Southern California negative cash flow

53 Replies

Hi everyone,

I am new to real estate investing, but I am very excited to invest in my first property. I have saved enough down payment and am ready to go, just trying to find the right deal. The problem is that in Southern California, I have very little luck finding properties that bring a good positive cash flow, not to mention the market is super competitive. I am looking at Santa Clarita, Riverside, Long Beach, and other greater LA cities that are more affordable (~$400k). 

My question is that since the property appreciates so much in SoCal, if I hold it for 2-3 years, I can probably get a pretty good profit, but again, it's risky without knowing for sure how the housing market and economy going to be in 2-3 years. Does it make sense to just break even, or maybe even a little bit of negative cash flow? 

Wondering what is everyone's experience in SoCal, I am trying to avoid investing OOS since this will be my first deal, also I have a full-time job that keeps me busy and I intend to work for at least a few more years, so just want to make my first investment as straightforward as possible. 

Thanks in advance!!

Learn to do the math.  Figure out the actual numbers with $$$ in front for cash flow, and appreciation, then ask yourself that same question.  Make sure you don't rationalize your answer to that question...just like you're rationalizing now.

I live in Santa Clarita, but ended up investing out of state for a number of reasons. I agree - I've analyzed properties around here and they're pretty break-even or even negative. I know there are definitely places in CA where you can achieve positive cashflow - Bakersfield is one, for example... but I don't think I'll be in any rush to buy rentals in CA because the laws scare the crap out of me. I would hate to get stuck with a squatter and not be able to do anything about it. The lease for my current tenants that I inherited doesn't mess around. One day late with rent, $35 fee. 5 days late, $150 fee (this is on a $800/mo lease, btw). 10 dates late, EVICTION. It's a different world out there for investors outside of CA...

Originally posted by @Joe Villeneuve :

Learn to do the math.  Figure out the actual numbers with $$$ in front for cash flow, and appreciation, then ask yourself that same question.  Make sure you don't rationalize your answer to that question...just like you're rationalizing now.

^That's a pretty condescending reply that provides no substance except for putting her down to make yourself feel superior. I'm sure glad most of the people on BP aren't like you; they're supportive and encouraging. 

Originally posted by @Nathan Kapusta :
Originally posted by @Joe Villeneuve:

Learn to do the math.  Figure out the actual numbers with $$$ in front for cash flow, and appreciation, then ask yourself that same question.  Make sure you don't rationalize your answer to that question...just like you're rationalizing now.

^That's a pretty condescending reply that provides no substance except for putting her down to make yourself feel superior. I'm sure glad most of the people on BP aren't like you; they're supportive and encouraging. 

hm, I read that as a matter of factual and a very helpful statement. You can't rationalize if you want to make a solid investment, and you also have to look at the big picture especially here in SoCal. I don't plan on cash flowing big on my SoCal investments on year 1. But year 5....oh you betcha. Not to mention the appreciation to help buy the next properties.  

Also it is a good idea that if you call someone out on a online forum, that you then back up your call out and follow through with what you are calling the other person out for. But by providing no counter argument to Joe or better advice, support, and encouragement to the OP then it's just a troll post that reflects the same as you thought of Joe. 

Originally posted by @Nathan Kapusta :
Originally posted by @Joe Villeneuve:

Learn to do the math.  Figure out the actual numbers with $$$ in front for cash flow, and appreciation, then ask yourself that same question.  Make sure you don't rationalize your answer to that question...just like you're rationalizing now.

^That's a pretty condescending reply that provides no substance except for putting her down to make yourself feel superior. I'm sure glad most of the people on BP aren't like you; they're supportive and encouraging. 

A - There is nothing condescending about what I wrote. If you think there is then you're reading it wrong.

B - There is nothing but substance in what I wrote. I told her exactly what she needs to do to find the answers, which is more than simply handing that answer to her. I told her where the answer can be found. In other words, I was teaching her how to fish...instead of just feeding her this one time.

C - I see you've been on here for less than 3 months.  Maybe you should do a little more research about the person you're calling out (me), and check out what I've written in the past.

D - How much more support can one give than telling that person how to get the answer on he own...as in being in control of their own destiny instead of depending on someone else for the answer to the same question over and over.

E - The word "rationalization" is the most expensive word in the REI vocabulary. Telling her not to do it now, and in the future, is great advice.

Originally posted by @Peter Eberhardt :
Originally posted by @Nathan Kapusta:
Originally posted by @Joe Villeneuve:

Learn to do the math.  Figure out the actual numbers with $$$ in front for cash flow, and appreciation, then ask yourself that same question.  Make sure you don't rationalize your answer to that question...just like you're rationalizing now.

^That's a pretty condescending reply that provides no substance except for putting her down to make yourself feel superior. I'm sure glad most of the people on BP aren't like you; they're supportive and encouraging. 

hm, I read that as a matter of factual and a very helpful statement. You can't rationalize if you want to make a solid investment, and you also have to look at the big picture especially here in SoCal. I don't plan on cash flowing big on my SoCal investments on year 1. But year 5....oh you betcha. Not to mention the appreciation to help buy the next properties.  

Also it is a good idea that if you call someone out on a online forum, that you then back up your call out and follow through with what you are calling the other person out for. But by providing no counter argument to Joe or better advice, support, and encouragement to the OP then it's just a troll post that reflects the same as you thought of Joe. 

That's what I thought.  Maybe there's something wrong with my keyboard.  LOL

@Shiyuan Zhang good cash flow is going to be difficult, but like you've mentioned factoring in the appreciation (along with loan paydown and tax benefits) you can still have good returns. You have a full time job so I'm assuming you don't need the cash flow to supplement your income. Is there a reason why you're only looking at a 2-3 year time horizon to hold? 

A few options to consider getting "better" returns in socal:

1) house hack so you can utilize owner occupant low down loans. The appreciation returns look crazy when comparing 5% to 20% down loans. 

2) buy a building and convert a garage to an ADU

3) 2-4 units have much better chance to cash flow than single family

4) learn to self manage

@Shiyuan Zhang great topic and question, a lot of people run into this and these days it is hard to find deals in any market, SoCal being the top market to compete in and not get cashflow. 

The biggest advise is value add, value add and value add. We picked up a rental back in November last year in the Inland Empire 2/1 1200sf, with the income being about $2200 a month for that side and configure of house. We pulled permits added a 3rd bedroom and now we just rented it out for $2650.00. To add more value we'll be adding an ADU as well to the back of the property to increase the gross income to $4500-$4600 a month. Just like everyone else in business not just in real estate, it pays to think outside the box and apply value add tactics.

@Bill Ward good question, hired a licensed contractor that took his sweet time, spent a total of $14,953 for rehab permits etc. plus holding of $9718= $24,671. And with yearly increases of 7.5% conservatively for the future if we apply that to the renewal next year we'll have the lease up to $2848.75. After the refi once the ADU is in we'll recoup all rehab costs front unit and ADU once complete in about 3 months along with half of the initial downpayment due to the comps with ADUs on the same street and area as this property.

@Shiyuan Zhang

Do not buy anything with a negative cash flow. Cash flow is the most important thing in real estate investing. It’s important because it allows you to maintain the property to allow things like appreciation, tax benefits, and principal reduction to take effect. Everyone’s response to accepting negative cash flow is well I am working full time right now so I don’t need it right now. That like @Joe Villeneuve says is rationalizing a bad decision. You would be better served looking in a cash flow market, doing a syndication etc. where you are investing in assets not a liability. Remember you want to be an investor not a speculator.

"My question is that since the property appreciates so much in SoCal, if I hold it for 2-3 years, I can probably get a pretty good profit. . ."

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If your investment horizon is two or three years, then real estate investing is NOT for you. The transaction costs of buying and selling are too great. When you get to a ten-year investment horizon -- or longer -- THEN consider real estate as an investment.

If you are looking at buying for your own residence and maybe renting out a second unit in your building, your investment time horizon comes down a bit (to about 5 - 7 years for most people) because you need some place to live yourself, but it is still longer than 2 or three years.

Originally posted by @John Clark :

"My question is that since the property appreciates so much in SoCal, if I hold it for 2-3 years, I can probably get a pretty good profit. . ."

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If your investment horizon is two or three years, then real estate investing is NOT for you. The transaction costs of buying and selling are too great. When you get to a ten-year investment horizon -- or longer -- THEN consider real estate as an investment.

If you are looking at buying for your own residence and maybe renting out a second unit in your building, your investment time horizon comes down a bit (to about 5 - 7 years for most people) because you need some place to live yourself, but it is still longer than 2 or three years.

That's not true.  It all depends on how much the DP is.

Originally posted by @Nick Robinson :

@Shiyuan Zhang

Do not buy anything with a negative cash flow. Cash flow is the most important thing in real estate investing. It’s important because it allows you to maintain the property to allow things like appreciation, tax benefits, and principal reduction to take effect. Everyone’s response to accepting negative cash flow is well I am working full time right now so I don’t need it right now. That like @Joe Villeneuve says is rationalizing a bad decision. You would be better served looking in a cash flow market, doing a syndication etc. where you are investing in assets not a liability. Remember you want to be an investor not a speculator.

 Very well put.  Let me take your work analogy a bit further.  Buying a negative CF property, and rationalizing that the positive CF from another property is high enough to cover it, is , like saying you have a full time job that pays you enough so that the income you don't need is enough to cover a 2nd job where you pay the employer to work for them.  Your rationalization is that 2nd employer promised you a raise and a bonus based on a future contract extension...which may or may not happen.  You have no control over it.

 @Alex Armstrong : . . . Counting on appreciation over a 2-3 year period would be foolish
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Oh, given California's history, you can almost assuredly count on appreciation over a 2 or 3 year period, but I sincerely doubt that the appreciation would cover the transaction costs of the buy and sell.

And no, Joe V, down payment has nothing to do with transaction costs, unless you are including private mortgage insurance as a transaction cost. Even then, it's not a major factor.

I've been looking to do investing out of state since its quite difficult to find an opportunity that cash flows in my area. Additionally, the rental laws in my area are not landlord friendly. Basing investment decisions solely on potential appreciation falls outside of my risk tolerance.  Best of luck! 

@Shiyuan Zhang I live in Southern Cal, in fact I’m in one of those cities you mentioned. I would never begin my investing journey here! TOO PRICEY. If you want to invest close to home, maybe check out other markets, such as Bakersfield. That’s a more “reasonable” market. That’s what I decided to do.

Curious what you plan to do? Maybe I can answer questions about investing in Bakersfield. I’m still somewhat new myself, but maybe I can share what I do know!

Best of luck to you whatever route you take. :)

@Shiyuan Zhang this makes zero sense to me. Why gamble and hope for future appreciation. Buy somewhere else or go to the casino if you want the gamble. Cali is not for me as you can see. Too liberal. Too expensive.

California.

The economics simply work different in parts of California.  I grew up there and my parents still live there.  I had to figure out why my parents rather middle class house was worth well over a million dollars.  California, it turns out, is the most difficult state in the Union to build new housing stock.   The results of this are a crimped supply of housing stock that results in very high prices. And unfortunately, the worst homeless situation in the country.

For cash flow, you're not going to find much in coastal California.  There has been an appreciation run that has been incredible the last 15 years.  Too bad you didn't buy back then.   Matter of fact, I'll take appreciation of high priced properties over cash flow.  People made lots of money.

Can prices go up forever?  Aren't middle class people leaving California?  Is the gravy train over?

Anything can happen in the short term.  In the long run, California is still an attractive place to live, it has one of the most creative economies in the world, and a large supply of new housing stock is not  on the horizon.  

Turns out that attractive places are just more expensive.  And people have made a lot of money with expensive real estate.