Hi All, I'm new to BP.  I've lived in SoCal my entire life, and don't plan on changing it.  My wife and I are aggressive investors by nature, and we want to take it to the next level.  We have some nice assets that I want to leverage OR sell, then upsize our investments, then turn them into my full-time job (and our new home).

This is what we have:

1) We own a SFR outright (sell around $430k OR borrow $300k against it)

2) Our primary residence (make $160k if we sell OR borrow $60k against it)

3) Own a small tree service business

4) Residential development site (that $ is tied up for a couple years)

After getting mortgage pre-approvals, running scenarios and numbers, I realize I have around $400,000 to play with.  I want to make that my full-time job.  I figured 3 possibilities:

First Thought: sell both SFR's and aim at purchasing 2-3 4plexes in our area in need for some beautification (preferrably north orange county (Brea, La Habra, Fullerton, Placentia, Yorba Linda, etc)).

Second Thought: borrow against both properties, and find 2 mirroring triplexes (or 4plexes) in need of some help. I figured this would be a 6-plex and I can avoid a commercial loan (higher interest). In addition, I'll have both SFR's to rent out, and cash-flow nicely. I do realize that this plan may require me to sell SFR's, but if I can hold on to them, I'd be better off in the long run.

Third Thought: ask BP!!!!!!

If all goes well, my plan is to gift my tree business to my brother, then just pay attention to my REI.

Hi @Daniel Siapin  

That all sounds very exciting! I helped a client buy a couple 4plexes in Orange County last year, one in the city of Orange and one in Anaheim. It took about 10 months of searching before we were able to find great deals. Amidst all of that searching I became very familiar with both the current prices and operating costs of 4plexes in North Orange County. If you'd like more information on the numbers to help you make your decision let me know. 

@Daniel Siapin  Have you calculated what your cash on cash returns are going to be for these rental strategies? Is this going to be enough to pay the bills so that you can be full time?

I'd really like to see your numbers on these since I have doubts that you'd be able to make enough on the multi family properties in the areas you're talking about. Orange County properties are in high demand and you generally get smaller returns on rental properties vs San Bernardino or Riverside Counties.

We're you planning to "house hack" one of the plexes? That is, were you planning to live in one of the units and rent out the others?

I'm a believer in thinking about a personal residence differently than your investment properties. Everybody needs a place to live and it's ok that your lifestyle choices trump investment considerations when it comes to your house. Since you've mentioned that you and your wife are aggressive investors, I'd suggest buying 4 plexes out in San Bernardino. You get more bang for your buck i.e. more rental income for the same amount of money invested. Plus, those areas haven't recovered as much in price appreciation, IMO, so you'll have more upside potential.

If you and your wife don't want to move out to San Berdoo, consider buying your "house hack" plex in the area you want to live in (North OC) and buy the rest of your rentals in San Bernardino or Riverside. 

I definitely agree with @Andreas Mirza  

In general, people who dream of house hacking in Orange County tend to make incorrect assumptions of their potential for cash flow. I have not come across even one multifamily property in Orange County that a person could cash flow in while occupying one of the units. 

It's a little exciting, but I know it's a long process, (hence your 10 months turnaround).

You mentioned "great deals", what do you use to identify a great deal?  Initially I'm okay with a junker and vacancies.  That gives me the opportunity to get in and add some sweat equity; I'm pretty handy; what I don't know, I figure out how to do it myself (or I have lots of contractor friends).  Also if a property has some relatively high operational expenses, I may be able to bring that down by managing/maintaining/improving everything myself.

Sooooo, what do you consider a "great deal"?

So you want to leverage $400k and live off it...

$400k will leverage to $1.6M of property at 75% LTV (assuming you have the W2 income to back it all up). Assuming you can buy 2% properties in California, that would generate $384,000 a year in rent. So if we take the 50% rule, you're down to $192,000 for Operating Income, pay your mortgage payment of $6,080 a month (4.5% interest) and you're working off just under $120,000 a year... doing the PM yourself will add $38,400 back in giving you about $158k a year to live off.

Is that a full time job for you in SoCal?

I think your biggest problem is that you won't be finding 2% properties, you'll be lucky to find 1.5% properties... and probably well below that.  At 1.5% you'd be at $288,000 GOI putting your cash flow at $71,037 plus your $28,800 from self managing would be about $100k... things quickly go down hill based on the numbers.

@Nathan Emmert you can't even find 1% properties in OC.  You could barely even find them a few years ago when things were bad.

@Daniel Siapin  , while I admire your can-do attitude, I strongly encourage you to do some research on local rentals and returns before you jump in feet first.  Prices have come up significantly in the last couple years, and from the numbers I've seen, you'd be lucky to break even, even if you self-manage and do the repairs yourself.  We bought a triplex in Orange in 2010 (around the bottom of the market), and we make an ok return, nothing fantastic, just ok.  However, we self-manage and do most repairs and work ourselves.  That property is now worth about 50% more than we paid for it back then (we bought it for upper-$400k's, and it's worth mid-$700k's now), so if anyone bought it at the current value, they'd be losing money.

I agree with the suggestion of looking at the Inland Empire, I think you can probably get better returns there.  I grew up in Riverside, and my parents even owned a fourplex there before they sold everything and retired out of state, so there are definitely good areas to buy in (good areas = non-scary neighborhoods).  Since buying our Orange triplex, my husband and I have actually been buying only out of state (AZ and CO) because the returns were better (even with a PM) and those states are much more landlord-friendly than CA.  That's another option I would encourage you to consider.

You're not likely to find anything over 1% in Orange County.  In fact, the typical retail price for multis is about 0.5%, which leads to $1,000-2,000 negative cashflow under Nathan's scenario.  Obviously, there are still some deals that can be had with a little effort.  They are going to be mostly in the rougher areas of Santa Ana, Anaheim, and Stanton from what I've seen, so you have to decide if you can manage in a higher crime, low income area.

@Clint Kreider  Do you know what ratios your client achieved?

I have to agree the better rental markets are in Riverside and San Bernardino counties with many properties exceeding 1% and some even hitting 2%.

@Andreas Mirza   (did I put your name right?)

Early on in our planning, my wife gave me the green light on "House Hacking" for 3 years. I'm not too worried about cash-flowing on owner-occupy, since I'm definitely NOT cash-flowing on our current residence right now!! In addition, I can rehab as much as we want and get the write-offs (not to mention depreciation/interest tax savings!).  

Cash-on-cash is going to be dependent on several things, nothing I can pin down without an exact property I'm looking at.

I have been reluctantly entertaining the idea of investing in the IE, for exactly what you've been mentioning.  You might have a good idea in that.

@Nathan Emmert  I wouldn't even dream of getting any 2% deals here!!

@Kimberly T.  Things may be a little more difficult managing myself driving out to the IE every day.  Someone mentioned buying NOC and Inland Empire.  Maybe I ought to chew on that.

I'll investigate and report back if I find anything hitting 2% in the IE.

Monthly averages: 800K Purchase price, 25% down

Monthly Expenses                            Monthly Revenue

Mortgage         2952                          Rent        5250

Tax                   815                            Laundry   75

Insurance         120                             Other

Gardening        60

Repairs             200

Trash                160

Water/Sewer    150

Electric              60

Gas

Total:              4517                              Total:    5325

These are monthly estimates on a 4plex in North Orange County. A client of mine bought a 3/2,2/2,2/2,2/2 in Orange and a 3/2,2/1,2/1,1/1 in Anaheim. They both were purchased in below average condition with solid upside in rent.

He put 25% down on each, and should cash flow $600-800/month initially with upside to cash flow $1600-1800/ month once units are updated and new tenants are found. Of course, this will require more cash.

For this type of investment in this area these are "great" deals with solid long term potential. My client plans to hold onto them for a long time.

Hello @Daniel Siapin My brokerage office is in downtown San Bernardino. If you are looking for properties online I doubt you will be able to find a 4plexes at 2%, even in San Bernardino. To find the 2% rule in the Inland Empire you'll have to do mailers and make the deal happen off-market. No agent is going to put a 2% deal on the MLS. Just a true fact. Even if they did you'll be bidding against 10+ other bidders. Right now 1% is common on the MLS. If you plan to invest in the I.E. let me know. If you have cash there are other ways to get to that 2% rule.

I would agree if he is cash flowing then he got a great deal.  Rents are also increasing organically as the job market improves and entry level homes become less affordable, so he will benefit from that growth in terms of cash flow and appreciation over the long run.

@Clint Kreider   is a multifamily wizard... 

But if it was me, i'd sell the rental (or refi it out), pay off principle residence, and then buy awesome rentals for the rest of my life

Originally posted by @William Larsen:

@Clint Kreider   is a multifamily wizard... 

I don't know that I agree with that. His numbers don't account for vacancy, which is bound to happen. If you assume 7% vacancy (totally reasonable), then his monthly profit drops to about $430/month, or $5,160/year. With 25% down and assuming $5k for closing costs, that's $205k down, just to make $5k a year. That's a 2.5% ROI, which isn't worth the risk in my book.

Oh, and he's also not setting aside any money for CapEx, which is bound to bite him in the butt since he plans to hold onto the properties long-term.

That low ROI, coupled with the tenant-friendly stance of CA, is why we no longer buy rentals in CA.

But if you're interested in those kinds of deals, it looks like they can still be had.  Just found this after a quick search online, pretty comparable to the deal mentioned above:

https://www.redfin.com/CA/Anaheim/310-E-Wakefield-Ave-92802/home/3689152

@daniel 

@Daniel Siapin  what are your goals and what aspect of real estate do you like most? That would drive my decision on what to do next if I were you. 

@Kimberly T.  I am not sure what you are disagreeing with. The only claim I made was "For this type of investment (multifamily), in this area (north O.C.), these are "great" deals with solid long term potential". I am only comparing it to other deals of the same type and in the same location. Of course, we all have different objectives and ideas about what makes a good deal. Clearly these deals are not for you, but the best ones are pretty highly contested when they are listed. 

I would be comfortable cutting your vacancy estimate in half. In this area vacancies are very rare, and if they do occur they are very easy to fill. I know this from speaking to many owners of property like this.

@Clint Kreider  She doesn't think you're a wizard

@William Larsen Well, that's between me and Dumbledore