2016 California - Feasible rentals at home or look out-of-state?

78 Replies

Hi folks - I'm new to BP and to REI in general and am looking for some advice as I get started. I purchased my SFR back in 2007 (what terrible timing!) in Los Angeles county and plan to continue living here for the next few years, at a minimum. I'd really like to start investing conservatively in cash-flow-positive rental properties, while keeping my regular job, and with an eye towards retirement in 15-20 years. Unfortunately, I didn't have the reserves to invest during the last down cycle. Now that I do the SoCal market has of course rebounded. So, what's the best play for me right now?

  • Keep saving and wait for the market in Southern California to crash again - but who knows when that will be?
  • Invest out-of-state in an undervalued area with all of the challenges that being remote might bring
  • Try to find a deal in Southern California in 2016. Is this even feasible though? If so, in what regions and how?

@Justin M.

It all depends on what your goals are. Right now, southern California is a very competitive market and there are very few deals going around. I don't think you're going to see another crash like 2007, so if you decide to go that route, you could be waiting a very long time. As for investing out of state, this is also difficult unless you find the right team that can be your boots on the ground.  If you're looking for buy and hold properties, the further you get from LA and San Francisco, the better you'll do. If you can only put 20% down, you're going to have a hard time finding anything that will break even, unless you head out to the boonies.

-Christopher

@Justin M. finding properties here that cash flow and still have a decent cash on cash return can definitely be difficult. I have found myself investing in Palm Springs vacation rentals because of this.

I am having all of the same thought processes myself and my situation is quite similar! I am looking into turnkey properties out of state. There are people here on BP who recommend this, and for me, part of it is getting good property management along with an already renovated property. This seems like it would reduce the issues significantly. I'm considering cities where I could see myself living in the future, such as Austin. I don't know if people get rich off of turnkey properties but it's a place to start. 

Good morning, Vanessa

Buying and holding in Austin is a good pathway for building passive income. For a single family house its a bit harder to cash flow initially but over time you will have less headaches than a fourplex or a duplex. Single Family housing can also be sold in both an investors market and a owner occupied market. Duplexes, Fourplexes and other multifamily will have the best selling results in an investors market where the interest rates are favorable. It changes often. Austin house prices appreciated by 8% last year. Rents are also going up considerably. I think the city is at 97% occupied. Austin Metro unemployment rates are in the mid 3%. The city is doing very very well. 

As a broker, I can send you specific properties that might be conducive to your goal of long term passive income streams. 

Aaron

It depends on your personal finances in the here and now. We are in a top heavy market now and no one has a crystal ball. If you are looking to hold long  or short term and is big question too. I still think that CA is a dynamic market with the right buy can be a nice long term investment. Out of state investments have some real challenges too!!!

@Justin M. Welcome to BP! Here are my two pesos.  Near 15% of the country lives in Cali so yes it is full of landlords and renters.  There is every type of property and class in Cali so depending on your goals something would fit most investors normally. Some areas have more appreciation and some areas will have more initial cash flow.  You can find similar out of state like cash flow returns in the more inland areas of Cali.  There is typically way more competition in the bigger cities so that is more of an appreciation move now. If you are a long term buy and holder something to consider is since 2000 the top 3 areas for the nation for appreciation are LA 138%, SF 116% and SD 115%.  

  • Keep saving and wait for the market in Southern California to crash again - but who knows when that will be? Many are predicting a return to a more normalized market vs crash. 
  • Invest out-of-state in an undervalued area with all of the challenges that being remote might bring. Areas are not undervalued normally, the market dictates price. If it is a sub 100k house that is probably what the area thinks it is worth. There are gentrification exceptions and those areas will appreciate more. 
  • Try to find a deal in Southern California in 2016. Is this even feasible though? If so, in what regions and how? Tough but feasible, all regions, agents, brokers, mass mail marketing to distressed owners. Consider Bakersfield SOCAL too. 
  • Good luck with your search! 

@Vanessa Vandervalk  

Turnkey is a popular option. 90%+ who recommend turnkeys on BP are selling Turnkeys and nothing wrong with that. The most experienced investors likely would not recommend for value, exit and profit reasons. 

@Justin M. Hi and welcome to BP and the world of REI! Like others have said it all depends on your capabilities and your goals. I live on the West Coast as well, and if your like me when I started out in REI, after years of trying to get into REI locally, I finally took the plunge by investing out of state with a full service turnkey provider, which provided me a fairly passive way for me as the owner of an unrelated (to REI) business at the time. This has been a solution for many busy professionals, and others who live in non-cash flowing markets who want to get into REI, but it is not for everybody.

Originally posted by @Matt R. :

@Vanessa Vandervalk  

Turnkey is a popular option. 90%+ who recommend turnkeys on BP are selling Turnkeys and nothing wrong with that. The most experienced investors likely would not recommend for value, exit and profit reasons. 

:giggle:  I've been collecting 64k/year for 18yrs on this. When I sell (soon), the buyer will take my seat.

NA Beard Awesome. Are you saying you bought rent ready on your own or from a tk company? 64k for 18 years...the rents stayed the same for 18 years or? Either way sounds sweet.

Originally posted by @Matt R. :

@J Beard Awesome. Are you saying you bought rent ready on your own or from a tk company? 64k for 18 years...the rents stayed the same for 18 years or? Either way sounds sweet.

We bought the 6 units via 1031 off MLS and yeah, it wasn't always this sweet; the first 5yrs were recovering from 'deferred maintenance'. Each vacancy was used to refurb/upgrade AND to raise rents. SO let's call it 10yrs of 64k.

My point is turnkeys work well and imo are a better bet for cash flow that SFRs will ever be.  My 401k had 100k at one time but took a bath in 2000 and 2008 and the MFU has outperformed the market every year.  I didn't buy for appreciation, but today, the appreciation is over 100%

I watch the FMV rents and as a marketing strategy, I keep stable rents below FMV to avoid the tenants from having motivation to move elsewhere - - it would cost more for the same amenities and I have a rare commodity - - lockable garages per unit. Consequently, I hold tenants 5-8 years.

@Justin M.

I would recommend moving some of that CA equity out of state into cash flowing investments.  If the market does turn, at least you're still getting a check for your equity.  There are turnkey operators you can research on BP that have strong cash on cash returns.  With financing now, you can get in excess of 20% on your money in yearly cash flow.

Welcome aboard @Justin M.

If you are looking for information on out of state investing (both good & bad) you are in the right place.

I can't speak to what plan makes the most sense for you but if you do choose to go out of state I suggest setting up a keyword alert for "turnkey" You will get alerts multiple times a day.

Good luck to you.

NA Beard Right on sounds like a winner. I guess there are different definitions for turnkey. These days many sfrs out of state are selling as turnkeys. For bp I think that is what people are referring to as turnkeys or 1-4 unit types. 

@Matt R.   likely, but clearly, turnkey is any property acquired with tenants in place and has nothing to do with sfr, 1-4 or 5+, but only operating with cash flow (good god, why buy red ink).

NA Beard Agreed in the real world that is turnkey. I can assume you would not buy sfr out of state retail priced turnkeys normally. This new definition of turnkey I speak of is almost entirely sfrs and retail priced. No mls, no value add opportunities like you did. That is the  big difference. So what you did is not what most others on bp call turnkey today for the most part.

Originally posted by @Matt R. :

@J Beard Agreed in the real world that is turnkey. I can assume you would not buy sfr out of state retail priced turnkeys normally. This new definition of turnkey I speak of is almost entirely sfrs and retail priced. No mls, no value add opportunities like you did. That is the  big difference. So what you did is not what most others on bp call turnkey today for the most part.

 And that bothers me that terms get created from a whim and don't apply to the real world.  I'm sure that it's not misrepresentation nor intended to be, but I assume it became in vogue by consistent reference to it, beginning in a vacuum from limited experience.

Guess I've too many years in engineering where term are intended to convey accurate information.

Oh Well.

NA Beard Yes the term has been partially hijacked by marketers. Experienced investors like yourself are the few who understand the misconceptions that created. I agree your definition of turnkey is what the most experienced investors expect when someone says turnkey in real estate.

Hi! I am in Justin's shoes.  For those of you in favor of CA investing, what regions should we be looking in?  Right now I am checking out parts of LA and riverside because of housing prices and rent attained, but I haven't found anything that makes sense on the calculators. Is the CA market more of a flip market and less of a buy and hold market? and Thank you Matt R. I am going to consider Bakersfield now:)

@Jessica W. , with oil prices dropping, the Bakersfield market might suffer and that might create a buying opportunity.  Logistics has really taken off and Bakersfield's economy is more diverse than ever, but oil is still a major industry in the area and will have some effect.  

That is really good to know!  I am going to start watching that market.  I still feel the houses in my area are over priced for what they are and they never measure out on the calculator, but very worth watching the market not to far north from me. 

@Jessica W. I assume you can chuck Lancaster, Palmdale on that list too. I heard there are some new aerospace multi billion contracts coming to AV that could help. Worth researching more perhaps. I have not invested in Bake or AV but many do very successfully. 

Sidebar: One surprising stat last time I check was Bake had twice the crime of AV per capita. Good luck with your search!

Originally posted by @Larry Fried :

@Justin M.Hi and welcome to BP and the world of REI! Like others have said it all depends on your capabilities and your goals. I live on the West Coast as well, and if your like me when I started out in REI, after years of trying to get into REI locally, I finally took the plunge by investing out of state with a full service turnkey provider, which provided me a fairly passive way for me as the owner of an unrelated (to REI) business at the time. This has been a solution for many busy professionals, and others who live in non-cash flowing markets who want to get into REI, but it is not for everybody.

Interesting suggestion Larry. I'm going to have to do some more research on these turn-key providers. You always hear that you "make your money when you buy", which seems to imply that you're only going to find cashflow positive properties by locating needle-in-the-haysack distressed sellers, or winning at a foreclosure auction. I wouldn't have thought it would be possible to purchase a turn-key property with immediate cashflow. "What's the catch?" is my first thought, but it's certainly something I'll do some research on.

Originally posted by @Jessica W. :

That is really good to know!  I am going to start watching that market.  I still feel the houses in my area are over priced for what they are and they never measure out on the calculator, but very worth watching the market not to far north from me. 

Tell me about it. Norwalk is surprisingly expensive. It has some nice areas, but even the rough neighborhoods are pretty pricey. Chock it up to good freeway access and the metro.

Originally posted by @Matt R. :

@Jessica W. I assume you can chuck Lancaster, Palmdale on that list too. I heard there are some new aerospace multi billion contracts coming to AV that could help. Worth researching more perhaps. I have not invested in Bake or AV but many do very successfully. 

Sidebar: One surprising stat last time I check was Bake had twice the crime of AV per capita. Good luck with your search!

I appreciate the suggestions Matt! I haven't spent a lot of time in Bakersfield, AV, Palmdale or Lancaster, but I can see the appeal numbers-wise. I feel like I need to get a better sense of how the economies work in these way-out-there regions and understand who are my potential renters if I buy in those areas? A long weekend excursion may be in order.

Another complete newbie question - what's typically the best method for analyzing the rent prices and vacancy risks in a city? I'm assuming Zillow's not to be trusted Is Craiglist as good as it gets? How do investors who are new to an area determine how long it will take to rent property? How do they determine the true market rent prices since those numbers aren't published the way home sale prices are?