Southern California negative cash flow

53 Replies

Originally posted by @Brian Ploszay :

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.  

There may be a housing shortage in California and that may be linked to some of the high prices, but I don't think that really paints a complete picture. Attributing the sky high prices to a shortage of houses to me reminds me of the way people think high rents are the reason for the homeless epidemic. I don't buy either argument for a second. 

I mean, are there really a lot of areas that can be developed in LA for instance? Prior to the GFC, folks went crazy with moving to the suburbs with their 2 hour commutes and development was through the roof. Now the trend is for folks to live in the city. The amount of new skyscraper luxury apts in DTLA is staggering. I also live close to the city and there is new construction going up on virtually every block. LA is doing everything it can to provide more housing....heck, it's one of the easiest cities now to build an ADU... provided you rent it and not air-BNB it.

Nobody wants to do the 2 hour commute anymore and most of the close by suburbs in LA are pretty much developed. It's not like there are huge tracts of land that the city is preventing from being developed.

I just think there are a lot of folks here and a good amount of them simply have a lot of cash sitting around. And with the pandemic and folks getting cabin fever along with very little on the market,.....all it takes is one lunatic to make a $1.25M offer on a small house listed for just over $1M that needs a full gut and renovation.

https://www.redfin.com/CA/Torr...

Originally posted by @John Clark :
 @Alex Armstrong: . . . Counting on appreciation over a 2-3 year period would be foolish
----------------------------------------------------------
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.



That's not what I meant. The cost of a property to the REI is only what comes out of their pocket. This means the lower the DP, the lower the cost. This of course requires positive CF. Profit is made when, and only when, the REI recovers their cost. If the transactional cost comes out of pocket in the form of cash at closing, then that adds to the cost to the REI. However, if you can burry the transactional cost in the loan, then it isn't a cost to the REI. Again, this requires positive CF.

Originally posted by @Delbert Standifer :

@Shiyuan Zhang

Personally I don’t think it’s a good time to invest In California. It can’t possibly be to much more room left for appreciation.

 People have been saying this at least 45 years.   As we know all of those people were mistaken.  

 @Tony Kim    I appreciate your analysis, but indeed there is a housing shortage in Southern California.   This is the result of 40 years of zoning restrictions and other regulations.  Los Angeles is the 2nd most populous region in the United States, yet it is a very horizontal city over reliant on the single family.  The term sprawl is associated with Southern California.  Here's an example.  If Santa Monica had more liberal zoning, the city would be complete high rises;  there is significant demand to live there.  

Yes, they are building more now and that is the result of finally loosening building restrictions.  Homeless problem?  Affordable housing traditionally has been older housing stock for cities.  The market doesn't produce affordable housing well.  But in Southern California, older buildings were revamped because of the strong demand for middle class housing.  Affordable housing disappeared.

Housing prices do reflect supply and demand.  Wages in California are not 3x other regions.  As for ADUs, they are hardly making a dent in supply gaps.  Let's see single family zoning lifted all across Los Angeles and outlying cities.   You'll see the biggest building boom in the country.

Originally posted by @Joe Villeneuve :
Originally posted by @Nick Robinson:

@Shiyuan Zhang

 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.

No, its like working for an employer for stock options only. If you worked a full time job and took a part time gig with Google, or Apple, or Amazon or Netflix or Nvidia or a thousand other companies and all you got paid was in stock options, you would have made far more than any salary would have given you over almost any 5 year period after 2000. Some risk, yes, more than banking on some appreciation in LA or SF or NY etc which have an even more consistent track record of increasing values in 5-10  year periods. And dont forget, there is mortgage pay down happening all the time also. And finally, I think 90% of people buying into midwest and south markets turnkey today are buying negative cash flow with no appreciation. They just dont know it yet!

Originally posted by @Anish Tolia :
Originally posted by @Joe Villeneuve:
Originally posted by @Nick Robinson:

@Shiyuan Zhang

 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.

No, its like working for an employer for stock options only. If you worked a full time job and took a part time gig with Google, or Apple, or Amazon or Netflix or Nvidia or a thousand other companies and all you got paid was in stock options, you would have made far more than any salary would have given you over almost any 5 year period after 2000. Some risk, yes, more than banking on some appreciation in LA or SF or NY etc which have an even more consistent track record of increasing values in 5-10  year periods. And dont forget, there is mortgage pay down happening all the time also. And finally, I think 90% of people buying into midwest and south markets turnkey today are buying negative cash flow with no appreciation. They just dont know it yet!

The stock option analogy is nothing like my 2nd job one.  In both analogies, the person is working, in your analogy, the employee is getting something for it.  In mine the employee is paying to work.  If you want to assume the appreciation as being similar to your stock options, that could be true but your stock options come with no added cost,  My appreciation comes with a cost, a negative, one in the form of negative CF.

 Midwest still can cash flow.  You just have to be more creative in how you buy.  Besides, if you buy just for the sake of buying, then you're going to have bad deals...even when the playing field is normal.  The answer to the question of, "if a property has negative CF, should I still buy it", is still no.

Originally posted by @Tony Kim :
Originally posted by @Brian Ploszay:

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.  

There may be a housing shortage in California and that may be linked to some of the high prices, but I don't think that really paints a complete picture. Attributing the sky high prices to a shortage of houses to me reminds me of the way people think high rents are the reason for the homeless epidemic. I don't buy either argument for a second. 

I mean, are there really a lot of areas that can be developed in LA for instance? Prior to the GFC, folks went crazy with moving to the suburbs with their 2 hour commutes and development was through the roof. Now the trend is for folks to live in the city. The amount of new skyscraper luxury apts in DTLA is staggering. I also live close to the city and there is new construction going up on virtually every block. LA is doing everything it can to provide more housing....heck, it's one of the easiest cities now to build an ADU... provided you rent it and not air-BNB it.

Nobody wants to do the 2 hour commute anymore and most of the close by suburbs in LA are pretty much developed. It's not like there are huge tracts of land that the city is preventing from being developed.

I just think there are a lot of folks here and a good amount of them simply have a lot of cash sitting around. And with the pandemic and folks getting cabin fever along with very little on the market,.....all it takes is one lunatic to make a $1.25M offer on a small house listed for just over $1M that needs a full gut and renovation.

https://www.redfin.com/CA/Torr...

 Dude, my parents live not far from this one you shared. here's one on their block, full gut renovation needed, listed for just under $1.1. We knew the old owners, who passed away in their 90's. Great people. House has not been upgraded since the 1970's: https://www.redfin.com/CA/Torr...

@Shiyuan Zhang Unless you plan to live in the property then your calculation is different because you need housing in a high cost area.  Buying to value add is also an option for a short holding period. 

@Tony Kim   and rent control and stabilization and proposition 13 I am curious if you think they have impact ?  California laws seem to discourage moving which I think impacts the housing supply and prices as well.  

Originally posted by @Colleen F.:

@Shiyuan Zhang Unless you plan to live in the property then your calculation is different because you need housing in a high cost area.  Buying to value add is also an option for a short holding period. 

@Tony Kim  and rent control and stabilization and proposition 13 I am curious if you think they have impact ?  California laws seem to discourage moving which I think impacts the housing supply and prices as well.  

There are some good points throughout this thread and a lot of opinions stated as facts making them bad advice.

The real truth is, there are a number of ways to successfully invest and stating that you MUST buy with cash flow to be successful is just false. People have often stated that you can't "eat appreciation" meaning you cant count on it or get income from it, both of which are not true if your time horizon and place of investment are well thought out and applied. I personally know many investors who have invested for zero to negative cash flow in year 1,2 and even 3, but then turn that into positive cash flow by forcing it (via improvements, better management, etc.). Taking the simple comparison of a CA investor A who invests out of state for a $300 monthly net cash flow with absent or little appreciation and investor B who buys in CA with negative $300 cash flow but after 5 years, has a appreciation gain of $200k that they bring into their own account via cash out refi (or sale). The net result is that investor B made a ton more money in this example.

This is NOT to say that this is the right way, only way or best way to invest. This is NOT to say that investor A out of state is wrong or foolish either. To each his own and one must determine what the end goal is and which strategy best gets them to that goal. Perhaps investor A method works better for some and not for others.

This is not about being right or wrong, more over, which is BEST for YOU. The only way you can determine that is educating yourself (which does include reading others opinions here) and making the best educated decision you can on each transaction moving forward towards your end goals.

Betting on appreciation is different then knowing it is coming from research. Appreciation is NOT ALWAYS gambling, and often times it is. It is up to YOU to make the right decision and education is paramount!

Originally posted by @Brian Ploszay :

 @Tony Kim    I appreciate your analysis, but indeed there is a housing shortage in Southern California.   This is the result of 40 years of zoning restrictions and other regulations.  Los Angeles is the 2nd most populous region in the United States, yet it is a very horizontal city over reliant on the single family.  The term sprawl is associated with Southern California.  Here's an example.  If Santa Monica had more liberal zoning, the city would be complete high rises;  there is significant demand to live there.  

Yes, they are building more now and that is the result of finally loosening building restrictions.  Homeless problem?  Affordable housing traditionally has been older housing stock for cities.  The market doesn't produce affordable housing well.  But in Southern California, older buildings were revamped because of the strong demand for middle class housing.  Affordable housing disappeared.

Housing prices do reflect supply and demand.  Wages in California are not 3x other regions.  As for ADUs, they are hardly making a dent in supply gaps.  Let's see single family zoning lifted all across Los Angeles and outlying cities.   You'll see the biggest building boom in the country.

Hi Brian,

I appreciate your response. I agree there is a housing shortage in CA, but again, I don't believe it's as simple as saying it's due to the zoning restrictions. It's very popular for some groups and politicians to point the finger at zoning laws, but changing the zoning laws will make SFR's even more expensive. My neighborhood is proof of that effect. Houses can no longer be built in my area... only high-rise SFRs. As a result, there is little-to no inventory in my area other than flips because no one wants to sell. We all know what happens to prices if that happens. Also, the high-rise SFR's that are being built generally sell for 7 figures and have HOA costs of over a thousand per month. That honestly doesn't sound like much of a solution to me. And Santa Monica is far from being a metropolitan-style city and so I don't really believe it's destined to be a city entirely composed of high-rises. The city is also a perfect example of how trying to help lower income earners only makes the situation worse.

And again, there are no huge tracts of undeveloped land that will help alleviate the housing shortage. It's the simple fact that the population density is high here. LA suburbs don't look any different to me than other suburbs in the US. A lot of SFRs.

Also, let's say a crazy loosening of the zoning restrictions is implemented.  Like pretty much all laws designed to help the lower-class, these rules will most likely have an effect that is opposite to which it was intended. In my area, that's exactly what's going on. New apartments in my area are far too expensive for the middle to low class and existing houses are never being put on the market. 

Updated 3 months ago

Not saying zoning laws did not have an effect. Like any situation, there were a lot of dynamics in play,... it's never about just one thing. I just don't agree with the statement that zoning laws are to blame. It's a multi-factoral situation and any solution that takes aim at just one thing will not help.

Originally posted by @Colleen F. :

@Shiyuan Zhang Unless you plan to live in the property then your calculation is different because you need housing in a high cost area.  Buying to value add is also an option for a short holding period. 

@Tony Kim  and rent control and stabilization and proposition 13 I am curious if you think they have impact ?  California laws seem to discourage moving which I think impacts the housing supply and prices as well.  

Colleen, those two things you mention definitely have an effect on housing prices. Just another in a long list of items and 'interventions' which in the long-term only make things worse for the folks they were originally trying to help.

I see comments like if it does not cash flow do not buy it or relying on appreciation is is not investing but gambling.

Some thoughts:

  • I recommend all new investors start local.  I believe that virtually all markets can provide opportunity for smart, hard working RE investors.
  • By definition of investing, purchasing RE with expectation of a profit is investing.  Lets not re-define words.
  • If I research a market and expect it to increase in value then I am an educated investor regardless if I buy for cash flow or appreciation.
  • Anyone that thinks cash flow never goes down or nearly as bad cannot keep up with inflation does not have a good knowledge of cash flow.  At the GR there were many locals that did not have rent depreciation, but there were many locals were the rents decline and the vacancy rates sky rocketed.  Detroit was likely the most negatively affected cash flow market, but there were many other markets that had declines.
  • I do not understand putting much more value on one type of return than another.  Granted it is a little harder to extract appreciation than cash flow but not much harder.  For me I seek best total return.  On my RE, my property appreciation has been far higher per month than very good cash flow markets.  What has this done to my rents.  All of my properties have rent above 1% rent to purchase ratio.  Some have over 2% ratio.  This ratio is achieved on top of the outstanding property appreciation.
  • There is a poor correlation between a markets initial cash flow and the cash flow achieved over a long term hold.  This is because prices are set by a market that factors in numerous parameters.   Two primary parameters factored into the price is expected appreciation and associated risk.  The cheap markets that have good initial cash flow are that way because they typically that way because they are not expected to have much appreciation (both property and rent as there is typically a relationship between the two).  It is simple math that the RE with the better rent appreciation will always eventually have better cash flow (assuming rent is increasing faster than expenses) than the slower appreciating RE.  It is simple math.

Southern CA does not have negative cash flow for the long term hold and has not for at least 60 years.  The subject really should be "Southern California negative initial cash flow".

Originally posted by @Dan Heuschele:

Southern CA does not have negative cash flow for the long term hold and has not for at least 60 years. The subject really should be "Southern California negative initial cash flow".

I agree. If I were to buy in CA I would hold longer than 2-3 years. You'd need to factor in closing costs when selling, and that could potentially eat up all profits.

I'm from SoCal, and I was looking for local opportunities to invest, but as most here have mentioned - it's too pricey + less landlord-friendly tenant laws. I'm new to investing, and I think that the outskirts may and could present great opportunities, but you might also want to consider the demographics and the quality of potential tenants. I know investors in Bakersfield, Victorville, Apple Valley, etc. whose house has been trashed. I'm not too familiar with those areas, and it could've been bad luck, poor management, poor tenant screening, etc. It all depends on your risk tolerance, and since you mentioned you try to avoid OOS investing, I assume B/B+ neighborhoods would suit you best. 

On negative CF... it depends on how you look at it, what your goal is, and what your risk tolerance/comfort zone is. Most here would avoid negative CF, and as would I. However, I know people who bought properties in CA a few years back and would do it again without hesitation despite the negative CF. The appreciation over the years has "offset" the negative CF, but relying on appreciation alone would be speculation, especially given current circumstances.

In the end, the numbers are there, and they don't lie. Whether or not you're comfortable with that, only you can decide. Good luck!

Originally posted by @Jessie Kristie :

Originally posted by @Dan Heuschele:

Southern CA does not have negative cash flow for the long term hold and has not for at least 60 years. The subject really should be "Southern California negative initial cash flow".

I agree. If I were to buy in CA I would hold longer than 2-3 years. You'd need to factor in closing costs when selling, and that could potentially eat up all profits.

I'm from SoCal, and I was looking for local opportunities to invest, but as most here have mentioned - it's too pricey + less landlord-friendly tenant laws. I'm new to investing, and I think that the outskirts may and could present great opportunities, but you might also want to consider the demographics and the quality of potential tenants. I know investors in Bakersfield, Victorville, Apple Valley, etc. whose house has been trashed. I'm not too familiar with those areas, and it could've been bad luck, poor management, poor tenant screening, etc. It all depends on your risk tolerance, and since you mentioned you try to avoid OOS investing, I assume B/B+ neighborhoods would suit you best. 

On negative CF... it depends on how you look at it, what your goal is, and what your risk tolerance/comfort zone is. Most here would avoid negative CF, and as would I. However, I know people who bought properties in CA a few years back and would do it again without hesitation despite the negative CF. The appreciation over the years has "offset" the negative CF, but relying on appreciation alone would be speculation, especially given current circumstances.

In the end, the numbers are there, and they don't lie. Whether or not you're comfortable with that, only you can decide. Good luck!

Virtually all investments, with possible exclusion of FDIC insured, is speculation. Positive cash flow has disappeared from markets that initially had positive cash flow in some markets in the past. I believe Detroit rents still have not recovered to their rent prices just prior to the Great Recession.

Compare this to coastal Ca where virtually all markets have not experienced a single case of property depreciation over any 10 year period in the last 60 years.  The coastal Ca RE has seemed expensive for 50 years, yet the prices have continued to increase   

I agree Ca LL laws are not LL friendly, but the low vacancy rates help ensure that there are many well qualified tenants.  My market (San Diego) is near lowest in nation at both eviction rate and delinquency rate.  You may think with tenant friendly rules there would more delinquency, but tenants with an eviction or missed rent payments will find it very difficult to obtain a decent rental in my market.  

@Shiyuan Zhang I just sold off my portfolio in the Midwest to buy more here in Southern California, specifically San Diego. If you want to take the less risky route then buying in southern CA such as your area in Los Angeles is the way to go. Prices are higher because you are paying for a higher quality asset, prices are much lower in some places because of the higher perceived risk.

Initial cashflow is difficult but after a few years you should be able to increase cashflow and at the same time enjoy the long term appreciation. Areas in southern CA, especially here in San Diego, will experience a housing shortage for decades to come.

Start by house hacking a condo or single family home by living in one room and renting out the others and you can do this with only 3.5% down. Better get, if you can swing it, buy a single family home with an ADU or a duplex to live in one unit and rent out the other.

Good luck!! :)

First of all, I've been in California since January 1973 and even though I purchased several homes between 1974 and 1978 the numbers for single family never made sense. In about 1974 everyone was purchasing homes with negative cashflow, but homes were increasing in value by $10,000 per month and people were doing turn-around escrows where homes were in escrow and the people who had the homes in escrow had already sold the homes and the new buyers were waiting for the first buyer's escrow to close. I purchased the home I currently own in 1974 for $49,000. In about e to 5 years (can't remember) the home was worth about $180,000. Then by the end of 1990 the home I put the home on the market for $625,000 and the first person who looked at the home wanted to buy it, but I got cold feet and backed out. Today, the home is on a major thoroughfare, in a crappy neighborhood and the home is worth an easy $1 million.

Here is the major problem with investors. At any time during the past 100 years of investing in California the smartest and most-profitable investments was always in multi-unit properties Had I known about the math I know today about investing in multi-units I would be a billionaire and would literally own every apartment building in a 50 mile radius.

Here is the reason why. While I was screwing around trying to figure out how to make a profit with single family homes while they were increasing in value disproportionately, always with a negative cashflow and while they were increasing in leaps and bounds by $10,000, $20,000 and more per month nobody was looking at apartment buildings. In 1980, when the $49,000 home I purchased in 1974 was worth about $180,000 apartment units were for sale for as low as $7,000 per unit. There was a 7-unit apartment building for sale for $49,000 when my single family home was worth $180,000 and I turned the building down. Today, those units are selling for $300,000+ per door.

If you want to be rich stop looking at single family homes and learn to do the math for multi-unit properties where you will learn that it is many times more simple to find multi-unit properties were you have a positive cashflow. It is many times easier to absolutely be positive that you can increase the re-sale value of the property when you increase rents and you cannot do that with single family homes. When you learn to do the math you will learn that is is very simple to increase your profits almost exponentially. For example, suppose, you own a 20-unit property. Then, when you increase the rents for 20 units this is how much YOU EARN THE EXACT SAME DAY YOU INCREASE THE RENTS - NOT SEVERAL YEARS DOWN THE ROAD.

20 unit rent increase of $60 = $1200 extra in your pocket every month.

$1200 extra per month X 12 months = $14,400 extra in your pocket every year.

$14,400 is $14,400 in ANNNUAL GROSS INCOME 

The Gross Multiplier for the average multi-unit (4+ units) property is about 18 in todays hot market even for undesirable properties.

How much money do you make the same day you raise the rents?

Annual Gross Income Increase $14,400 X Gross Multiplies = $14,400 x 18 = $259,200

That means, if your purchase your 20-unit property (or 4+ units) for $1 million dollars last month, then you should put the property back on the market for $1, 259,200, but you don't want to do that because what if you can raise the rents $60 to $200 every year. You will be filthy rich and you can retire from that one property and live on Easy Street.

BUT YOU MAKE MORE THAN $259,200 when you raise the rents only $60 because you still need to add the your annual rent increase to the $259,200 so when you increase the rents by only $60 you really earn $259,200 in appreciation plus the $14,400 that you actually collect from the rent increase = $259,200 + $14,400 = $273,600 you earn by the end of the 12th month after you increased the rent.

So, never look as properties that are less than 4 units and you can always find units that are cheaper than single family homes and you will always find properties with a positive cashflow.

There is a calculator on BP that does calculations very close to the image below and the numbers on my image should blow your mind and send you into a whole new world. Personally, I think any broker who recommends single family properties to investors who want to make some major cash is a serious idiot and I've had serious arguments with some brokers where I wanted to punch some sense into them.

Don't invest without getting the book 50 Real Estate Investing Calculations. NO! I did not write the book and nobody is paying me a penny. Every real estate investor should know every formula in this book, but it does not have what I just showed you, above. I love to put my books on Kindle so I have them on my cell phone, tablet, or can access them on a computer anywhere in the world.

@Shiyuan Zhang welcome to BP!  I think starting here is a great step.  Most of the people are very helpful and super knowledgeable!  

Regarding your question, if you put the downpayment in and you are able to find a. property that can break even at least for now, then the question is are you going to be able to get a decent return just using appreciation in the market.  For example, if you are able to find a property that breaks even in Long Beach, and you hold that property for 2-3 years, that property would have to increase at least 8% in those years just to cover your selling expenses.  So that then becomes approximately 2.5-3% growth that you need just to break even.

I would say that looking into areas such as Bakersfield and the surrounding communities might be a better option here.  The locale is still within driving distance of your current location, and you will not have to invest OOS and try building a team from a distance on your first deal.  

In Bakersfield, there are cash flowing properties that are still good deals, however, they aren't just floating around out there like they used to be.  And you want to work with someone who knows the area as well.  

[Removed by moderators]

Best of luck!

Great thread here. One point I would like to add: There's no negative cash flow with a lower down payment. We picked up a 10 unit building in LA, at a price well under market (direct to seller). The rents are low, and we'll be able to raise them over the next several years. 

We put a large down payment on this property. It's worth it, because when we get the rents up, we've increased the property value greatly, and can probably take out 70% of the initial cash in 3 to 4 years, and keep cash flowing nicely. This is not at a crazy LTV either. Thanks to the value add work we did, and the natural market dynamics, there's also now a lot of equity in the property, and nice cash flow.

We investors talk a lot about leverage, but in Los Angeles at least, there are multifamily deals where, if you can add value, you with a large down payment, improve the property, cash out nicely, and enjoy the long term cash flow, strong appreciation, and tax benefits. Added together, these are incredible long term returns. Similar things happen in SF, San Diego, and New York City. Probably others I didn't name also. 

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.

Nick, I'd caveat this with 'Do not buy anything stabilized with negative cash flow".  Fixing an prior owner's poor management and unlocking value is a major key in RE investing.  It's definitely been a key to my success in the syndications that I have invested in.  I apologize if someone else pointed this out, as I have not read every response.

There are some good points throughout this thread and a lot of opinions stated as facts making them bad advice.

The real truth is, there are a number of ways to successfully invest and stating that you MUST buy with cash flow to be successful is just false. People have often stated that you can't "eat appreciation" meaning you cant count on it or get income from it, both of which are not true if your time horizon and place of investment are well thought out and applied. I personally know many investors who have invested for zero to negative cash flow in year 1,2 and even 3, but then turn that into positive cash flow by forcing it (via improvements, better management, etc.). Taking the simple comparison of a CA investor A who invests out of state for a $300 monthly net cash flow with absent or little appreciation and investor B who buys in CA with negative $300 cash flow but after 5 years, has a appreciation gain of $200k that they bring into their own account via cash out refi (or sale). The net result is that investor B made a ton more money in this example.

This is NOT to say that this is the right way, only way or best way to invest. This is NOT to say that investor A out of state is wrong or foolish either. To each his own and one must determine what the end goal is and which strategy best gets them to that goal. Perhaps investor A method works better for some and not for others.

This is not about being right or wrong, more over, which is BEST for YOU. The only way you can determine that is educating yourself (which does include reading others opinions here) and making the best educated decision you can on each transaction moving forward towards your end goals.

Betting on appreciation is different then knowing it is coming from research. Appreciation is NOT ALWAYS gambling, and often times it is. It is up to YOU to make the right decision and education is paramount!

If one could see the cash flow on some LA props after a cycle or three, it might blow your mind. Not the BP 1 and 2% stuff, try 4%+.  LA rountinely tops in nation for total profits ( CF+ equity gains) in multi year single family holds. ( case shiller). Thats just for SfRs. Other commercial props like apts or storage almost can look more like lottery ticket returns. Location really matters. 

Good luck! 

I do not think you should ever lose money on an investment on the onset. I also think, contrary to a popular belief on BP, that a paltry 200 monthly cashflow is not worth the risk, stress, liability, and time. I crush in CA, you just need to be creative and understand the markets and how to cashflow. Make sure to calculate property tax into your monthly payment. Happy to help if you want to work with an agent who is also an investor. If you have an agent already, make them crunch the numbers and find you a deal, that is their job.

Z

"The sun shines up even a dogs' butt every once in a while"

I know people who purchased 1 to 5 homes in the 1970's for $49,000 to $180,000 and if a person had purchased 5 homes back in the 1970's and 1980's they would be worth about $3.5 million today. If you do the math, had I and those same people invested in multi-unit properties starting back in the 70's we would be worth an easy $500 million today if we took only a small amount of cash out of the properties and re-invested the money because even up to 1985 multi-unit properties were selling for as low as $7,000 per unit and in 2001 I purchased my 28-unit apartment building for $69,000 per unit when homes were selling for $650,000 to $1.2 million for a 2-bedroom 1-Bath in middle income areas.

In 2001, I had already worked 38 years. I owned about 6 homes and I was worth about $2.1 million. In 2001 was when my broker friend taught me the math for multi-unit properties. I dumped my homes like hot potatoes and during the next 20 years of my working life increased my net worth to $36 million minus 2 million I already had = $34 million or I made $1.7 million every year for the last 20 years and I am not a real estate broker, or agent.

You can still purchase 4+ unit properties for $80,000 to $100,000 per  unit in many parts of the country and you have all the advantages stated in the prior post, or take your blind chances with negative cashflow, high priced single family homes, purchase properties through brokers who can't get a grasp on 5th-grade math and maybe the sun will shine up your butt, too!

Hi @Shiyuan Zhang ,

Congrats on getting into RE! California has little pocket areas that are more affordable than the big cities. You listed some in Long Beach, Riverside and anywhere in Southeast LA. Here in California, you get a bang for your buck when you hold it longer than 2-3 years. If you hold it longer then you will eventually have the equity and value no matter what the market status is. Even if you get negative cashflow for the first couple years, California has very strong rental appreciation over time so you will cashflow in a few years. Just as long as the negative cashflow is not substantial and you can front it then you'll be in a good position. Good luck and don't hesitate to reach out!