Cash Flowing in Southern California
New to Real Estate · Carlsbad, CA · Member since 2022 · 3 posts · 1 vote
Cash Flowing in Southern California
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Twana RasoulBusiness Member
Real Estate Agent · San Diego, CA · Member since 2017 · 1k+ posts · 1k+ votes@Eric Leach Initial cashflow in San Diego is difficult with 25% down (investment) or lower 0%-20% (owner occupied/house hack).
I've gone from negative cashflow to positive cashflow on my local properties in 2 ways.
1st way, which is how I started, I would just purchase a property retail with low money down. I made sure the property needed very little to no work because I had limited funds and barely knew how to screw in a light bulb. I would start by house hacking it then move out after a year to make it a full investment property. Each year I would increase rents until I broke even then eventually cashflow. That is the easier way to get started especially if you don't have a lot of funds for value add. One condo I purchased never made it out of the red (negative cashflow). However, I sold it recently, after 4 years, through a deferred 1031 exchange into a multifamily 4 unit property without additional funds out of pocket (technically zero down).
The 2nd way which I've done a couple of times, including this past summer...purchasing a property with value add potential. I purchased a triplex that was making $2,850/month between ALL 3 units, way below market and I was paying their utilities like water/sewer. Needless to say I started out about $2,500-$3,000 NEGATIVE cashflow each month. I renovated all 3 units within 3-4 months and increased rents to $7,825 with tenants paying their own utilities. Also, I am in the process of converting 2 single car garages on the property into a 1bed/1bath ADU which will increase rents another $2,000/month to get to around $10,000/month. There's nothing passive about investing in Real Estate.
Contrary to popular opinion on here, I prefer newbies get started with the first method, buying something move in ready in lieu of doing a major value add. purchasing a fixer for the first property or something that needs a decent amount of work can be risky for someone just starting out with limited funds. Construction costs often go over budget and end up behind schedule, this is true for professionals (I was in commercial construction for quite a few years) so it certainly would be the case for a newbie. Imagine running out of funds in the middle of a rehab. Buying a property that has out-dated finishes but is still livable would be ok since that work can be done slowly, overtime.
I personally started investing locally buying what I can afford with low money down and slowly rolling those into bigger properties. It is certainly easier to get started locally than in a random market that happens to be cheaper unless you have ties to other markets that you know well or have family or trust worthy resources in (not just a PM and Realtor).
Compass5122 Reviews
9 Replies
- Investor · Member since 2019 · 145 posts · 131 votes4y
From my glance at the market, it looks like if you're doing LTR you'll have to look at areas like Fresno or Bakersfield. Those seem to be the areas where rent will support the purchase price.
However, if you're doing STR you can make LA or San Diego work because the monthly income you can pull in is going to be much much higher than a long term lease. You might also want to consider areas like 29Palms or Joshua Tree for STR (this area will have a lot more seasonality than LA or San Diego though.)
Disclaimer: I currently don't own any units in SoCal. For personal reasons, I have my capital allocated in other states for the time being. - Rental Property Investor · San Diego, CA · Member since 2013 · 3k+ posts · 4k+ votes4y
I don't know who MeetKevin is (I assume that's not his name? Or some Instagram alias?) but I can tell you as someone that lives in SD, I haven't found properties that cash flow. Though to be fair, I'm looking at multifamily mostly, aside from my own home, and LTR only.
When people say "You can make money in SD, just go to ...." (and then they give you some BFE city that's in socal 1000 miles from San Diego), don't listen. Whne people think of San Diego they think of San Diego. not Alpine or Hemet or whatever.
That said, as long term SD investors will tell you, if you look at cash flow + appreciation over the last x years, San Diego does quiet well. Personally I invest outside of SD but I was lucky in that I was in Houston for a few years on my 9-5 business and had a chance to setup a large multifamily operation before moving back to SD. I think to start in a new city from scratch, when you don't have any ties, would be hard.
- Developer · San Diego, CA · Member since 2015 · 1k+ posts · 1k+ votes4y
@Eric Leach For the fictional persona of average "Joe Investor" starting out in San Diego with long term rentals, I'd say this:
You have to work (much) harder to own properties that throw off current free cash flow in San Diego than you'd have to work in Othertown USA.
That's just the reality. And, so, "investing" in San Diego is going to involve either a bunch of additional personal effort or a business operation that results in properties with stable rents and free cash flow. Either way, that's not the definition of "investing" ... there's an element of work involved.
Why would people do this? For some, it's probably unintentional and because they're ignorant of what else is out there. For many (myself included), it's because of the natural tail winds you mention.
Many people think of these things as binary choices, as if one is exclusive of the other. It's so tiresome. Better to use AND instead of OR.
- This now AND that later.
- This first AND that next.
- This in my current situation AND that in my future.
- This while I have a job AND that once I've quit it.
This until I finish school AND then that once I have more time. - This for some of my money AND that for the rest.
- This so I feel secure AND that so I've got a chance for a big win.
Could be split 100/0, or 50/50, or 75/25, or whatever ... and could change as you grow. Point is to get rid of the zero sum mindset, thinking you have to give up something to get something else. If I end up teaching my kids one thing, that might be it ... I wish I had learned it earlier.
My 2 cents.
- Member since 2018 · 138 posts · 56 votes4y
Your not going to find "easy" cash flow in San Diego's current market.....at least in the areas I track. The rent to values don't support it. You can value-add to cash flow but these paths are more capital and hands-on intensive (building adu/additions, renos, etc). Good thing is (at least historically) is that over time the rents come up to balance the price relatively quickly....so if you can use a strategy to just hold a property (without being over leveraged) for 5+ years the investment will likely work out for you....IE use a large down payment or house-hacking. Also I know some people who have been doing "Live-in Flips" to good effect in San Diego (though the last two years have been a bit difficult due to lack of supply). That said if your looking for immediate and higher cash on cash return you may want to look elsewhere.
- 4yTwana RasoulBusiness MemberReal Estate Agent · San Diego, CA · Member since 2017 · 1k+ posts · 1k+ votes
@Eric Leach Initial cashflow in San Diego is difficult with 25% down (investment) or lower 0%-20% (owner occupied/house hack).
I've gone from negative cashflow to positive cashflow on my local properties in 2 ways.
1st way, which is how I started, I would just purchase a property retail with low money down. I made sure the property needed very little to no work because I had limited funds and barely knew how to screw in a light bulb. I would start by house hacking it then move out after a year to make it a full investment property. Each year I would increase rents until I broke even then eventually cashflow. That is the easier way to get started especially if you don't have a lot of funds for value add. One condo I purchased never made it out of the red (negative cashflow). However, I sold it recently, after 4 years, through a deferred 1031 exchange into a multifamily 4 unit property without additional funds out of pocket (technically zero down).
The 2nd way which I've done a couple of times, including this past summer...purchasing a property with value add potential. I purchased a triplex that was making $2,850/month between ALL 3 units, way below market and I was paying their utilities like water/sewer. Needless to say I started out about $2,500-$3,000 NEGATIVE cashflow each month. I renovated all 3 units within 3-4 months and increased rents to $7,825 with tenants paying their own utilities. Also, I am in the process of converting 2 single car garages on the property into a 1bed/1bath ADU which will increase rents another $2,000/month to get to around $10,000/month. There's nothing passive about investing in Real Estate.
Contrary to popular opinion on here, I prefer newbies get started with the first method, buying something move in ready in lieu of doing a major value add. purchasing a fixer for the first property or something that needs a decent amount of work can be risky for someone just starting out with limited funds. Construction costs often go over budget and end up behind schedule, this is true for professionals (I was in commercial construction for quite a few years) so it certainly would be the case for a newbie. Imagine running out of funds in the middle of a rehab. Buying a property that has out-dated finishes but is still livable would be ok since that work can be done slowly, overtime.
I personally started investing locally buying what I can afford with low money down and slowly rolling those into bigger properties. It is certainly easier to get started locally than in a random market that happens to be cheaper unless you have ties to other markets that you know well or have family or trust worthy resources in (not just a PM and Realtor).Compass5122 Reviews - 4yDan H.Pro MemberInvestor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votes
I agree with the posts that initial cash flow is a challenge in San Diego, but improves quickly with time. Also challenge does not imply impossible
Cash flow is a single source of return and to the investor that is using RE to build wealth and not to pay the bills is likely the worst source of return. The historic return on San Diego buy and hold is near best in nation.Why do I consider cash flow to be the worse source of return?
- It is taxed. Most other sources of return on RE is tax deferred and there are legal means to never pay tax on those returns.
its return historically pales to the return of San Diego appreciation. What is good cash flow of a Midwest low appreciation SFR? $500/month? My lowest appreciating San Diego property has appreciated $2k/month over its hold. My best is over $16k month and my best long hold is over $7.5k month.
the slow and steady of cash flow makes it one of the more difficult means to scale.
How Little do I value cash flow? As soon as I have a property that cash flow noticeably effects the taxes I pay, I refinance it to lower my cash flow and provide me more capital for scaling.
In addition, deals can be found/created in virtually any market. my last local purchase had market rent ratio over 1% when stabilized which only took us 2 months to stabilize. Identifying these opportunities is a skill. Networking with people that have this skill could provide great value. I will say some of the people who posted on this thread definitely have this skill.
Good luck
- It is taxed. Most other sources of return on RE is tax deferred and there are legal means to never pay tax on those returns.
- New to Real Estate · Carlsbad, CA · Member since 2022 · 3 posts · 1 vote4y
Great insight from all! Thank you! I suppose that it's not critical to cash flow, but I don't want to be losing much money in the short term either. I understand that over time rents will catch up and eventually will cash flow.
- Investor · Southern California · Member since 2021 · 27 posts · 16 votes4ySo much wisdom here! I just purchased my first multi-family house hack, and let me tell you, I wish you were wrong. My wife and I hired a contractor that quoted us $8600 (labor only) for a 1/1 facelift (sanding off old-school wall texture/ paint/floors/bathroom remodel). The remodel was supposed to last 1-2 weeks and actually lasted closer to a month with $1500 over budget because other things came up.
Quote from @Twana Rasoul:
@Eric Leach Initial cashflow in San Diego is difficult with 25% down (investment) or lower 0%-20% (owner occupied/house hack).
I've gone from negative cashflow to positive cashflow on my local properties in 2 ways.
1st way, which is how I started, I would just purchase a property retail with low money down. I made sure the property needed very little to no work because I had limited funds and barely knew how to screw in a light bulb. I would start by house hacking it then move out after a year to make it a full investment property. Each year I would increase rents until I broke even then eventually cashflow. That is the easier way to get started especially if you don't have a lot of funds for value add. One condo I purchased never made it out of the red (negative cashflow). However, I sold it recently, after 4 years, through a deferred 1031 exchange into a multifamily 4 unit property without additional funds out of pocket (technically zero down).
The 2nd way which I've done a couple of times, including this past summer...purchasing a property with value add potential. I purchased a triplex that was making $2,850/month between ALL 3 units, way below market and I was paying their utilities like water/sewer. Needless to say I started out about $2,500-$3,000 NEGATIVE cashflow each month. I renovated all 3 units within 3-4 months and increased rents to $7,825 with tenants paying their own utilities. Also, I am in the process of converting 2 single car garages on the property into a 1bed/1bath ADU which will increase rents another $2,000/month to get to around $10,000/month. There's nothing passive about investing in Real Estate.
Contrary to popular opinion on here, I prefer newbies get started with the first method, buying something move in ready in lieu of doing a major value add. purchasing a fixer for the first property or something that needs a decent amount of work can be risky for someone just starting out with limited funds. Construction costs often go over budget and end up behind schedule, this is true for professionals (I was in commercial construction for quite a few years) so it certainly would be the case for a newbie. Imagine running out of funds in the middle of a rehab. Buying a property that has out-dated finishes but is still livable would be ok since that work can be done slowly, overtime.
I personally started investing locally buying what I can afford with low money down and slowly rolling those into bigger properties. It is certainly easier to get started locally than in a random market that happens to be cheaper unless you have ties to other markets that you know well or have family or trust worthy resources in (not just a PM and Realtor).
Now comes the fun part, another unit in the same property (4/2) just became vacant and needs a little more severe rehab (windows/paint/tare down of a wall or two /drywall covering of all these random doors the unit has/kitchen cabinet work). Although it is not a gutting job, I am afraid of going way over budget. All this while cash flow is negative. We are 100% sure we will make the money back many times over, but in the meantime, those bills won't stop...
Keep the knowledge flowing and happy investing! - Member since 2022 · 2 posts · 1 vote4y
Hi Eric,
Just came across your post. I’ve also begun house hunting in SD since the beginning of the year! Just curious if you ended up going a certain route, still looking, or already a Homeowner! If you’re in a meet up group I’d love to meet up and chat!
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