Do the general "rule of thumbs" apply to orange county, ca?

Question

As a new investor, I am trying to learn as much as I can and trying to catch up on the lingo for real estate investing. As I go through the beginner guide on this site, I came across the "rule of thumb" and I cannot understand how this applies to Orange County, CA because the prices seem high. I plan to buy and rent for my strategy. Some examples I don't understand are;

2% rule - Rent is my area for a 2bdrm, 2 bathroom condo/house is about $2,000. Applying this rule, I would need to find something for $100,000? I don't even know if that is possible.

50% rule - If I take the above rent, and apply 50% of that to the expenses, that leaves $1000 for the mortgage. Only way I imagine this to cash flow would be to own the property out right or have a very small mortgage.

70% rule - this is understandable.

I know these are just a rule of thumb to screen properties, but do investors in Orange County, CA find these applicable or do you guys have to adjust these rules?

Thank you,

George

Matt Devincenzo · Answer

Well the 50% rule actually refers to the fact that 50%of a given rent wil go to expenses over the life of the asset, you can tell that may be very inaccurate out here in SoCal due to higher costs.

2%, in Orange county I doubt it would be possible at all.

You have to understand out here there is an extremely different mindset to buy and hold investing, it's for appreciation not cash flow.

I've run across bogs in the past where they discussed how the numbers work out here. Basically the gist was "buy a place with 50-100K down hold it at most likely a negative cash flow for XX # of years experiencing (we'll say) 20% appreciation and sell for a healthy check at closing"

It works in a good increasing market but you have to be able to feed your investment to make up the negatives. You will lose money on a buy and hold in SoCal looking only at cashflow but the appreciation is where you can make it up but that strategy falls apart in 2007 type markets.

It's not what I like I prefer cashflow that I can calculate and isn't dependent on a market I can't control like in '07-'11, so I invest out of state and rent for myself out here because it is cheaper than buying really.

Mehran K. · Answer

In my opinion, SoCal is not ideal the best place for cash flow. It is more of a speculative market in terms of buy & hold. Rehabbers do well also. These are the reasons I invest out of state!

Tim G. · Answer

My opinion differs from most but I do not think one of those rules on average applies to Orange county.

Now, I am not saying is it impossible but on the open market someone else will pay more for properties and ignore all of the above rules all day long. So... it can be done, but if there is ANY competition they will be coming in way higher than you.

Just for example I just wholesaled a deal at 85% of ARV less repairs. That is on the very high side but it was a rental, that would have barely met the .05% Rule if it existed.

I am not telling you to ignore those rules as they are smart and they do make sense (except the 70% rule here) but what I am trying to say is another investor/buyer will ignore those rules and buy the deals.

Do the general "rule of thumbs" apply to orange county, ca?

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