Rental Property Investor · Santa Barbara, CA · Member since 2015 · 78 posts · 34 votes
I'm a in a great spot, yet somewhat stagnant. Like many others here I feel the market is pretty expensive right now and that a correction is near. I own a small house in Santa Barbara, CA that now has about .5 mil of equity. Currently, the cyclical field I work in is at the bottom of it's downturn, this makes me fairly cautious about leveraging myself too any great extent. I'd like to continue building my wealth. I'm interested what the experienced investors here have to say. No sales pitches please.
Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes
10y
@Conrad Metzenberg have you ever owned or operated rental properties in the past? I am not sure I would recommend you to leverage your home to buy out-of-state rental property as a first time buyer. I would save up for the down payment and buy a SFH in a stable market. Find a home in the $100K range and put $20K down on it. Look for 3 bedroom, 2 bath. Beware that many CA investors find properties out of state and have problems. They come on BP all the time with their troubles. Usually they don't go to look at the property. They forget that other parts of the country get rain, flooding, snow, cold weather, etc. They buy turn-key with a crap tenant in place that is nothing but trouble. They burn through property managers who just take advantage of them. If you are willing to work through all this, then move ahead. Also, I would be less focused on an LLC and more focused on finding the right property and saving up money. Unless you are extremely wealthy, the LLC is more advanced than a beginning investor needs to worry about.
Santa Barbara, CA · Member since 2016 · 5 posts · 1 vote
10y
Hey Conrad,
I'm not an expert by any means, but I am an aspiring buy-and-hold investor here in SB. I concluded almost immediately that the SoCal market is no place for a budding investor (CA tenants rights are unfavorable to landlords, and even these rents can't net you a solid CoCROI).
Have you considered looking outside your area for continued growth in real estate?
I've been following the wisdom of many podcast guests to look outside my area. In particular, I'm looking into the midwest markets. Looking around online (zillow, loopnet, nextdoor), I'm realizing there are many good neighborhoods out there that are receptive to remote investing. The traditional wisdom for buy-and-hold seems to be Indianapolis, but other markets (Milwaukee, for example) seem quite favorable as well.
Do you have a HELOC set up to tap that equity? It would be nice to have that set up in advance of a real estate crash or a drying up of money from the banks. Huntington will lend 95% LTV on owner occupied property at the moment. You might still get a haircut if things get really bad, but at least you'd be ready to jump on the deals if they appear. I'm in Indy and invest here, but a lot of out of town investors get burned in my area. Don't believe everything that the brokers tell you! Good luck....
Real Estate Entrepreneur · Mid West, East Coast · Member since 2015 · 3k+ posts · 1k+ votes
10y
@Conrad Metzenberg as @Louise A. has said, I'd go the HELOC route so that as Louise mentioned when an opportunity arises you'll be in position to act. Unless you already have a few 100K tucked to the side...The money is cheap and I'm not sure what Huntington's terms are but Capital One does sub 90% LTV @ sub 5%, 30 Amort, initial 10 years are interest only and last 20 years P&I. Don't see how you can go wrong with a deal like that. It will cost you a hard inquiry on your credit report is all. Once you have the funds ready let me introduce you to the Mid-West where a 20%+ return on investment is not uncommon.
Rental Property Investor · Santa Barbara, CA · Member since 2015 · 78 posts · 34 votes
10y
I've had a heloc before, really liked it. If i was buying property through an LLC could i still use my heloc or would this cause a legal issue for the LLC for commingling of assets?
I've had a heloc before, really liked it. If i was buying property through an LLC could i still use my heloc or would this cause a legal issue for the LLC for commingling of assets?
It shouldn't cause any issues - I do it all the time.
Of course, consult your tax professional to confirm!
Investor · Roseville, CA · Member since 2015 · 35 posts · 20 votes
10y
@Conrad Metzenberg Consult a tax professional in the state you're investing, but using a HELoC through your LLC shouldn't be a problem. The LLC just keeps your personal assets protected from any liability that may arise from anything owned by your LLC. That's pretty much it. You can shove whatever cash into your LLC you want. I've done that with other businesses(non-RE) and never had a problem but it was all in CA and had my cpa approve any actions.
The only thing that I know of that gets tricky is when you deal with retirement accounts from family members. There's certain rules you need to follow or you get penalized like crazy. I don't remember all the rules off the top of my head but worth looking over since many people are looking for alternatives to the stock market at this point.
Real Estate Coach · Venice Beach, CA · Member since 2012 · 6k+ posts · 3k+ votes
10y
Not totally sure what you are asking. Are you asking about what avenues of real estate to get into, or specifics on how/where/when to get into certain ones, or.... not sure. Are you looking for monthly cash flow, somewhere you can buy a rental with minimal to no leverage, are you wanting to do something in CA or it doesn't matter...etc.
Maybe jump a little more into sharing your thoughts on what you might want to do, and you'll get more on how you might be able to do it? Or if you just want strategy ideas, those can be given too.
Rental Property Investor · Santa Barbara, CA · Member since 2015 · 78 posts · 34 votes
10y
@Ali Boone, Allow me to clarify. My goal is to build equity over immediate cashflow. I don't plan on quitting my day job anytime soon so I already have cashflow but I don't have copious amounts of time. For these reasons I feel a buy and hold philosophy with SFH's and maybe very small multi units is probably my best avenue. However I'm open to suggestion. I feel CA is too expensive right now for buy and hold, even the cheaper parts. I plan on taking advantage of the equity in my house and using leverage.
Real Estate Coach · Venice Beach, CA · Member since 2012 · 6k+ posts · 3k+ votes
10y
Gotcha. Are you thinking of out-of-state properties then? I live down in Venice and I've only bought out-of-state for all the reasons you mention. There's some really cool cash flow around...Chicago is one of my favorites. Indy, KC, Philly....all good ones. If you have $500k, that can get you 2-6 properties easily just paying cash for them, or it can get you a LOT of properties with leveraging. Lots of options. The nice thing about the cash flowing properties is if you can buy several, they help keep each other afloat during vacancy periods or repairs and such.
Rental Property Investor · Santa Barbara, CA · Member since 2015 · 78 posts · 34 votes
10y
@Ali Boone The only place I could see my self investing in CA is Bakersfield and even it looks expensive to me, but come a correction it could be really nice. I've read about many of the areas you mentioned. I'm apprehensive about investing that far away as I am very unfamiliar with the areas and that it will add cost for me to inspect my holdings. What do you think? Distance doesn't seem to disturb you. I also like "not putting all your eggs in one basket" investing philosophy.
Bakersfield, CA · Member since 2016 · 378 posts · 307 votes
10y
If it were me, I'd get some sort of equity loan (HELOC or home equity loan) on your primary residence and use it to buy a high cap rate high cash flowing rental property in Bakersfield for cash. Rental properties are cheap out here. Most of my investor clients don't have that much equity and end up getting a conventional loan to purchase rental properties, and 9 times out of 10 we lose our offer to a cash buyer, which sometimes are lower priced offers. People selling rental properties know the business much more than your typical home seller, and they prefer cash offers, even lower ones, for a lot of reasons: short escrow that gets the seller paid fast, no lender-required repairs which costs the seller money, no lender-required insurance policies that can kill the deal because it ends up being too expensive to the buyer to justify going forward with the sale, lender-required appraisal can come in low and kill the deal, etc. Basically, if you are a cash buyer looking for rental properties in Bakersfield, you are in a great position to steal deals away from conventional loan buyers for less. It's a great position to be in from an investors perspective.
Flipper/Rehabber · Lake Isabella, CA · Member since 2011 · 969 posts · 488 votes
10y
@Conrad Metzenberg , there are areas in rural Kern County that are much less expensive than Bakersfield and are still pretty close. I have rentals in the Kern River Valley. I has its own set of benefits and issues, but overall the prices are lower and nice cashflow is still possible today.
I like Kern county/bako but the numbers i'm seeing in DFW area are very appealing. What kind of cap rates are you two seeing in your areas? Bako puts me a bit more at ease as I know people who live out there to show me around and give me an unbiased lay of the land, I don't have that in DFW.
Flipper/Rehabber · Lake Isabella, CA · Member since 2011 · 969 posts · 488 votes
10y
@Conrad Metzenberg , Multi-family are almost non existant in the Kern River Valley. There are a few duplexes and triplexes around but they are rarely for sale. I buy SFH stick built homes in the 60k to 80k range that rent for $700 to $800/month. There is better cash flow with mobile homes (with land) but it can be harder to find good tenants and they generally require more maintainance.
Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes
10y
@Conrad Metzenberg have you ever owned or operated rental properties in the past? I am not sure I would recommend you to leverage your home to buy out-of-state rental property as a first time buyer. I would save up for the down payment and buy a SFH in a stable market. Find a home in the $100K range and put $20K down on it. Look for 3 bedroom, 2 bath. Beware that many CA investors find properties out of state and have problems. They come on BP all the time with their troubles. Usually they don't go to look at the property. They forget that other parts of the country get rain, flooding, snow, cold weather, etc. They buy turn-key with a crap tenant in place that is nothing but trouble. They burn through property managers who just take advantage of them. If you are willing to work through all this, then move ahead. Also, I would be less focused on an LLC and more focused on finding the right property and saving up money. Unless you are extremely wealthy, the LLC is more advanced than a beginning investor needs to worry about.
Escrow Officer · Temecula, Ca. · Member since 2016 · 418 posts · 152 votes
10y
I disagree that SoCal (and the rest of Ca) is bad investment, I have over 50 investors that I work with personally that are turning a profit all day statewide...it's about finding the diamond in the rough and where it is located. Some areas have lower profit margins but are a guarantee, while others are a lot harder to find quantity, but it will only take 1 deal to net over $500k in profit in flip or allow you to collect a decent rent.
B&H in some areas are a waste of time because the tenant pool is not the best or your have rent control issues, but there are quite a few places where renters are stabilized former homeowners that were displaced from the crash and they will pay well for the right house and not move for a while.
It's all about perspective and using that perspective in the right areas, IMHO.
It's important to remember that the times we are in now are NOTHING like the run up to the crash.
Before the crash, easy money increased the housing demand inflating values artificially.
After the crash, two factors changed radically:
First, money stopped flowing through the economy. Lending all but dried up. Housing demand hits the skids and bottomed out.
Second, as housing demand and tight money set in, home builders went out of business - some 80% of them, nationwide.
Today, we're in a housing shortage. Builders are coming back, but only very slowly - capital is hard to come by. Lending is still suffering from the post-crash knee-jerk. So, housing demand is suppressed artificially - latent demand, if uncorked, would send home prices into inter-stellar space.
Housing supply is still suppressed by the lack of building since the crash. So, prices / values are high, even in the face of suppressed demand.
It's a very different market today than it was in 2006 - ten years ago.
Rental Property Investor · Santa Barbara, CA · Member since 2015 · 78 posts · 34 votes
10y
@Shannon Wright@Account Closed, Don't get me wrong; i've got love for CA. I've built more equity owning my house in Santa Barbara than anyone I know out of state. The problem is CA comes with high price tag most of the times and comparatively low cap rates compared to other parts of the country, see here. Though where @Gene Hacker is talking about there is hope.
@David Dachtera So you don't think a correction is coming but rather a surge?
@Joe Splitrock Yes i've been a landlord before. It was more educationally gratifying that financially, but not detrimental by any means. I bought a house in San Jose CA, lived in it and fixed it up. I then rented it out and eventually sold it. I made a few bucks but learned a lot, mostly not to be skeptical of real estate agents. I'm fairly cautious and feel I can do ok out of state. But, I pick my tenants personally or i'd have someone else do it that i've picked personally. Due diligence is the name of the game.
I think you're going to see values remain high and either trail off in some places as supply slowly increases, or possibly surge if lending is loosened and pent up demand is released.
If any of the dire sooth being said about the dollar comes about, all bets are off.
Sherman Oaks, CA · Member since 2013 · 3k+ posts · 2k+ votes
10y
Not sure where the idea not to invest in Cali is what a pro does came from? That person either does not know REI history, basic math and or is trying to make a commission. Good luck with your search!