California investment strategy

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General Real Estate Investing
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California investment strategy

Kit Elliott
Real Estate Agent · Monterey, CA · Member since 2022 · 48 posts · 23 votes

Hello BP community,

What strategies are people using when investing in California? It seems that cash flow is not as favored by investors over here as other strategies like appreciation or flipping. I think any strategy is doable, but which is best (particularly for luxury markets like in the Bay Area)?


- Kit

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Dan H.Pro Member
Investor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votes
4y

The reality is coastal CA has provided outstanding cash flow for the long term hold who does not refinance to extract equity.  Case Shiller has the top 3 profitable RE markets for this century are all coastal Ca cities. 

Initial cash flow historically has a poor relationship to actual cash flow.  This is not happenstance as the best initial cash flow markets are usually markets with poor appreciation outlook.  This includes the rent appreciation. 

In my market 2020 and 2021 each had average rent increase of over 20% (source ApartmentList.com).  If I purchased a unit that was cash neutral after properly allocating for all expenses at the beginning of 2020 that was renting for $2500 and had average rent increases, my rent would have increased over $1.1k/month.  Assuming mortgage is fixed and property tax is virtually fixed implies a very large percentage of the expenses are fixed.  I suspect I likely would have ~$1k of cash flow just 2 years after purchase. 

Purchases: $167k, current market rent $3700. Purchase $375k, current STR rent $13.4k average. Purchase $775k, current market rent $14.8k. purchase $302k current market rent $5.5k. Purchase $490k current market rent $9k. Purchase $390k current market rent $4.8k. Purchase $390k, market rent $4.2k. Purchase $442k, market rent $5.8k. Purchase $620k, market rent $8.5k. Does it appear there is any issue with cash flow?

Reality is these properties do not have the cash flow that may be suggested by the purchase versus rent because all except the last have been refinanced, some/most multiple times.  The initial refinance allowed the scaling.  The recent refinances have been just to leverage the money better than having high equity position on the properties.  

Do not confuse initial cash flow with actual cash flow.  

Good luck

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  • Andrew Garcia
    Lender · Charlotte, NC · Member since 2022 · 739 posts · 410 votes
    4y

    Hi @Kit Elliott, a lot of the investors that I know in CA are doing STRs.

    Obviously, the regulations are different in different jurisdictions so the Bay Area might not take too kindly to STRs.

    Others are eating cashflow losses for the appreciation play. However, that is much more neighborhood-specific.

    There are always the flippers/BRRRRers that seem to make money in any market as well.

    I know that my answer was very vague but without being a CA investor myself, I did not feel qualified to speak too much on it.

    Hope this helps!

    1Reply
  • Kit Elliott
    OP
    Real Estate Agent · Monterey, CA · Member since 2022 · 48 posts · 23 votes
    4y

    @Andrew Garcia 

    STRs seem like the way to go especially in these luxury markets along the coast of California. 

    Unfortunately the hotel industry has been successful at lobbying local governments to ban them, such as in Monterey. In the beautiful tourist haven of Monterey, STRs are illegal if they're less than 30 days.

    2Reply
  • Zachary Beach
    Specialist · Los Angeles, CA · Member since 2018 · 291 posts · 231 votes
    4y

    @Kit Elliott STR's in vacation town.

    1Reply
  • Jack Swank
    Contractor · California, CA · Member since 2020 · 32 posts · 27 votes
    4y

    STR in California are difficult with current market price and interest rates. Of course there is always a deal to be found, but I'm sticking with long term rentals.

    1Reply
  • Aj Parikh
    Rental Property Investor · Centreville, VA · Member since 2019 · 1k+ posts · 799 votes
    4y

    Hi Kit! Investing in CA is always a challenge and I have seen so many investors go out of state for investing. Feel free to reach out if that is something you want to discuss

    1Reply
  • Allan C.
    Rental Property Investor · Member since 2018 · 826 posts · 810 votes
    4y

    @Kit Elliott buy multifamily properties with rents below market and reposition the asset with some value add. Alternatively, purchase MF properties with rents close to market and eat a few years of negative cash flow.

    Either way you'll need to get a little more sophisticated with your underwriting to perform IRR analysis and not simple CoC. The high down payments and early year negative cash flows eat into investment NPV significantly.

    2Reply
  • Chris MasonPro Member
    Moderator
    Lender · CA · Member since 2015 · 9k+ posts · 10k+ votes
    4y
    Quote from @Kit Elliott:

    Hello BP community,

    What strategies are people using when investing in California? It seems that cash flow is not as favored by investors over here as other strategies like appreciation or flipping. I think any strategy is doable, but which is best (particularly for luxury markets like in the Bay Area)?


    - Kit

     You turn the dial to one extreme, and it's a warzone. High nominal cap rate, but you need that cashflow to patch the bullet holes. Very low appreciation. This isn't a super common option in California.

    Turn the dial to the other extreme, you get strong appreciation, but low/no cashflow. Stable tenants, drama free. California has a lot more stuff in this extreme. San Jose, for example. Much of Marin, and if you want to get really extreme you've got parts of LA.

    For the stuff in the middle, where the bulk of investing activity happens, and California has the same options as other places. Sacramento comes to mind.

    Prop 13 tends to reward long-term buy and hold, so many prefer to have the dial turned a little more towards appreciation in California. If you're in New Jersey or Texas, property appreciation outpacing rent hikes could actually be very bad, since now your property tax bill blew up on you (but rent didn't go up proportionally). In California, by contrast, thanks to Prop 13, that downside isn't there, so this is great news. Because of that, real estate investors in California will compromise on cashflow for appreciation (Oakland, for example), but that's a (rational) choice, nothing stops anyone from chasing pure cashflow in the Great Valley (Fresno), Foothills, or along the Oregon border (this last one is fairly rare). 

    6Reply
  • Osazee Edebiri
    Realtor · San Jose, CA · Member since 2015 · 318 posts · 154 votes
    4y
    Quote from @Kit Elliott:

    Hello BP community,

    What strategies are people using when investing in California? It seems that cash flow is not as favored by investors over here as other strategies like appreciation or flipping. I think any strategy is doable, but which is best (particularly for luxury markets like in the Bay Area)?


    - Kit

    I would say the top two in California, is Househacking and Appreciation plays. 

    In long term real estate game, California appreciation wins. 

    If you purchase a property for appreciation but don’t househacking people are leaning more to STR’s depending on what market the property is in. STR’s are favorable because they can generate more income than an LTR, however they don’t work in every market.

    Househacking, works in every market.



    4Reply
  • Marc Stevenson
    Real Estate Agent · Dallas-Fort Worth, TX · Member since 2021 · 117 posts · 69 votes
    4y

    @Kit Elliott I lived in San Diego for 40 plus years till I relocated to DFW 5 years ago. I flipped may properties in the San Diego area. It's a challenging market for sure, but not impossible. Flipping is not for the faint of heart for sure. If you're just getting into this, I would highly recommend finding a mentor that can help you as you learn. I'm currently focusing on buy and hold in Texas using the BRRRR method and am very happy with this type of investment. I wish you all the best. Happy Investing!

    1Reply
  • Gregg Watkins
    Residential Real Estate Broker · San Diego, CA · Member since 2015 · 44 posts · 27 votes
    4y

    Hi Kit,

    Many different strategies can work for investing in California. It depends on your location, experience, and your cash situation.

    I've seen numerous strategies be successful, including BRRR, housing hacking, STRs, fix and flips, multifamily value-adds, appreciation plays, ground-up construction, etc.

    Good luck!

    3Reply
  • Jason NesbittPro Member
    Flipper/Rehabber · San Jose, CA · Member since 2019 · 27 posts · 13 votes
    4y

    Hi Kit,

    We have done really well with fix'n flips in the SF Bay Area. I also work with investors who look specifically for a SFH with an ADU, or MFH. There's no way to cashflow simply off of a SFH at today's prices. There is a strategy for every market.

    1Reply
  • Paul Merriwether
    Investor · Oakland, CA · Member since 2015 · 141 posts · 82 votes
    4y

    In Bay Area it's all about appreciation. What's great about that is you can FORCE appreciation. 

    Or you can buy and hold and wait yearly for 6 -10% or more. Forcing by adding sq/ft to the home. 
    If the home you bought was $500/sqft and you add 200 sqft at $200/sqft you profit by $300/sqft 

    or $60,000 if you were to sell, potentially at $500/sqft. 

    2Reply
  • Jeremy Marquez
    Investor · Sacramento, CA · Member since 2021 · 44 posts · 15 votes
    4y

    Looking forward to connecting @Kit Elliott

    0Reply
  • Darius Ogloza
    Investor · Marin County California · Member since 2018 · 1k+ posts · 2k+ votes
    4y

    The last three years have been amazing for forced appreciation fix and flips in higher end Bay Area markets like Marin County.  Whether the numbers will still be there in the current environment remains to be seen.    

    0Reply
  • Kit Elliott
    OP
    Real Estate Agent · Monterey, CA · Member since 2022 · 48 posts · 23 votes
    4y
    Quote from @Jason Nesbitt:

    Hi Kit,

    We have done really well with fix'n flips in the SF Bay Area. I also work with investors who look specifically for a SFH with an ADU, or MFH. There's no way to cashflow simply off of a SFH at today's prices. There is a strategy for every market.


    Jason,
    I agree with you on that one. ADU's are the way to go right now especially for our market (greater Bay Area down to Monterey). I came close to landing a deal in Seaside, CA with a property selling about $200k below market value and had the space to build an ADU. I calculated those two doors as bringing in almost $4k in gross income. I keep my eyes open for more of those around here. I have a working list of similar properties around here that I'm prospecting.
    2Reply
  • Kit Elliott
    OP
    Real Estate Agent · Monterey, CA · Member since 2022 · 48 posts · 23 votes
    4y
    Quote from @Jeremy Marquez:

    Looking forward to connecting @Kit Elliott


    Definitely! I sent you a PM.
    0Reply
  • Kit Elliott
    OP
    Real Estate Agent · Monterey, CA · Member since 2022 · 48 posts · 23 votes
    4y
    Quote from @Paul Merriwether:

    In Bay Area it's all about appreciation. What's great about that is you can FORCE appreciation. 

    Or you can buy and hold and wait yearly for 6 -10% or more. Forcing by adding sq/ft to the home. 
    If the home you bought was $500/sqft and you add 200 sqft at $200/sqft you profit by $300/sqft 

    or $60,000 if you were to sell, potentially at $500/sqft. 


    Hi Paul,

    That's what I'm seeing in my local market. Investors are forcing appreciate with various value adds and the two that I see happening the most is building ADUs and adding a second story. Every week I see construction on houses to add that second story to give tenants an ocean view.

    I have my sights set on a local property that's an FSBO that I'd add a second story should I get it. The neighbors added a second story 2 years ago.
    1Reply
  • Kit Elliott
    OP
    Real Estate Agent · Monterey, CA · Member since 2022 · 48 posts · 23 votes
    4y
    Quote from @Darius Ogloza:

    The last three years have been amazing for forced appreciation fix and flips in higher end Bay Area markets like Marin County.  Whether the numbers will still be there in the current environment remains to be seen.    


    Hi Darius,

    I've seen that around my local market where investors are adding a second story because it offers an ocean view (aside from the obvious benefit of more square footage). Everyone likes that ocean view of the Monterey Bay.
    1Reply
  • Paul Merriwether
    Investor · Oakland, CA · Member since 2015 · 141 posts · 82 votes
    4y
    Quote from @Kit Elliott:
    Quote from @Paul Merriwether:

    In Bay Area it's all about appreciation. What's great about that is you can FORCE appreciation. 

    Or you can buy and hold and wait yearly for 6 -10% or more. Forcing by adding sq/ft to the home. 
    If the home you bought was $500/sqft and you add 200 sqft at $200/sqft you profit by $300/sqft 

    or $60,000 if you were to sell, potentially at $500/sqft. 


    Hi Paul,

    That's what I'm seeing in my local market. Investors are forcing appreciate with various value adds and the two that I see happening the most is building ADUs and adding a second story. Every week I see construction on houses to add that second story to give tenants an ocean view.

    I have my sights set on a local property that's an FSBO that I'd add a second story should I get it. The neighbors added a second story 2 years ago.

     Check out the value of your neighbors home vs yours. Then calculate what it will cost to get to their size. Your home might not be similar but it's all about square footage. I hope you don't have to upgrade the foundation that will really hurt the budget. :) 

    0Reply
  • Patrick DruryBusiness Member
    Real Estate Agent · Columbus, OH & Cleveland OH · Member since 2021 · 1k+ posts · 2k+ votes
    4y

    @Kit Elliott
    I have a lot of clients that do a house hack locally in California and then invest out of state in the midwest like Columbus OH for cash flow. 

    [email protected]614-412-4565
    Reafco-556 Reviews
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    1Reply
  • Carlos Ptriawan
    Member since 2019 · 7k+ posts · 4k+ votes
    4y
    Quote from @Kit Elliott:

    Hello BP community,

    What strategies are people using when investing in California? It seems that cash flow is not as favored by investors over here as other strategies like appreciation or flipping. I think any strategy is doable, but which is best (particularly for luxury markets like in the Bay Area)?


    - Kit


     The most workable strategy for individual is flipping. But flipping at the right time. 

    For large syndication. Currently the typical MF class A deal is something like this. $650k per door, $4000-$4500 rent/mo for 2 BRs.

    0Reply
  • Carlos Ptriawan
    Member since 2019 · 7k+ posts · 4k+ votes
    4y
    Quote from @Paul Merriwether:
    Quote from @Kit Elliott:
    Quote from @Paul Merriwether:

    In Bay Area it's all about appreciation. What's great about that is you can FORCE appreciation. 

    Or you can buy and hold and wait yearly for 6 -10% or more. Forcing by adding sq/ft to the home. 

    Sorry, no need to even wait yearly ; I can make 20% appreciation in just 4 months but it's all depends on the timing. Good time to invest in Bay Area is 2016-2018 ; and 2020-2021, there's that small time window that if you buy correctly and flip the right house, it's guaranteed a great result. Do not buy in Jan 2022.

    2023 could be a good year to buy if the market going down a little bit more. I noticed flipper started buying ugly house again recently.

    0Reply
  • Paul Merriwether
    Investor · Oakland, CA · Member since 2015 · 141 posts · 82 votes
    4y

    My waiting comment of 6 - 10% appreciation is about owning and doing nothing else. 

    Any time in Bay is great to buy & force appreciation. It's all about sqft added. 

    What did it cost to add those sqft. Vs what it will bring on the sale per sqft 

    0Reply
  • Ethan Hanes
    Real Estate Agent · Westlake Village, CA · Member since 2021 · 64 posts · 41 votes
    4y

    Kit, it is very very common to do STR's in the Bay area especially.

    California is an appreciation hotspot. People who invest here wait many years before selling. 

    I work primarily with multifamily properties in the San Fernando Valley. I’m not entirely sure what the Bay Area looks like, but I do know that there are thousands upon thousands of multifamily properties in the San Fernando Valley. 

    Perhaps if you are looking for a long term investment that is 99% passive, look at buying a 4+ unit property! They are fantastic for those who are looking to own real estate. 

    0Reply
  • Kit Elliott
    OP
    Real Estate Agent · Monterey, CA · Member since 2022 · 48 posts · 23 votes
    4y
    Quote from @Ethan Hanes:

    Kit, it is very very common to do STR's in the Bay area especially.

    California is an appreciation hotspot. People who invest here wait many years before selling. 

    I work primarily with multifamily properties in the San Fernando Valley. I’m not entirely sure what the Bay Area looks like, but I do know that there are thousands upon thousands of multifamily properties in the San Fernando Valley. 

    Perhaps if you are looking for a long term investment that is 99% passive, look at buying a 4+ unit property! They are fantastic for those who are looking to own real estate. 


     I agree about MF properties. I am working on a deal right now that's a house hack. A nice fourplex. Hopefully, I'll have in by Jan/Feb 2023.

    0Reply
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