Los Angeles rental property. Worth it? Or do i look out of state?

52 Replies

Salutations!

Thanks in advance for any response I might receive to this question. I am a newbie. I am interested in maximizing monthly cashflow through acquiring rental properties. However, being in Los Angeles, there are not many nearby markets that cashflow without exposing you to high crime rates, undesirable tenant populations, etc. Additionally, even with a cashflowing property, the cost of entry (or initial investment) is much higher here than in other states. So ROI is not good either.

When I browse through properties, let us say in Ohio for example, I find numbers that work on SFR's or multiplexes between 50k and 100k, sometimes less.

Am I right to be looking at remote investing and avoiding CA? If, so I am sure there are many good markets to look into. Any suggestions on how I get started on this? I assume start developing a team, learning the neighborhoods in a target market, etc. I am not very interested in appreciation speculation in CA. Not to knock anyone who successfully does this. But my goal is cashflow. 

I am also considering jumping into one of these local low priced "problem area" homes in the greater LA county that cashflow moderately, as I am young and don't have a family yet. I think I can handle all the extra headaches for at least a few years :-)

Thanks for reading!

@Timothy Castaneda

If you're purely interested in cash flow and you're OK with low appreciation, the mid west is probably the best place to go. My wife and I sold our assets in California and moved earlier this year to have a chance at better cash flow. If you do want to invest in California, places like the Inland Empire offer some cash flow and are still within driving distance for you.

-Christopher

Hi Timothy,

I second Christopher Brainard. I live in Southern California and have been doing real estate investing with my family for decades - both in and out of the state. It's my strong opinion that California real estate goes in cycles - and that right now in L.A. the prices are really expensive and don't make sense. You are a psychologist - read up on theories of behavioral finance, herd mentality and value investing. Cali is a boom and bust place.

We also are invested in the mid-west - and yes the cash flow is better. However we have apartments there - enough to pay for professional on-site management - and we got the capital to do that after decades of slowly accumulating in California.

If you only have enough capital to get a duplex or something like that out in the mid-west it could be tough to manage it from California.

I will tell you this brother - there will be another crash in California. And there will be another boom. I just can't tell you when! If you have the self discipline to wait, be patient, keep saving money - then buy when everything goes to sh*t again in California. You will surely see crazy appreciation after that, and then you can harvest your gains and move the profits to a higher cash flow state. You are young, life is long.

I agree with your instinct that now is NOT the time to speculate on appreciation in Cali - that time was after the crash in 2008.

As for the Inland Empire I grew up out there and we recently sold some apartments in some crappy places in the I.E. (recently as in a few months ago) - let me tell you - people are paying STUPID prices even out in the IE right now. Not as dumb as L.A. but still dumb.

So be careful.

However, having grown up in the IE I can tell you there is a solid population base that isn't going away any time soon, so if you can find a decent property at a decent price it could work for you.

And yes problem area properties can be profitable like your instinct says - just be willing to roll your sleeves up and endure a lot of headaches. If you can handle that and the numbers make sense then go for it. Just don't believe income projections given to you by brokers.

This is such a personal finance question. You have to look at your personal strengths to determine which markets you are long term suited for. Can you handle a "problem area" . Also are out of state investments accessibaly for you? Many questions that you need to evealuate and toss around. LA is expensive, but diversified and very demanded.

Property prices fluctuate everywhere, in some areas thou, prices remain mostly flat or very close to it. 

In California cities you buy equity growth and liquidity. But California is not for everyone. You can buy cash flow in almost every other state with exception of New York. There are cities, like Indianapolis, where you can buy a house with a credit card and will rent for $700-$800 a month. You will find it hard to sell it thou.

Out-of-state local investors have made a pretty good income in the last 10 years or so, buying houses for say $30k-$50k, fixing them for $10 and selling them to, guess who? - California or other out of town investors for $150,000. They give them to you rented for a whooping $1,400-$1,600/month and they even manage your tenants for you, for a fee, which is nothing but a win-win for them.

If you want to join them, you should make sure you will not need to liquidate on those investments any time soon. I see here in BP many investors who bought those out of state houses and duplexes some years ago and can't sell them now, even at a lost. They bought those properties at inflated prices based on manipulated appraisals and comps from a different area type. You may have cash flow but you don't have actual resell value.

In most California areas, properties don't spend 3 weeks on the market. In California and LA you can buy a 20-unit apartment, like the one we have available now, for $1.2M, possibly fix it for under $100k, and double your money in a few months. Or even convert into condos and walk with $5M+. Or buy a 4-plex for $750k that would pay for itself and would double in value in a couple of years as you do some repairs and raise rents. You will never be able to do that in other towns.

There was a time when we had houses for $50,000 in Los Angeles, a very long time ago. With our ups and downs, prices continue in the upraise, which others states can't speak of. Housing demand in LA along grows over 15% a year while new housing only increases 3%. Most experts say that we are heading for a steady property value growth of at least 8% annually

If in doubt, just tell me how many billionaires do you know who have made their money with Atlanta or Indianapolis real estate? I can list about 30, without effort, who have made their money in LA real estate. Some have then gone on to own other cities in and out of state.

@Josie Roman Thanks for the reply! I am evaluating all of the information I am gathering and am in the stages of developing my business plan. It is true, I am interested primarily in cash flow. 

The picture I am gathering is that investing out of state will get me cash flow. Investing in state will get me appreciation, liquidity, and SOME cashflow if I look really really hard. 

The question is... what game do I want to get good at? From what you argue, a person should get good at investing here in sunny so cal because the upside can't be matched. The best case scenario when out of state investing can't beat the best scenario when investing in CA. Indeed, as you say, CA creates billionaires. 

When I look at it this way, it seems that the best play is to find a cashflow market here, albeit modest, and wait for the next bubble to burst before buying in high demand areas like Glendale, Burbank, etc.

However, I am also drawn to the high cashflow markets in the midwest. 

I am weighing the pros and cons of each perspective. I think a good middleground would be finding the cashflow markets CA. I think I have identified a few, including Palmdale, Lancaster, Victor Valley, the IE, etc.

My next post will be my business plan. Feel free to tear it apart :-)

@Chris Reeves Thanks for the reply... Superman! Haha. I know, I know. Ultra lame and completely predictable and I'm sure you've heard it before. 

Thank you for verifying my instinct about SOCAL real estate right now. I have never been in the position to purchase any kind of property before now. However, I  have grown up here and lived here all my 27 years. So I am aware of the boom and bust nature of our fine state, even if only by way of news reports and seeing my grandparent's home go up and down in value. 

As I replied to @Josie Roman , I am weighing the pros and cons of investing in an area like Palmdale, the IE, Victor Valley, etc. and waiting for the bust (which local investors I talk to all think is fast approaching) or starting to accumulate properties in the midwest. 

Seems like you did both! Seeing as how cheap homes in places like Ohio are (I found a duplex for around 50K lol) I don't see why couldn't invest in both places from a monetary perspective. However, I know that I am not experienced enough to spread my investments like this.

I've been thinking about this day and night and will continue to do so. It's precisely this ability to think about something constantly that makes me good at my jobs... it's also one of the reasons I'm not married ;-)

@Account Closed  Initial cash flow is easier outside LA. Is it better?

(1) Bull market (first quarter of 1975 through the third quarter of 1980): real home price increased by 69% over 23 quarters.

Bear market (1980 Q4 to 1984 Q2): real price decreased by 9% for 15 quarters.

(2) Bull market (1984 Q3-1989 Q4): up 67% for 22 quarters.

Bear market (1990 Q1-1997 Q2): down 37% for 30 quarters.

(3) Bull market (1997 Q3-2006 Q4): up 166% for 38 quarters.

Bear market (2007 Q1-2012 Q2): down 43% for 22 quarters.

(4) Bull market (2012 Q3-2015 Q1): so far the price is up 27% for 11 quarters.

Good luck with your search!

@Account Closed midwest is good for cash-flow if that is the goal you are looking to achieve.

As he mentioned not huge appreciation out here, but when things go sour our home values don't drop significantly. More of linear markets out here versus being volatile. 

In the aspect of investing in a "problem area" will you be doing your own property management? May turn into a second job if you don't have a PM company

@Account Closed I too, reside in California (Orange County) and understand what you're talking about.  I'm currently investing long term holds in Kansas City, MO and Columbus, OH.   

Just like the other's had stated before, it really depends on your strategy.  The midwest does not have much appreciation, but it's pretty steady eddy.   If you want appreciation, then you may want to go Dallas / Houston market with less cash flow but assume for higher appreciation in the coming years.   

Feel free to message me if you have any questions.  I went through a lot of hoops and spent quite bit of my own money, before finding the right people to work with.  

Best of luck with your goals

Don't forget expenses. Cost to replace a roof can be absorbed much easier if your rents are 2000/mo, rather than 500/mo. 

You probably won't make any money at either extreme - 30k junkers and or 1M McMansions, but there's a sweet spot in the middle there for rentals. Where exactly will depend on your market, strategy, etc.

Good luck!

@Account Closed   if you can ever catch a Bruce Norris talk he will sometime talk about his selling everything I CA pre bubble 06  smart move and reinvesting in Texas.

not having the best of luck in Texas he was very happy to sell it all then reinvest in CA again.. It would be interesting to see his position on CA vs Out of state at this time in the cycle... IE sell all of CA and invest out of state... I would pay to listen to his speech on this.

And there are not many I would pay to listen to.

A lot of the people saying LA is bulletproof and the place where billionaires are made suffer from recency bias, meaning they are basing their forecast for appreciation on the past 5 years of exceptional growth.  The problem is if you stretch that timeframe just a little to 10 years, there are still people underwater and if they are investors, negatively cash flowing from their purchases in 2005.  LA has not surpassed the prior peak and rents in most areas have not grown that much from 10 years ago.

The inland markets where a small amount of cash flow is possible are still susceptible to crashing in value..  In fact they crash harder because they generally cater to lower income owners that can't weather a storm.  Be very careful about listening to anybody that advises buying right now without talking about the growing risk that accompanies an overpriced market.  Most of California is in the latter stages of the real estate cycle, but low interest rates are keeping these prices viable, for now.

@Jay Hinrichs advice to catch a Bruce Norris talk is golden and the good news is he speaks at many investor clubs throughout SoCal so it probably won't cost more than $15 to see him.  Learn his method for timing the California market before you proceed.

@Brent Seehusen   last time I caught Bruce was in Vegas at an Entrust event.. one of the presenters was the company that does those life settlements.. and also was the focus of American Greed show... we both looked at each other and said wow this is morbid.

HE is a very nice fellow and of course very knowlegable and free with his time.

NA Beard If the apts are built after 1978 there is no rent control and most LA area cities have no rent control. Like

El Segundo

- Long Beach
- Inglewood
- Hawthorne-Burbank-Glendale etc...

There are 5 cities with rent control and 83 cities in LA county with no RC. But still something to keep in mind when looking. 

@Brent Seehusen I have never heard anyone say it is bullet proof personally. I guess if you had the right location and nice positive cash flow today...it is probably is unlikely rents would go down enough to become negative but not 100% bullet proof. All real estate is high risk. Not that you did not know:)

Someone I know often say 'Live where you want to live and invest where it makes sense'. 

Only remote investing can give you this and Midwest is good for cash flow.......that's exactly what I am doing.

My $0.02, for what it is worth. If you invest out of state, you'd better already know what you are doing ... how do you get to know what you are doing? By doing it hands on in your own backyard (wherever that backyard may be)... then, once you know the ins and outs on how to do it, you'll be in a better position to build a team of professionals to do it on your behalf out of state. 

In summary, my advice is stay close to home at first ... if you can't find what you are looking for close to home, either wait until the market turns, adjust your strategy, or move to a place that has what you are looking for. Only after you cut your teeth working hands-on on a few deals in your backyard, then and only then would I even consider investing out of state.

I followed this path, local first then out of state, and even though I was well experienced before looking out of state, I still had MAJOR problems ... I had the money and experience to work through these issues and it is all good now, but if I tried out of state as a total newbie, I'm quite certain it would've been a one way ticket to BK.

When you live in Los Angeles and invest in the Inland Empire, it's almost like investing out of state, right? (kidding)

All of my rentals are in the Inland Empire. I have been investing a little out of state via notes, but I am far more comfortable being close to home. I'm still relatively new to the land lording game and I wanted to do that myself, at least the first few years. 

I think a number of the comments here are spot on. 

We have several of our hard money clients that do very well in Lancaster, Palmdale, Bakersfield, etc. You don't necessarily need to come east. I'm a little more conservative. I like newer houses with decent cash flow in decent areas. The Inland Empire still has those capabilities. 

When you're talking about rough areas in Los Angeles, you're typically not talking new inventory. So you're getting the double whammy of bad area and older houses. If you're brand new to the scene, that would concern me. Doesn't mean you can't take it on, I'd just be careful. 

The IE and North LA County are not as good as a few years back, but the numbers can still work. And if you can qualify for cheap leverage and you're going long, who cares if prices come down a little? I have several houses where I just plan to pay off and hold. I like the thought of not having to chase the market every cycle.

I guess I'm uncomfortable out of state mainly because I'm so busy. If I had an issue (like 2013 which was my year of exploding water heaters), I know people and have a network I really trust. Out of state is definitely doable, but I'm glad I at least have some experience locally and now better questions to ask as well as the kind of tenants I'm looking for. 

If you've listened to my Dad (Bruce Norris) this year talk at the local clubs, he's been saying he doesn't see a huge bust on the horizon (yet). Key factors are not in place. So while this year has been...meh, the factors aren't in place for a big bust (overbuilding by the builders, no crazy loan programs, etc.) There's still room in many markets in affordability, especially considering our interest rates. Maybe not in San Jose and San Francisco, but many parts of Socal.

However, Dad is also not planning on taking on hugely speculative investments like high dollar flips along the coast, risky building projects, or inventory that's been run up by the hedge funds. Don't get me wrong, money can be made there. He's just not interested in inventory where fewer people will lend and where buyers come in smaller quantities. He talks a lot about speculation vs. investments and that's important. The last downturn, speculators gave investors a bad name. Investors add value. Speculators show up thinking everything they touch turns to gold. They buy expecting price appreciation while not adding any value. That's not what our community is doing.

It sounds like you're really wanting an investment and going a little longer. I love multiple exit strategies. But, again, if you're going long and the cash flow makes sense, I would just be careful about the rough area. If you feel like you have to long your door while driving the neighborhood, maybe that's not a good starting place. 

If you were able to catch the live feed of I Survived Real Estate this year (do a search on Youtube for it), I think the insight provided by all the panelists are really important. Much of the content was California specific so definitely check it out. 

We like California. We're just being cautious. There's room to go up, but we're certainly watching for government interference, the lending world, interest rates, the construction industry and jobs, and those darn Milliennials!

Favorite call about a month ago was a new investor that wanted to buy a rental before she owned her own home. She didn't want to get tied down. Millennial much? 

Happy Halloween all. I'm currently eating my weight in chocolate.  

Originally posted by @Josie Roman :resell value.

In most California areas, properties don't spend 3 weeks on the market. In California and LA you can buy a 20-unit apartment, like the one we have available now, for $1.2M, possibly fix it for under $100k, and double your money in a few months. Or even convert into condos and walk with $5M+. Or buy a 4-plex for $750k that would pay for itself and would double in value in a couple of years as you do some repairs and raise rents. You will never be able to do that in other towns.

Some people chase all kinds of economic indicators to determine where the market is going. I have a few that tell me the market is near or at the top and this is one of my key indicators;  "Or even convert into condos and walk with $5M+"

During the last boom, my tile woman told me she was making a killing buying units in the Big Bear area and converting them to condos. Before that bust, a good friend told me he was doing it in L.A. back in the 90s. Both times the market tanked and both lost their ***-ets. I'm so glad I came here tonight. The vibe is in the air and it seems like the market is truly readying itself for another correction.

Originally posted by @Aaron Mazzrillo :
Originally posted by @Josie Roman:resell value.

In most California areas, properties don't spend 3 weeks on the market. In California and LA you can buy a 20-unit apartment, like the one we have available now, for $1.2M, possibly fix it for under $100k, and double your money in a few months. Or even convert into condos and walk with $5M+. Or buy a 4-plex for $750k that would pay for itself and would double in value in a couple of years as you do some repairs and raise rents. You will never be able to do that in other towns.

Some people chase all kinds of economic indicators to determine where the market is going. I have a few that tell me the market is near or at the top and this is one of my key indicators;  "Or even convert into condos and walk with $5M+"

During the last boom, my tile woman told me she was making a killing buying units in the Big Bear area and converting them to condos. Before that bust, a good friend told me he was doing it in L.A. back in the 90s. Both times the market tanked and both lost their ***-ets. I'm so glad I came here tonight. The vibe is in the air and it seems like the market is truly readying itself for another correction.

 Agreed. Buying units for condo conversion is more speculative than anything else, and while it may or may not say anything about the market, it says volumes about the participant's psychology. Condo conversion is more dangerous than flipping. If we are doing this en-mass...something big is brewing..

@Aaron Mazzrillo I understand what the gentlemen are saying regarding timing and risk. I have very limited experience and zero condo conversion experience although this could be the ultimate value add move for the high demand LA areas. To be fair to the young lady, this is unlikely fiscally similar to converting Big Bear condos. I do know someone who has approved and slated LA apts to condos. The value add is near 10 million. They purchased the property in 1995 for 365k. This is not being done in mass and the process takes awhile. Neighbors can object in public hearings etc....The guys who can pull this vision off in LA today are likely rewarded to say the least. I assume much of that risk revolves around the actual LA location more than anything else in 2015-16. We can also consider most anything convertable in the demand areas have already been converted 2 to 3 decades ago.

@Matt R.  I will assume you are not using the highly sexist, pejorative term "the young lady" to refer to me. Regardless of your age and experience, that would not be a professional way to refer to anyone.  But considering the amount of illiteracy I've seen going around BP, who am I kidding... 

Condo conversion is very lucrative and happens ALL THE TIME in at least half of the cities in LA county, and it is NOT more time consuming or challenging with hearings than a new house development. We've done a few of them both!

I have been in real estate for over 15 years in California, out of state and internationally and I know how the signs of a bubble look like, here and overseas. Most people go out of state to purchase real estate simply because they can't afford to buy in California. Period. You can be as resentful about it as you want but don't kill the messenger!

Other people make their money speculating in California RE and them, they sell out and buy in other estates for cash flow. Some of them go on blogs like this tearing California apart, when, in fact, they would have nothing without CA. That's how ungratefulness looks like.

If cash flow with no or almost no equity growth suits you, just buy out of state, but you will need an additional source of money if you want to grow your portfolio, or need to be very patient to be able to use your rental income as down payment for another property.