Is Southern California really that bad?

OP

Investor · Redlands, CA · Member since 2013 · 177 posts · 76 votes

12y

Makes sense, I know the more expensive you go, the worse the rent to value ratio gets. Guess I just to need to keep saving and looking for a good deal. I just can't help but look at these houses in Tennessee and Arkansas, etc in nice areas with nice schools for 50,000 dollars and get a little jealous! Haha but I know long distance land lording isn't a good idea in most cases. Thanks for the advice Jon!

2 Reply

Jon Holdman

Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes

12y

When you look at those Arkansas or Tennessee houses you absolutely must learn those markets and compare them locally. Comparing them to house in your area is a recipe for disaster. There are sellers out there that target buyer who fall into that trap. They are hoping you see a house for $50K and think "wow, great deal" when you compare it to a $250K house in your area. They're hoping you don't do any homework and don't figure out you can easily buy the house next door for $30K. Or that there is really no demand for rentals in the area. Or that they've done a shoddy rehab and you're going to be hit with ongoing "maintenance" issues. Not saying you shouldn't consider distant investments. I am saying you have to get serious about learning the area where you might invest. That means getting on a plane and spending some time there.

6 Reply

Aly W.

Investor · Middletown, NJ · Member since 2008 · 2k+ posts · 1k+ votes

12y

My husband and I invest out of state (FL) and we only considered that because someone we knew recommended a wonderful contractor and realtor in the area; he invests there too. It's crucial to have trustworthy local people if you're investing out of state. We are now very familiar with the area, going there 3 or 4 times a year.

We also own 2 SFRs in "less appealing" neighborhoods, and as @Jon Holdman said, the profits are good. The challenges are high to find decent tenants though, so turnover is very stressful and the properties depreciated for several years after we bought them. Investors purchased nearly everything on the market at rock bottom prices, and now they're finally moving up again.

OP

Investor · Redlands, CA · Member since 2013 · 177 posts · 76 votes

12y

Wow, I am definitely guilty of thinking that way and didn't even realize it.

Thanks again for more awesome advice.

Jon Holdman

Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes

12y

The two rentals I have here in Denver are both in "less desirable" areas. Sometimes people look at me like I'm crazy when I tell them where I have houses. Yet other landlords I know have rentals in the same areas. The folks who live there are families like everywhere else. And I've driven up and down most of the streets in these neighborhoods, even late at night. They're not nearly as scary as their reputations. My biggest fear isn't getting accosted or anything like. Its running over a little kid driving their electric car in the street after dark.

Rick H.

Lender · Greater LA/Orange County area, CA · Member since 2012 · 3k+ posts · 3k+ votes

12y

If you are afraid of missing out on the real estate investment opportunity boom, which is what you've described, beginning by purchasing out of state properties is not, in my opinion, a very sound strategy.

There's nothing like discovering what you don't know but should have known, only to complicate a problem or mistake by hundreds of miles of distance between you and the investment. I've met a ton of people in CA still waiting for their Memphis/St.Louis/Detroit/Texas rentals to finally pan out. They won't; it's a sucker bet for newbies.

Learn the business first by studying, observing, attending and participating. During the last property cycle, the gal who cuts my hair would quiz me about real estate investing. When I suggested that she ought to begin by reading up on the subject first, she scoffed "Oh no, I'm too busy for that!"

The best investment that you'll ever make is in yourself. That is, learn everything you can now. Set a budget and invest X dollars in books, audio files, attend real estate investment club events and maybe some home study courses. Even this course of action has its detractors and there are plenty of Dream Merchants willing to take your money and sell you BS.

And be careful of the naked man who offers you his shirt.

10 Reply

Jimmy Hong

Flipper · Irvine, CA · Member since 2013 · 349 posts · 45 votes

12y

Two words for you... "Inland empire".

OP

Investor · Redlands, CA · Member since 2013 · 177 posts · 76 votes

12y

This is great guys thank you for all of this info. Also, I hope I didn't sound arrogant when I said "less desirable" I just meant it is surprising how expensive those properties are even though they are in what you would expect to be cheaper areas. You've all given me a lot to think about. I definitely think I need to keep learning, haha I definitely don't want to be a sucker as described earlier!

OP

Investor · Redlands, CA · Member since 2013 · 177 posts · 76 votes

12y

Inland empire sounds like a great idea, that's actually where I'm from and where I found the house for my dad. I'll keep looking into that area. Any specific cities that have worked well for you?

Podcast Guest on Show #29

Dawn AnastasiPro Member

Rental Property Investor · Milwaukee, WI · Member since 2013 · 6k+ posts · 4k+ votes

12y

Investing out of state is definitely not for everyone. Some people can make it work really well however, but that's because they know someone in the area or have a relationship with a team on the ground who they can trust.

3 Reply

Jodi Slocum

Bentonville, AR · Member since 2013 · 12 posts · 1 vote

12y

I live in Northwest Arkansas, specifically the Bentonville/Rogers area. We've only just barely gotten our toes in the market here, but we've lived here for 16 years so if you want to throw some general questions my way go for it! :)

Michael Heisterkamp

Arlington, TX · Member since 2013 · 62 posts · 11 votes

12y

From what I have witnessed a lot of the buy and hold investments going on in SoCal were plays made years and years ago, bought during the recent market depression, or are what I call a loss hold investment. Where you rent out a property and while you are holding negative cash flow the value of the property is rising significantly faster than your losses. You hold onto a house for 12 to 24 months and sell at a higher value than what you have in the property including the negative cash flows during the holding period.

Different strokes for different folks (and areas)

CK Hwang

Capistrano Beach, CA · Member since 2013 · 283 posts · 169 votes

12y

Hi Trevor, I'd like to extend a welcome to a fellow OC investor. I'm currently investing in the OC market, with a mixture of rentals and flips and I totally hear what you're saying about returns. Most the the returns we get here in nice neighborhoods are right about 5%. The 1% rule or 12% per annum benchmark is almost non existent here in the coastal cities if you are buying today. not to say they can't be found, but they are not easy to come across just because the area is in high demand from owner occupiers and investors as well.

For myself, I invest in OC because I like the quality of the collateral. If worse case happens, ie economy collapses, and I am stuck with houses close to the beach, it's not the worst collateral in the world for me. Being stuck with a house in a town that is dying because some factory has moved offshore? now that keeps me up at night.

Sure, I'm always tempted by the amazing high yields of out of state investments, but over the years, I've found there's no such thing as a free lunch, and the yield on the property is generally a good indicator the risks.

5 Reply

Ali Boone

Real Estate Coach · Venice Beach, CA · Member since 2012 · 6k+ posts · 3k+ votes

12y

Welcome Trevor! I live in Venice Beach so I feel your pain.

As far as wondering how the current owners are doing it out here, I believe the majority of owners most likely fall into two categories: 1. owners who bought a long time ago or the properties have been in their families for decades (Venice is huge for this, most owners bought in the 70s when the prices were awesome because Venice was scary to live in but now they are sitting on gold mines and not selling them) or 2. owners who are likely losing money on their properties but in their minds appreciation potential and/or the enjoyment factor of owning in LA prevent them from selling. That's been my experience. I've never heard of a investor buying a straight buy and hold now (or in the last decade or two). The few people I know who have admit they lose money every month but they love having the properties so they keep them.

Meeting the 1% rule isn't the standard here. You'd be lucky to profit each month at all. Reason being, prices are stupidly high and then to add to the pain the property taxes (and maybe insurance, not sure?) can just demolish you. You can buy cheaper in worse areas like you mention, but the problem there is CA is exxxtremely tenant-friendly and that can really hurt you as an owner because of how many rights tenants have (i.e. bad ones don't have to move out of your property in any decent time frame). So if you buy in the not-so-hot areas where properties are 'more' affordable, you are likely going to have a higher risk of not-so-hot tenants and then because of the laws they could end up costing you a fortune.

Welcome to SoCal. I truly believe flipping is just about the only main investing route out here that can work on a regular basis.

I only buy out of state and it's totally fine. I have never had a problem managing issues from a distance. There's a learning curve for sure, but plenty of ways to do it.

Sorry for the ramble, but it was nice to be able to get out what the LA problems are!

Good luck.

6 Reply

OP

Investor · Redlands, CA · Member since 2013 · 177 posts · 76 votes

12y

Wow!

@Ali Boone ,

@CK Hwang

@Jodi Slocum

It always amazes how spot on the advice is on this website! CK, what you're saying makes perfect sense, I think I may just be priced out of the market for the time being. Ali! Thank you for validating everything I have been feeling. Currently, buy and hold investing is really all that I feel comfortable stepping into, and I just don't fell comfortable doing so in my area. The inland Empire is constantly thrown out at me as a suggestion but as you said it (even more than other California areas) is incredibly tenant friendly. A coworker of mine has a rental in ontario that has had a tenant living in it for two years without rent (while subletting) and been unable to evict. He might be doing it incorrectly I'm sure but it seems to be a common tale. Additionally, the inland empire is still expensive compared to other areas, and by expensive I mean the RV ratios are pretty bad. Now, I'm sure there are others who are successful, so I don't mean to say it is impossible, but I definitely agree with what you are saying.

I am seriously considering out of state investing, and will use money that I do not absolutely need, and will look for high quality safe areas. I really am in love with the south right now, particularly some of the nicer areas of memphis, Houston, little rock, and even some parts of Austin (although it is getting pretty pricey)

Thank you for the awesome input guys, I know out of state investing isn't for everyone, but I don't plan on jumping in without putting in some serious research and networking time.

Thanks again guys.

Marco Santarelli

Specialist · Orange County, CA · Member since 2008 · 2k+ posts · 623 votes

12y

HI @Trevor Lohman,

Welcome to BiggerPockets! Nice to see a fellow OC neighbor.

Fortunately for you, you live in a beautiful part of the country, but one of the most difficult local markets to generate a good return and cash-flow from any "investment" here. With rent-to-value ratios around 0.3% to 0.5%, at best, you can see the challenge.

I love that you're thinking about buy-and-hold investing - a true wealth creation strategy. If that's your path, do some research into the various markets around the U.S. that makes sense for you. There are many goo markets to choose from. You may want to download our "2013 Housing Market Forecast" from our website to get some ideas and food for thought. (Note: I will be updating that report in January.)

Think about your investment goals, and criteria. That will help you narrow down your markets, and property type.

BTW - Austin is also a pricey market unless you go further outside the city limits.

Feel free to post any other questions you might have.

Continued success!

Ali Boone

Real Estate Coach · Venice Beach, CA · Member since 2012 · 6k+ posts · 3k+ votes

12y

Yay, I love validating! But on the reverse, it's always good to hear that my observations are also seen by others and I'm not making this stuff up. I'd be really bummed if I was making it up about LA because it really would be cool to have properties here!

As far as I've heard, your Ontario friend's situation isn't too far out of the norm. It's crazy here, according to actual property managers I know.

Research and networking is perfect for learning out-of-state. It's definitely not for everyone, but it's all I've ever done and all I plan to do for multiple reasons. I've never had a problem with an out-of-state property that was anything I wouldn't experience if the property was local. There is really no difference other than the ability to handle the problem in person or not (worst case you hop on a plane, but there is nothing I can think of that could happen that would even warrant that). And in my case, being near my properties to handle anything in person would just stress me out and I'm pretty openly against stress :)

Lena Chen

Investor · Seattle, WA · Member since 2013 · 13 posts · 2 votes

12y

Welcome @Trevor Lohman ! I am also quite new to invest in Socal and I am not surprised to see we share the same concern here. I have been looking into the Inland Empire area for a while and am going to close my first property here. It seems to be a common issue of problematic tenant and long eviction process.

I have considered Texas before but I am not confident to invest out-of-state as a newbie. CA is cyclical I believe and I think it will be on up-trend for a while. Maybe it makes sense to look into the foreclosure opportunities, I am going to learn more regarding the financing options to get into that area.

Sam M.

Investor · Diamond Bar, CA · Member since 2012 · 79 posts · 24 votes

12y

I have rental properties in So Cal... All purchased since 2008. One is a 3-unit in Rubidoux purchased in 2010. It has a 1.2% ratio including renovation costs.

Rubidoux can be a rough area. After we removed the hoard and evicted the drug dealers, I found three awesome families with good credit and jobs. The drug dealers were paying rent every month but I wanted to create a safe environment so I could attract and retain good tenants. Success! The current tenants (and the neighbors) are hard working, really good people.

@Lena Chen Evictions do take some time in CA. My approach is to get good tenants in the first place. But if you have to evict, budget $1000 and 60 days or offer $500-1000 cash for keys. Be 100% relentless about late payments. Have the 3-day notice on their door on the 6th of the month if they do not pay. Begin the eviction process (or offer cash for keys) on the 9th if they don't pay 100% of rent and late fees. If they really want to stay, you can be nice and offer to let them stay if they pay all rent, late fees and incurred legal fees in cash within 24 hours. Otherwise, bite the bullet and get paying tenants with jobs and good credit. Do not listen to any excuses and don't do any favors. I have heard some doozies and have been burnt bad. I prefer to let a unit stay vacant for an extra month to find the right tenants because it's cheaper in the end.

Jake Kucheck

Residential Real Estate Agent · Costa Mesa, CA · Member since 2008 · 1k+ posts · 380 votes

12y

This is really a much more basic question, and isn't necessarily one that is specific to CA, although southern CA is a particularly popular market to apply the premise. The question you are really asking is "does the market I am physically located in bear a risk/yield equilibrium in line with my investment objectives?"

There isn't any one answer to that question, because people live in lots of different places, and have lots of different investment objectives. If your goal is to get yourself a tax write-off (mortgage interest deduction) while hoping for appreciation and taking a big hit on (probably negative) cash flow, then So Cal (and OC especially) is a terrific place to start. If your goal is to maximize your Cash-On-Cash returns by acquiring low cost properties in C areas while doing as much as you can to mitigate the trials and tribulations of high turnover, crime, and unreliable property management, then you should probably start elsewhere.

If you don't know which of these strategies (or which strategy in-between these two) is the one you want to utilize, then the only thing that is clear is that both of these (and all other) markets are wrong for you. Having a game plan, finding a market that will allow your plan to be successful, and executing that plan are how you become successful.

2 Reply

DL Martin

Rental Property Investor · Cincinnati, OH · Member since 2013 · 292 posts · 280 votes

12y

Originally posted by @Sam M.: @Lena Chen Evictions do take some time in CA. My approach is to get good tenants in the first place. But if you have to evict, budget $1000 and 60 days or offer $500-1000 cash for keys. Be 100% relentless about late payments. Have the 3-day notice on their door on the 6th of the month if they do not pay. Begin the eviction process (or offer cash for keys) on the 9th if they don't pay 100% of rent and late fees.

@Sam M.

LOL!!! I have been a landlord in Riverside and San Bernardino Counties for 15 years or so. I thought that I was the only guy to offer "cash for keys." It does my eager good to know that there is someone else besides me who continues to negotiate even after the eviction has been started. Listen, I would rather pay a tenant a months rent , reminding them that they can use that money for the deposit on their next place, than to let the eviction run its course. Plus, if you pay them to move out, they wont be doing any additional damage on their way out...

I have a 4plex in Loma Linda, CA, directly adjacent to Loma Linda University and Medical Center, that I will be listing for sale next summer or sooner. The rents are $800 to $850 and I jope to get $550k for it ($138 per unit). If it doesnt sell, I will just be an absentee landlord for a few years, even though I'm not thrilled about that.

I am not wired to be an absentee landlord and I dont understand how anyone else is. How can you stand to be so far from your investment?Who empties the quarters out of the washer/dryer? Who checks the cabinets to see if they can be repaired/painted as opposed to demod and replaced? Who checks the local Lowes for yellow tag markdown laminate? Who shops for the best deal on the crane to lift your slightly used craigslist HVAC units on the roof of your building? Who looks the prospective new tenant in the eye and asks them why they are leaving the place where they live now?

I am in the rental business to make my own pockets bigger. I am not in the rental business to make a property manager's pockets bigger. My contractor buddies pockets a little bigger? Heck yes. My lawn guy's pockets a little bigger? Heck yes. My realtor buddy's pockets a little bigger? Again, heck yea.

But the month by month parasitic strangulation that property managers inevitably eventually inflict upon net income? No way.

DL

3 Reply

DL Martin

Rental Property Investor · Cincinnati, OH · Member since 2013 · 292 posts · 280 votes

12y

Originally posted by @Sam M.: @Lena Chen Evictions do take some time in CA. My approach is to get good tenants in the first place. But if you have to evict, budget $1000 and 60 days or offer $500-1000 cash for keys. Be 100% relentless about late payments. Have the 3-day notice on their door on the 6th of the month if they do not pay. Begin the eviction process (or offer cash for keys) on the 9th if they don't pay 100% of rent and late fees.

@Sam M.

LOL!!! I have been a landlord in Riverside and San Bernardino Counties for 15 years or so. I thought that I was the only guy to offer "cash for keys." It does my eager good to know that there is someone else besides me who continues to negotiate even after the eviction has been started. Listen, I would rather pay a tenant a months rent , reminding them that they can use that money for the deposit on their next place, than to let the eviction run its course. Plus, if you pay them to move out, they wont be doing any additional damage on their way out...

I have a 4plex in Loma Linda, CA, directly adjacent to Loma Linda University and Medical Center, that I will be listing for sale next summer or sooner. The rents are $800 to $850 and I jope to get $550k for it ($138 per unit). If it doesnt sell, I will just be an absentee landlord for a few years, even though I'm not thrilled about that.

I am not wired to be an absentee landlord and I dont understand how anyone else is. How can you stand to be so far from your investment?Who empties the quarters out of the washer/dryer? Who checks the cabinets to see if they can be repaired/painted as opposed to demod and replaced? Who checks the local Lowes for yellow tag markdown laminate? Who shops for the best deal on the crane to lift your slightly used craigslist HVAC units on the roof of your building? Who looks the prospective new tenant in the eye and asks them why they are leaving the place where they live now?

I am in the rental business to make my own pockets bigger. I am not in the rental business to make a property manager's pockets bigger. My contractor buddies pockets a little bigger? Heck yes. My lawn guy's pockets a little bigger? Heck yes. My realtor buddy's pockets a little bigger? Again, heck yea.

But the month by month parasitic strangulation that property managers inevitably eventually inflict upon net income? No way.

DL

3 Reply

OP

Investor · Redlands, CA · Member since 2013 · 177 posts · 76 votes

12y

@DL Martin said, I guess its about what I'm trying to accomplish. I was trying to accomplish cashflow close to home, I think I may need to reconsider my goals!

Anyway, Loma Linda is a great place DL... that is actually where I got my doctorate, its surrounded by a lot of bad though. If I was closer I would offer to manage it for you just to learn about landlording. Anyway, good luck!

Chuck W.

Real Estate Investor · salem, OR · Member since 2013 · 105 posts · 32 votes

12y

Bakersfield is another area you might look at. They get big swings in values and when things heat up in Los Angeles, Bakersfield benefits. It does it a bit hot in the summer !