Detroit to other cities and Deep Dives on Metro Detroit cities & neighborhoods:

https://www.biggerpockets.com/...

(BP search feature can be problematic, so we’ve also added links @ our website under View Cities & Neighborhoods We Service)

Your biggest question shouldn't be WHERE to invest, but HOW you will invest!

Many OOS investors set themselves up for failure because they don't invest the time to ACTUALLY understand:

1) The Class of the NEIGHBORHOOD they are buying in - which is relative to the overall area.

2) The Class of the PROPERTY they are buying - which is relative to the overall area.

3) The Class of the TENANT POOL the Neighborhood & Property will attract - which is relative to the overall area.

4) The Class of the CONTRACTORS that will work on their Property, given the Neighborhood location - which is relative to the overall area.

5) The Class of the PROPERTY MANAGEMENT COMPANIES (PMC) that will manage their Property, given the Neighborhood location and the Tenants it will attract - which is relative to the overall area.

6) That a Class X NEIGHBORHOOD will have mostly Class X PROPERTIES, which will only attract Class X TENANTS, CONTRACTORS AND PMCs and deliver Class X RESULTS.

7) That OOS property Class rankings are often different than the Class ranking of the local market they live.

8) Class A is relatively easy to manage, can even be DIY remote managed from another state. Can usually allot 5-10% vacancy factor and same for maintenance.

9) Class B usually also okay, but needs more attention from owner and/or PMC. Vacancy and maintenance factors should be higher than for Class A as homes will be older, have more deferred maintenance and tenants will be harder on them.

10) Class C can be relatively successful with a great PMC (do NOT hire the cheapest!), but very difficult to DIY remote manage. Vacancy and maintenance factors should be higher than for Class A or B. Homes will have even more deferred maintenance and tenants will be even harder on them.

11) Class D pretty much requires an OWNER to be on location and at the property 3-4 times/week. Most quality PMCs will not manage these properties as they understand most owners won’t pay them enough for the time required and even then it’s too difficult successfully manage them.
***Only exception is if an owner has plan & funds to reposition Class D to Class C or higher.

https://www.biggerpockets.com/forums/776/topics/960183-what-they-dont-tell-you-about-cheap-rental-properties?highlight_post=5562799&page=3#p5562799

Also, SERIOUSLY consider - do you really have the time to be a DIY landlord or should you hire a PMC?

Let us know if we can help in any other way.😊
Logical Property Management4.9453 Reviews
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Sebastian MarroquinPro Member
Real Estate Agent · Pasadena, CA · Member since 2015 · 476 posts · 263 votes
3y
We have continuously helped investors cash flow in CA (Los Angeles county ).
We adapt to the market and are creative when needed. It was a lot easier of course with low interest rates, but the reality is that back then, many people were saying that you could not cash flow in CA even with 3.5% interest rates or lower, so.... if you were not buying then, you will definitely not be buying now...
(disclaimer: I do not know what the market holds in the next 2,5,10 or more years) and I think every person has to either believe the market will be great or good or not and make decisions based on that believe).
Just to give you a couple of examples:
1. We have helped investors buy a single family home and turn that to 2 or 3 or 4 units (depending of funds available, zoning, etc ) and rent them out to long term tenants.
2. We have helped investors buy a small single family home (700 sq ft) and then helped them add s footage, to increase the value and max rents. Then put an ADU on the property and rent it to long term tenants.
3. Same as #2 and rent it out to people that are not air bnbing the home. (so the owner does not manage the air B and B right... their tenant does).
4. We also helped someone buy a home, renovate it, then rent it out to people running an assisted living home from it :both parties are profitable.
As you can see, yes, you have to be creative and have a team of people that can help and the funds to do these things. But the opportunities are out there.
Depending on how much you have for the investment : I like ADUs, I like additions, I like off market homes and I like several cities in Los Angeles county and riverside, Palmdale, and other notable cities :)
Reach out if you need me!
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Eric FernwoodBusiness Member
Realtor · Las Vegas, NV · Member since 2014 · 994 posts · 1k+ votes
3y
I disagree with the statement on location vs. “how you will invest.” Location is THE most important investment decision you will make. If you choose a bad investment location, you will not have the financial freedom you want.

Financial freedom is more than just replacing your current income; it's about maintaining your current lifestyle for life. To have lifelong financial freedom, you need a passive income that meets three requirements:
- Rents outpace inflation: Inflation continually erodes the purchasing power of a fixed amount of money. What you can purchase today for $100 will require $155 in 10 years if the inflation rate is 5%. The only way to sustain your current lifestyle is if rents keep up with inflation. If rents don't keep up with inflation, your financial independence will be short-lived.
- Persistent: Your rental income will last a long time, ensuring that you do not outlive your income.
- Reliable: You can depend on a steady stream of income each month, even during tough economic times.
I will cover each of these three requirements necessary for lifelong financial freedom.

Rents Outpace Inflation

In real estate, prices and rents are determined by the imbalance between the number of buyers and sellers.
- When there are more sellers than buyers, prices decline until there is a rough balance between the number of buyers and sellers.
- When the number of buyers roughly equals the number of sellers, prices are static or increase at a slow rate.
- When the number of buyers greatly exceeds the number of sellers, prices increase rapidly.
Rents follow prices.
- Higher prices reduce the number of people who can purchase, increasing demand for rental properties and increasing rents.
- Lower prices enable more people to purchase, decreasing demand for rental properties and decreasing rents.
The only market condition where prices (and rents) keep pace with inflation is one where buyers greatly exceeds the number of sellers. Under what conditions does this occur?

✅ Rapid population growth.

Income Persistence

If you outlive your rental income, you will be in a world of hurt. So what conditions are necessary for income persistence?

Income persistence is tied to the long-term economic growth of the city. The best indicator is jobs. Jobs are what attract people to move to a city. And, it's not just the jobs they have today. Non-government jobs are short-lived. On average, a company only lasts 10 years. The average life of an S&P 500 company is only 18 years, and falling. So every non-government job that exists in the city will disappear in the foreseeable future. Unless new companies move in and create replacement jobs, your tenants will be forced to take lower-paying service sector jobs. Therefore, income persistence depends on companies relocating to the city and creating replacement jobs.

What are the conditions that attract companies to a city? The primary requirements are:

✅ Low operating costs

✅ Low crime rate

✅ Low risk of a natural disaster

✅ The area must have a sufficient population to maintain economic stability, as well as major highways and a major airport.

Income Reliability

The reliability of your rental income depends on the tenant who occupies it. To have a reliable rental income, your property must be continuously occupied by a reliable tenant. A reliable tenant is someone who consistently pays rent on time, stays for extended periods, and takes good care of the property.

Reliable tenants are the exception, not the norm.

And since you will hold the property for many years, you will need multiple reliable tenants. The best way to achieve this is to select properties that attract people from a tenant segment with a high concentration of reliable individuals. You can identify such a segment through interviews with property managers and research.

When I chose Las Vegas to establish an investor services business in 2004/2005, I spent a significant amount of time researching the characteristics of the various tenant pool segments. I selected a tenant segment with a high concentration of reliable tenants. Some of our 15 year results:
- Over the course of 15 years, there have been 6 evictions with a tenant population of over 1,000 tenants.
- During the 2008 financial crash, our clients experienced zero decrease in rent and no interruptions. While property prices crashed, their rental income was unaffected.
- Our average tenant stay is over 5 years.
After identifying the segment I wanted to occupy our properties, I determined what and where they rented. We then purchased similar properties. To date, we have delivered over 480 properties targeting the same segment, and the performance has been excellent.

The reason you can select a specific tenant segment by buying certain properties is that every segment has specific housing requirements. And, people only rent properties that meet all of their housing requirements. If you buy properties that match all the housing requirements of a specific segment, the majority of applicants will likely come from that segment.

What if you buy a property that does not meet all of the target segment housing requirements? You intentionally excluded this segment from renting your property.

Note that this method does not assume a property type or location. Instead, let the target segment inform you of what they want to rent. In some locations, this could be a multi-family property, while in others it could be a single-family home or condo. The type of property is not important; what matters is maximizing the return on your investment.

Location Selection Requirements

Below are the location requirements we previously determined, along with the metrics for evaluating potential investment cities. Any city that fails to meet any of the following requirements should be eliminated from consideration.

✅ Rapid population growth

Sustained, significant, population growth. Never invest in any location with a static or declining population Wikipedia

✅ Low operating costs

It’s not how much you gross, it's how much you net. You have to look beyond simple return calculations. You must consider all major recurring costs when selecting an investment location. Below is a comparison between three no-income tax states.

Sources for insurance and property taxes: Insurance - ValuePenguin, State Property Tax Rates - Rocket Mortgage.

To show the impact of taxes and insurance, I compared overhead costs on a $400,000 property in the three states. (Remember that these are state averages, and individual cities may impose additional taxes.)

What does the difference in overhead costs mean to you as an investor?

To achieve the same level of cash flow as a property in Nevada, you would need to generate a higher cash flow in Texas and Florida to offset their higher operating costs. How much?
- To compensate for Texas' higher operating costs, a property in Texas must generate $5,700 ($9,194 - $3,494) more in cash flow annually than a property in Nevada.
- To compensate for Florida's higher operating costs, a property in Florida must generate $2,123 ($5,617 - $3,494) more in cash flow annually than a property in Nevada.
✅ Low crime rate.

Never invest in any city on Neighborhood Scout’s 100 most dangerous cities list. Companies looking for a new location, they are unlikely to choose high crime cities.

✅ Low risk of a natural disaster

Natural disasters, such as tornadoes, can devastate entire communities, destroying jobs, shopping centers, and housing. When a tenant loses their home, they immediately relocate to an area where they can live and work today. Once people are settled elsewhere, there is little incentive for them to return to the devastated area, which can take several years to rebuild or may never fully recover. So, even if your insurance company rebuilds your property, there may be no renters. However, the debt service, taxes, maintenance, and insurance costs will continue. To avoid such disastrous situations, only invest in locations with low-cost homeowners' insurance. Insurance - ValuePenguin

✅ Sufficient population

Only invest in cities with a metro population greater than 1M**.** Small towns may rely too much on a single company or market segment. Wikipedia

✅ I will add one more requirement - No rent control. In some cities, you may not have the option to select the tenant with the best financial history. In others, you may not be able to increase the rent fast enough to keep pace with inflation. Other cities make it difficult and expensive to remove non-performing tenants. While these are not direct costs, they can be the most expensive costs of all. Do not invest in any city with any form of rent control.

There will be only a few cities that meet all the above requirements. This is the process I followed and it will work anywhere.

In Summary

In order of importance:
1. Location
2. Tenant segment
3. Property
[email protected]702-358-8884
FERNWOOD Team, KW VIP Realty520 Reviews
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Jerome MorelosPro Member
Redlands, CA · Member since 2017 · 205 posts · 88 votes
3y
You don't find good deals, you MAKE good deals. My advice is to find a property where you could convert areas into useable space such as a garages, large bedrooms, ect. Or better yet, if you could find one with an existing ADU or guest house.
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Jacob Paulson
Investor · San Antonio, TX · Member since 2020 · 22 posts · 4 votes
3y
Quote from @Jordan Futch:

I just have a question for anyone active in SoCal; Are there any areas in southern/ central California where long term rentals cashflow, or is that impossible now with today's interest rates? Most of the deals I see the numbers don't quite add up, or break even at best. I've been told that the working strategy in SoCal is to break even after all expenses, and the appreciation and equity is where the money is made. Rather than other areas of the country where property might cashflow but not have as much appreciation. Is this true? Looking at 2-4 unit. Thanks for your help.

Jordan, what I have done is buy a SFH with a detached garage and converted it with permitting to 3 units where it cash flows $2.5K a month. That's the only way in SoCal right now to cash flow and this was it really does.
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Allen DuanPro Member
Property Manager · Los Angeles, CA · Member since 2022 · 590 posts · 463 votes
3y
Check MTR rates and demand for any properties you analyze. Maybe it can cash flow with those numbers. The challenge is inherited tenants paying below market rents.
1 Reply
Robert Reynolds
Real Estate Agent · Los Angeles, CA · Member since 2019 · 302 posts · 163 votes
3y
Hi Jordan,
The only way I can see to cash flow would be to do Short Term Rentals or HouseHack. My recommendation would be to buy a house hack, rent out all the rooms that you aren't using. You could even combine the two by buying a house with an adu, and live in the adu and short term rent the house out. I could see this being hard in Santa Barbara, but if you were to be a little further south in Ventura or Oxnard, where the prices are much lower, I could see that working. Reach out if you'd like to talk further.

Quote from @Jordan Futch:

I just have a question for anyone active in SoCal; Are there any areas in southern/ central California where long term rentals cashflow, or is that impossible now with today's interest rates? Most of the deals I see the numbers don't quite add up, or break even at best. I've been told that the working strategy in SoCal is to break even after all expenses, and the appreciation and equity is where the money is made. Rather than other areas of the country where property might cashflow but not have as much appreciation. Is this true? Looking at 2-4 unit. Thanks for your help.

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Rick Albert
Real Estate Agent · Los Angeles, CA · Member since 2018 · 2k+ posts · 1k+ votes
3y
It would be tough unless there is major value add. For example, adding an ADU for the additional $1,500+ cash flow. I would also get creative with house hacking since you need a roof over your head and can justify the waiting out of appreciation.
I've ran numbers for Airbnbs and it is tough because of the added cost such as utilities, etc. I have a client house hacking a duplex doing mid-term rentals and after all expenses it comes out to what it would rent for long term. He just likes the flexibility of not having long term tenants.
You could also explore value adds to existing properties. For example something simple might be buying a 2-4 unit with no laundry and adding coin operated. I haven't ran the numbers yet but something to consider.
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Sebastian MarroquinPro Member
Real Estate Agent · Pasadena, CA · Member since 2015 · 476 posts · 263 votes
2y
Hello, this has been the question I get the most from clients in the last 10 years.
The last 6 to 7 years our go to was to help a client buy a fixer, and help them fix it, make it bigger or and add an ADU. With interest rates in the 3% to 5% : it was a no brainer and many are extremely happy with the investment.
With higher interest rates we keep doing the same strategy but the returns aren't as good.
Now we are adding to the strategy:
Now we are helping people do the same thing but starting to lean more on construction loans.
We will help a buyer buy in LA county anywhere between $600k to $800k usually. 5% down payment with a construction/ renovation loan.
At $700k : plus $175k construction budget for (rehab, JR ADU and ADU garage conversion)
(numbers can change of course, this is only an example)
Now client can see a $500 to $1000 per month cash flow and own a property with about $100k to $200k in equity.
Several of them have chosen to sell the home once done for a profit and re-start the process and some have kept it as a rental.
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Winning strategies for Southern CA in 2023

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Rents Outpace Inflation

Income Persistence

Income Reliability

Location Selection Requirements

In Summary