California investment strategy

[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

[Dan H.]

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