California investment strategy

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

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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Matt Bishop
Rental Property Investor · Dallas, TX · Member since 2020 · 161 posts · 88 votes
4y
@Kit Elliott, it seems like the wealthiest people, the ones who pay the taxes are leaving California and the only ones left will be the ones who rely on government assistance and public housing. I don't see how this could work, long term.
1 Reply
Kit Elliott
OP
Real Estate Agent · Monterey, CA · Member since 2022 · 48 posts · 23 votes
4y
Quote from @Matt Bishop:

@Kit Elliott, it seems like the wealthiest people, the ones who pay the taxes are leaving California and the only ones left will be the ones who rely on government assistance and public housing. I don't see how this could work, long term.
I tend to think the window to own property is getting smaller by the year. Also, I think that in the near future, governments will give a type of rental stimulus everymonth to renters in order to pay their landlords. The alternative would be confiscation of private property and I just don't see that happen but who knows.
Meanwhile in my marker we have a lot of cash buyers coming from Sillicon Valley who've been given permission from their respective tech employers to work remotely. So of course they get out as fast as they can to small town communities paying over 100% asking price, all cash and no contingencies. You can imagine what's that done to home values.
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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

6 Reply
John WilliamsBusiness Member
Property Manager · Clarksville, TN · Member since 2018 · 443 posts · 210 votes
4y
Many folks in more expensive markets like California are looking out of state. In my market, for example, there are still opportunities for cash flow and appreciation in traditional buy & hold properties!
[email protected]931-272-3065
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Bruce WoodruffPro Member
Contractor/Investor/Consultant · San Diego / Phoenix · Member since 2021 · 12k+ posts · 15k+ votes
4y
@Kit Elliott Not trying to be funny here, but seriously, for LOT of investors I know, their investment strategy is to leave California and take their dollars elsewhere.....
2 Reply
Ethan Hanes
Real Estate Agent · Westlake Village, CA · Member since 2021 · 64 posts · 41 votes
4y
Quote from @Kit Elliott:

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.

Oh that’s awesome! It’s so hard to find good deals on fourplexes. Wish you the best in this transaction! I do transactions of 5+ units, so if you are ever thinking of exchanging, message me! I can help ya out.
1 Reply
Jay C.
Walnut Creek, CA · Member since 2018 · 40 posts · 29 votes
4y
If you need a job you can flip. If you have money then buy hold and get rich. I am a Bay Area investor and agent happy to chat, feel free to PM.
1 Reply
Jordan MoorheadBusiness Member
Real Estate Agent · Austin, TX · Member since 2015 · 5k+ posts · 3k+ votes
4y
Why not invest outside of CA?
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Kit Elliott
OP
Real Estate Agent · Monterey, CA · Member since 2022 · 48 posts · 23 votes
4y
Quote from @Bruce Woodruff:

@Kit Elliott Not trying to be funny here, but seriously, for LOT of investors I know, their investment strategy is to leave California and take their dollars elsewhere.....
For those who are investing in CA, I wonder who they are? Becasue I see a a lot of flips going on around here. Maybe big institutional investors who can afford to not make money the first several years?
1 Reply
Bruce WoodruffPro Member
Contractor/Investor/Consultant · San Diego / Phoenix · Member since 2021 · 12k+ posts · 15k+ votes
4y
Quote from @Kit Elliott:

Quote from @Bruce Woodruff:

@Kit Elliott Not trying to be funny here, but seriously, for LOT of investors I know, their investment strategy is to leave California and take their dollars elsewhere.....
For those who are investing in CA, I wonder who they are? Becasue I see a a lot of flips going on around here. Maybe big institutional investors who can afford to not make money the first several years?

Oh, there will always be lots of people with lots of money in Cali....
0 Reply
Darius Ogloza
Investor · Marin County California · Member since 2018 · 1k+ posts · 2k+ votes
4y
We invest in California. We are a small team of three couples. HML-backed flips in our part of California have been making 45%-75% COC returns in 8-10 months since 2019. There's plenty of folks out here like us.

@Kit Elliott
4 Reply
Carlos Ptriawan
Member since 2019 · 7k+ posts · 4k+ votes
4y
Quote from @Darius Ogloza:

We invest in California. We are a small team of three couples. HML-backed flips in our part of California have been making 45%-75% COC returns in 8-10 months since 2019. There's plenty of folks out here like us.

@Kit Elliott

Let me know if I can join :)
0 Reply
Carlos Ptriawan
Member since 2019 · 7k+ posts · 4k+ votes
4y
Quote from @Jordan Moorhead:

Why not invest outside of CA?

Investing in Bay Area/LA is always the best money-wise.
Typical inflation is around 3%. House outside CA doesn't appreciate that much relatively like CA.

Smoothed appreciation is like 6.875% yoy over here, other than double the inflation rate, it's also the highest appreciation nationwide in dollar terms.

Folks selling cashflow in OOS can do CF because the smoothed appreciation is linear or below inflation rate.
1 Reply
Darius Ogloza
Investor · Marin County California · Member since 2018 · 1k+ posts · 2k+ votes
4y
@Carlos Ptriawan
In the final analysis, there's only so many slices in a pie!
BTW: I look forward to your posts as they contain strong insights
1 Reply
Kit Elliott
OP
Real Estate Agent · Monterey, CA · Member since 2022 · 48 posts · 23 votes
4y
Quote from @Jordan Moorhead:

Why not invest outside of CA?

I agree. I'm also looking into Omaha, NE right now.
2 Reply
Andrew SyriosPro Member
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Residential Real Estate Investor · Kansas City, MO · Member since 2014 · 10k+ posts · 5k+ votes
4y
From what I can see from afar, it's not so much that cash flow isn't favored in California, just that it's almost impossible to have a property cash flow very well there unless you don't have a loan.
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Kit Elliott
OP
Real Estate Agent · Monterey, CA · Member since 2022 · 48 posts · 23 votes
4y
@ darius ogloza
Ive determined student rentals and military housing to be good for cashflow especially if you can rent by the room.
I live near 2 military bases and I intend to cater toward those two demographics but particularly to he military because youll never have to worry about them missing rent.
0 Reply
Justin R.Pro Member
Rental Property Investor · San Anselmo · Member since 2015 · 659 posts · 600 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

This is a great question, and I continue asking myself this question constantly! I have been investing for 11 years, both in CA and out of state. I am a long tern rental investor by heart, and have been investing in 6 states (CA, GA, ME, MI, TX, IN.) I have a unique perspective on each of the US regions from my experience.
As a general rule of thumb, the hardest markets in terms of barrier to entry, also offer the greatest upside long term. For example my properties in the South, and Midwest have showed much more cash flow on paper from the beginning. Yet my balance sheet/net worth hasn't been affected much by cash flow. My balance sheet is affected predominantly by my properties in CA, and ME (the two most expensive ones in my portfolio.) This is mostly due to appreciation, prop 13 (keep property taxes from big rate hikes) and principle paydown.
People can say what they want about CA. I personally am not a fan of the politics here, but the upside cannot be argued with. It is a beautiful, vast area and there will always be demand to live and invest here.
In terms of strategy, this depends on your risk tolerance, and capital. If you had the capital to place 25% down, and not expect a return for a few years, Im confident you will make gains simply from the hold and small rent increases. Ive recently purchased 2 small apartments here in the Bay Area. They were stabilized, buy under market rent. Basically I'm breaking even, and if a large Capex item comes up I will be paying for it out of pocket. These are long term plays.
A conservative 4% annual growth on a 2m property is 50k annually. Assuming a 20% Down payment that is a 12.5 percent return on your 400k down payment not accounting for anything else.
4 Reply
Ethan Hanes
Real Estate Agent · Westlake Village, CA · Member since 2021 · 64 posts · 41 votes
4y
Quote from @Kit Elliott:

Quote from @Bruce Woodruff:

@Kit Elliott Not trying to be funny here, but seriously, for LOT of investors I know, their investment strategy is to leave California and take their dollars elsewhere.....
For those who are investing in CA, I wonder who they are? Becasue I see a a lot of flips going on around here. Maybe big institutional investors who can afford to not make money the first several years?

Yup. This is exactly right. People who invest in CA are people who have extra cash lying around and want to own real estate.
0 Reply
Paul Merriwether
Investor · Oakland, CA · Member since 2015 · 135 posts · 82 votes
4y
@Justin R. 4% appreciation is pretty low for the Bay Area. I generally calculate using 6%. In your case

that 2m investments could be valued at in

10 yr's $3,581,695.39

20 yr $6,414,270.94

30 yr $11,486,982.35

At recent appreciation rates the numbers get even more exciting!!!
0 Reply
Paul Merriwether
Investor · Oakland, CA · Member since 2015 · 135 posts · 82 votes
4y
@Ethan Hanes Extra cash??? That's true of any investment. I nice property in SAC sold for $330k.
3b, 2bth hat was renting Sec 8 with a large lot that could be split and sold off.
It could have been purchased with only approx 25% $82,500. Not bad for CA. The lot after being split could
have been sold for $90,000.
0 Reply
David Song
Real Estate Broker · Redwood City, CA · Member since 2014 · 679 posts · 888 votes
4y
Quote from @Kit Elliott:

Quote from @Bruce Woodruff:

@Kit Elliott Not trying to be funny here, but seriously, for LOT of investors I know, their investment strategy is to leave California and take their dollars elsewhere.....
For those who are investing in CA, I wonder who they are? Becasue I see a a lot of flips going on around here. Maybe big institutional investors who can afford to not make money the first several years?

I invest exclusively in CA, peninsula, east bay, modesto, fairfield, patterson, los banos, and santa cruz.
There are a lot of people investing in CA bay area. They do not appear to show up on BP much. There used to be a few bay area BPers, but most have disappeared over the years.
Bay area, IMO, is the best RE investment market in US. Although many on BP will dissagree.
I checked some OOS market like Las Vegas, columbus OH, and Houston TX. My conclusion is all those markets are inferior investment markets compared to Bay Area.
1. Their price point and cap rate are almost the same as properties in modesto to fresno area (central valley). Whereas their appreciation potential is less than central valley.
2. In Houston, TX, which I visited this April, the price to rent ratio is about the same as in bay area. In some bad neighborhood, their return might be similar to Oakland, CA. The property tax (>2%), which is also adjusted yearly based on the appraisal value, is a big problem. Their commercial properties also offer around 5-6% cap, similar to what I can get here in Hayward or central valley.
Therefore, I decided not to invest OOS, but focus in bay area and neighboring areas. Purchased 3 properties this year (self storage in Los Banos, SFR in hayward, SFR in castro valley). One more coming in Hayward (5 unit commercial).
5 Reply
Ethan Hanes
Real Estate Agent · Westlake Village, CA · Member since 2021 · 64 posts · 41 votes
4y
Quote from @Paul Merriwether:

@Ethan Hanes Extra cash??? That's true of any investment. I nice property in SAC sold for $330k.
3b, 2bth hat was renting Sec 8 with a large lot that could be split and sold off.
It could have been purchased with only approx 25% $82,500. Not bad for CA. The lot after being split could
have been sold for $90,000.
By “extra cash” I meant that it’s mainly for people who just have extra cash lying around and don’t rely on real estate investment as their main source of income. For a lot of people, it’s a place to put money for the future.
0 Reply
Darius Ogloza
Investor · Marin County California · Member since 2018 · 1k+ posts · 2k+ votes
4y
@Kit Elliott I think that's a fine strategy. We own a SFR in Davis CA just a couple of blocks from UC Davis campus. Since, 2010, it has proven to be an excellent investment.
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Kit Elliott
OP
Real Estate Agent · Monterey, CA · Member since 2022 · 48 posts · 23 votes
4y
@ Darius
I live next to several colleges and two military bases so my exit strategy is rent to students and military. Priority would be the military though since they're here for 2 years and they never miss rent.

Do you have any interest in investing in student/military housing down here in Monterey/Santa Cruz county?
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