Why would anyone buy rentals in places like Santa Barbara?

16 Replies

I live here in Santa Barbara and I understand there are deals in every market. For example I could find a cash flowing deal with certain owner financing terms or master leasing but other than that you need your loans to be really paid off here to have a low enough payment to generate cash flow. So my question is why would anyone want to invest in places where the rent to market values ratios are so low?

To gamble on appreciation like many are doing in Dallas here now. It’s not a wise play & that’s why many CA investors invest in cash flow markets in the Midwest.

parking $ with appreciation mainly.  If I have $$$ from another sale... and I can buy a house in SB, get good rent (return) AND think I am going to get 10% appreciation... why  not..  but you have to have cash... AND the appreciation.

one of the reasons I came up with would be for tax reasons here in SB you get more depreciation than you do in gross rents so on paper your property would always be at a loss. Thus you can get tax free income and if you have real estate professional status you can use the losses to offset other income.

Originally posted by @Storm S. :

one of the reasons I came up with would be for tax reasons here in SB you get more depreciation than you do in gross rents so on paper your property would always be at a loss. Thus you can get tax free income and if you have real estate professional status you can use the losses to offset other income.

 Plus maybe you picked up something with a 1031 exchange and are avoiding debt.

Could be a ton of reasons.

Yup, like others have said, appreciation, 1031 exchange to lock in gains into something bigger, international money (ie. China) looking for safe havens for capital preservation with currency fluctuations and risk of government intervention. they're less concerned about ROI.

Have you tried renting in Santa Barbara ? Having lived in the community three times I know first hand it is not cheap.

I just bought my first property in SB (two homes on one lot w/ zoning potential to add a third) - I put 30% down and am going to house hack it- it is cash flowing $4-700 and will cash flow more once I rehab.

I am a 27 y/o single guy, so I don’t mind living in the house with my tenants (all around the same age). I am getting a low cash on cash return, but I am living in a house that I like for about $1-300 (where I would usually pay 1k in rent) a month. Also, I am from the area and planning on sticking around for a long time, so I like the idea of having a place here in town.

Building equity, rehabbing and increasing rent for increased cash flow, learning the ropes of property management and contracting without having to travel — a few reasons I decided to forego the cash on cash return for the time being.

However, I am interested in speaking with folks in the area about investing out of state for the next property. Now that I have this property to live in and work on slowly, I would like to put together a few smaller deals for increased cash flow.

I think most of it has to do with the demographic of the buyers. People buying in these markets aren’t looking to build a real estate business, they’re looking for a good place to park their money. These markets have a good track record of appreciation so if that’s what your looking for it’s a safe bet in the long term. Highly paid professionals that are looking for an alternative to the stock market and other financial instruments.

Four reasons to buy in established and high price markets:

1) Park extra cash

2) In it for the long term appreciation

3) Not in it for cash flow income

4) Have a lot of faith in the sustainability of the area

There was a similar debate a few weeks back about NYC. To my memory the debate ended up overwhelming favoring an investment in NYC if one had the means to do that and did not need rental income to survive.

I want to get a fourplex and house hack it I’ve been waiting for one to pop up on the market but there hasn’t been one there’s been around 3-5 triplexes that have popes up though. I might just end up doing a syndication to get an apartment complex here and raising money from reits, insurance companies and pensions

When the bottom falls out of real estate market the hardest hit were the people who leveraged hundreds of thousands of dollars on a house in hot market areas of the country thinking they will bank on appreciation and it can only go up . They found out otherwise . Entire towns were under water on their mortgage . Their house was worth far less than what they still owed and many investors lost everything overnight . It was unique climate in history and lending has obviously changed since the housing bubble Ten years ago but apparently ten years is just long enough for people to forget all the lessons that were learned back then .

Just stumbled back across this old thread and thought I’d post a quick update in favor of these high priced areas like SB now that I’ve learned a little more:

1. Cash flow has increased from $500 to $2,700 a month from a combo of rehab, utilizing garage, refinancing.

2. I’ve put about $50k in over the last couple years and a lot of sweat equity. The result is that I’ve realized forced and regular appreciation of between $150-250k depending on the appraiser— I’ve done two refi’s in the last 9 months and the appraisals were $100k different haha.

3. High bar to get in but it feels like there is not as much competition for these “small” value add deals. Probably because they don’t have the best returns from an immediate cash flow perspective. However, I think that when you factor in appreciation, zero vacancy, and ability to score big on creatively repurposed space- then high priced areas can really start to make sense. There are lots more pros and cons of course to consider.

Thank you,

Danny