No Cash Flow Properties in my Market (CA - OC/LA)

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No Cash Flow Properties in my Market (CA - OC/LA)

Brandon S.
Irvine, CA · Member since 2014 · 19 posts · 4 votes

Hi all,

I just met with my RE agent and surprise, surprise, based on the pre-approval that I got from our broker, I could not find any properties that I could positive cash flow with unless I put more than 20% down in "decent" neighborhoods.

For you SoCal investors out there, where alternatives are you looking at? Of course, being optimistic, I would love to just bank on the idea of appreciation but I'm a bit conservative and that just seems like a foolish gamble.

tl;dr - No cash flow properties unless I put a lot down. What other markets/investment vehicles to look at?

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Alex CraigBusiness Member
Real Estate Professional · Memphis, TN · Member since 2009 · 1k+ posts · 1k+ votes
12y

@Alison Michel Jay is right. Like any business, there are good and bad ones. Bad TK can be costly and unfortunately I have seen some really bad ones.

@Brandon S Turnkey is an option. Find a market you like and interview several Turnkey companies. There are good ones out there; you just need to find them and like them as they will be in business with you for a very long time, especially since you are looking at conventional financing. You can do a lot of due diligence on the house such as flying out there for you to get your own gut feeling, property inspections, termite inspections, CMA's and appraisals. There are several markets to invest where cash flow works; it does not always have to be a major metro area. I have properties in Memphis and Little Rock---both have treated me well. My piece of advice, pick the market, then within the market, pick your area, then pick your house. The house is the least most important part of the equation. The house can be fixed and you have control over that. The area and market you have no control over.

Good Luck!!!!

901-848-9028
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  • Matt R.
    Sherman Oaks, CA · Member since 2013 · 3k+ posts · 2k+ votes
    12y

    Hi Brandon, syndication might be your next best SoCal alternative. I am just learning myself but I am in the same local competitive boat. I feel you on the cash flow part. The appreciation in Socal is going to be tough to beat and it seems the entire investor world knows already. Syndication makes alternative sense. There is also Bakersfield , IE or other less exotic options nearby.

    Thanks,

    Matt

    1Reply
  • Alison Michel
    Real Estate Investor · Silver Spring, MD · Member since 2014 · 62 posts · 6 votes
    12y

    Hi, I'm completely new to investing but have been thinking a lot about where to buy and wrapping my head around the idea of buying where the cost-benefit makes sense, not where I think would be a cool/good place to own property. But ultimately, the point of investing is making money, so we have to just go where there's money to be made.

    0Reply
  • Mike S.
    Investor · Los Angeles , CA · Member since 2014 · 132 posts · 25 votes
    12y

    A couple other options would be section 8 as well as looking for non rent control areas/buildings with major upside in rents. It will take a lot of work to reposition these types of properties but that is a strategy that works for some investors chasing yield in So Cal.

    0Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    12y

    @Alison Michel this sentiment created the Turn Key out of state cash flow business

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    1Reply
  • Alison Michel
    Real Estate Investor · Silver Spring, MD · Member since 2014 · 62 posts · 6 votes
    12y

    @Jay Hinrichs is that a good thing?

    0Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    12y

    @Alison Michel Yes and No .. Choose wisely and you do OK get hooked up with a bad TK provider and lose all your money..

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    0Reply
  • Alex CraigBusiness Member
    Real Estate Professional · Memphis, TN · Member since 2009 · 1k+ posts · 1k+ votes
    12y

    @Alison Michel Jay is right. Like any business, there are good and bad ones. Bad TK can be costly and unfortunately I have seen some really bad ones.

    @Brandon S Turnkey is an option. Find a market you like and interview several Turnkey companies. There are good ones out there; you just need to find them and like them as they will be in business with you for a very long time, especially since you are looking at conventional financing. You can do a lot of due diligence on the house such as flying out there for you to get your own gut feeling, property inspections, termite inspections, CMA's and appraisals. There are several markets to invest where cash flow works; it does not always have to be a major metro area. I have properties in Memphis and Little Rock---both have treated me well. My piece of advice, pick the market, then within the market, pick your area, then pick your house. The house is the least most important part of the equation. The house can be fixed and you have control over that. The area and market you have no control over.

    Good Luck!!!!

    901-848-9028
    4Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    12y

    @Alison Michel I will be speaking at the FIBI meeting in manhattan Beach on the 8th of April if you can get to LA ( and who does not want to come to La) you will be able to meet with all sorts of like kind investors. I am one of 3 presenters on Out of state RE ( what to look for) financing and alternate investments.

    Podcast Guest on Show #222
    JLH Capital Partners51 Review
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    3Reply
  • Alex CraigBusiness Member
    Real Estate Professional · Memphis, TN · Member since 2009 · 1k+ posts · 1k+ votes
    12y

    @Jay Hinrichs Love Manhattan beach. Love The Kettle for Breakfast.

    901-848-9028
    0Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    12y

    @Alex Craig will be spending a few days there I have meetings with RM and JR

    along with my friends at FIBI...

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    JLH Capital Partners51 Review
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    0Reply
  • Ali Boone
    Real Estate Coach · Venice Beach, CA · Member since 2012 · 6k+ posts · 3k+ votes
    12y

    I live in LA and only buy out-of-state properties because they are the only way to get cash flow. Banking on appreciation, definitely not. Ask all the speculators how 2009 treated them.

    There are lots of ways. Don't feel bad, we are all stuck in the same boat out here unfortunately.

    1Reply
  • Engelo RumoraBusiness Member
    Investor · Toledo, OH · Member since 2013 · 4k+ posts · 2k+ votes
    12y

    @Brandon S.

    The East and West coast markets are very similar to the Australian market.

    Very difficult to get cashflow unless a substantial deposit is put down.

    There are good deals in every location tho but most of the above mentioned areas I believe it will need to be more manufactured with buying something very run down and very cheap and doing a complete overhaul.

    I have done something similar in Australia where the numbers make absolutely no sense when it come to cashflow properties.

    Thanks

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    1Reply
  • James Wise
    Real Estate Broker · Cleveland Dayton Cincinnati Toledo Columbus & Akron, OH · Member since 2013 · 30k+ posts · 20k+ votes
    12y

    Lots of investors in your boat investing in the midwest

    @brandon S

    0Reply
  • Engelo RumoraBusiness Member
    Investor · Toledo, OH · Member since 2013 · 4k+ posts · 2k+ votes
    12y
    Originally posted by @James Wise:
    Lots of investors in your boat investing in the midwest

    @brandon S

    Definitely some great opportunities in the Midwest.

    Thanks

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    0Reply
  • Dawn AnastasiPro Member
    Rental Property Investor · Milwaukee, WI · Member since 2013 · 6k+ posts · 4k+ votes
    12y

    If you want a return on your money, you could invest in REITs or do private lending. If you want to invest in properties, you can invest out of state/area, either in turnkeys or buying non-turnkey property.

    Podcast Guest on Show #29
    1Reply
  • Brandon S.
    OP
    Irvine, CA · Member since 2014 · 19 posts · 4 votes
    12y

    Thank you everyone for the overwhelming response and tips!

    Just to summarize,

    Direct Investment Alternatives:

    • Go out-of-this-market:
      • TK properties with a reputable firm (e.g., mid-west)
    • If I stay in this market, go the less-trodden path
      • Find a "fixer" and put some "sweat equity" into the home to increase rents or possibly even flip the thing

    Indirect Investment Alternatives:

    • Real Estate Investment Trusts
    • Become a hard-money lender
    • Possibly buy-up mortgage notes

    @Mike S.

    0Reply
  • Marco Santarelli
    Specialist · Orange County, CA · Member since 2008 · 2k+ posts · 623 votes
    12y

    Hi @Brandon S.

    Welcome to BiggerPockets! Nice to see another neighbor.

    I have a trademark saying, "Live where you want. Invest where it makes sense!" You probably love living in SoCal/OC as much as I do but realize that it's very very difficult to find good deals that produce a good rate of return. And that's aside from the high purchase prices, low rent-to-value ratios, and *tenant* friendly laws here. Need I say more!?

    Your summary of investment options above is great. Now you just need to decide on the investment strategy that will help you meet your goals.

    Personally, if you're looking to buy-and-hold income-producing properties, I would seriously consider prudent properties outside of California. There are many great markets that I've identified which offer fantastic investment opportunities. We advise our client's that it's the first place to start. (See Rule #6 of my 10 Rules of Successful Real Estate Investing)

    Last, but not least, do NOT "bank on the idea of appreciation" as you mentioned. The equity in your property will grow over time -- more in some markets than others. But your investment should make sense the day you buy it with positive cash flow and a good rate of return. Appreciation should NOT be the primary reason you invest in real estate. It will happen in the right markets, but leading with appreciation as your primary criteria can be defined as 'speculation'.

    Continued success!

    0Reply
  • Jake Kucheck
    Residential Real Estate Agent · Costa Mesa, CA · Member since 2008 · 1k+ posts · 380 votes
    12y

    Brandon,

    Need to tweak your thinking a bit on the "no cash flow unless I put a lot down".

    Properties produce a certain amount of yield, regardless of how you choose to finance them. In its simplest form, this is NOI/Aggregated Cost, and is referred to as cap rate. Now, cap rates are relative, as a 6 cap is good for office buildings in A markets, but terrible for multi-family in C markets. So, there's a lot more to the equation, and you have to analyze each deal in its own context (asset type, market type, project type, etc).

    What doesn't matter, though, is how much you put down. That doesn't change the property or its context at all. It does change the cash that goes into (or gets deducted from) your bank account, but it doesn't change the fundamentals of the property.

    Circling back to the main point of your post- you can find markets in CA that generate decent yields, and if you do your homework, you can buy properties that outperform those markets. But, you're also giving up part of the HPA component by going after these properties that provide higher yields. It's not quite a zero sum game, but its close. I will say that you will have a better combination of cash flow and appreciation in the IE and Bakersfield markets than you will in OC, because OC is so out of whack with price/rent ratios that you would need massive appreciation to make up for the yield you are losing out on.

    To give you a concrete example- our Columbus, OH purchases have averaged $31,500 in aggregated cost for $675/mo in gross rent. In Orange County terms, that would be like being able to buy a $315,000 home (which I guess would be an old, 1500 Square foot SFR in Santa Ana/Anaheim) that rented for $6,750/mo. If you find one of those... you should definitely buy it :)

    1Reply
  • Brandon S.
    OP
    Irvine, CA · Member since 2014 · 19 posts · 4 votes
    12y

    @Marco Santarelli - great advice. I completely agree with your thoughts on 'banking on appreciation.' Like @Ali Boone said, just ask the speculators in 2009 how they are feeling. I think the only time you can possibly become a speculator is when you have already reached your wealth-buliding number and that kind of risk is simply because you literally can afford to. That's probably why OC price-to-rent ratios are all off since there are so many people with great wealth here.

    @Jake Kucheck - thanks for your thoughts! I totally see what you mean but I was referring directly to the LA/OC markets and particularly residential properties with conventional financing (sorry I wasn't clear there). If I happen to find a property that brings in $6750/month in rent, I will most definitely be buying that! :)

    0Reply
  • Kimberly T.
    Investor · Colorado Springs CO · Member since 2014 · 535 posts · 253 votes
    12y

    We own a triplex here in OC and a couple fourplexes in AZ. We bought the triplex in 2010, basically right at the bottom of the market around here, so it is cash flow positive, but not as good of a ROI as our AZ properties (which we bought in the last 2.5 years).

    Since the Phoenix area has appreciated so much lately, there's not that much there that makes sense any more (though it's still better than SoCal), so we are now considering buying in other states (I'm just starting to research, so we don't have any particular markets in mind yet, except that we want to buy in areas that are at least relatively landlord-friendly). We want cash flow, and we just can't find much (if any) of that here in SoCal or AZ any more.

    You certainly don't have to buy from a turnkey provider if you buy out of state, although I'm not saying you shouldn't. Just be aware that you are likely perfectly capable of finding cash flow positive deals that are in decent shape without a turnkey company having fixed it up for you.

    I grew up in Riverside, but I don't know if there numbers there still make sense, or if they have ridden the coattails of the rest of CA upwards to the point of not being cash flow positive. Nothing wrong with buying there (I'd probably avoid San Bernardino as a whole), I just don't know how the numbers look, since we aren't looking to buy in CA any more (CA is not a landlord-friendly state).

    0Reply
  • Matt R.
    Sherman Oaks, CA · Member since 2013 · 3k+ posts · 2k+ votes
    12y

    Brandon, the folks who bought SOCAL properties in 2009/10 are sitting on huge appreciations gains in nearly every inch SoCal. Some may even be at 100%+. The same could be said for Phoenix and Vegas. I have not seen any contrary data as 2009 was officially the bottom of SoCal markets.

    Thanks again,

    Matt

    0Reply
  • Engelo RumoraBusiness Member
    Investor · Toledo, OH · Member since 2013 · 4k+ posts · 2k+ votes
    12y
    Originally posted by @Marco Santarelli:
    Hi @Brandon S.

    Welcome to BiggerPockets! Nice to see another neighbor.

    I have a trademark saying, "Live where you want. Invest where it makes sense!" You probably love living in SoCal/OC as much as I do but realize that it's very very difficult to find good deals that produce a good rate of return. And that's aside from the high purchase prices, low rent-to-value ratios, and *tenant* friendly laws here. Need I say more!?

    Your summary of investment options above is great. Now you just need to decide on the investment strategy that will help you meet your goals.

    Personally, if you're looking to buy-and-hold income-producing properties, I would seriously consider prudent properties outside of California. There are many great markets that I've identified which offer fantastic investment opportunities. We advise our client's that it's the first place to start. (See Rule #6 of my 10 Rules of Successful Real Estate Investing)

    Last, but not least, do NOT "bank on the idea of appreciation" as you mentioned. The equity in your property will grow over time -- more in some markets than others. But your investment should make sense the day you buy it with positive cash flow and a good rate of return. Appreciation should NOT be the primary reason you invest in real estate. It will happen in the right markets, but leading with appreciation as your primary criteria can be defined as 'speculation'.

    Continued success!

    Hey Marco,

    Great words above.

    "Hoping" a property will go up in value is not a strategy.

    Thanks

    Podcast Guest on Show #89
    Oz Realty4.5369 Reviews
    WebsiteView Page
    1Reply
  • Karen MargraveBusiness Member
    Moderator
    Realtor, General Contractor, and Developer · Redding, CA · Member since 2009 · 7k+ posts · 4k+ votes
    12y

    @Brandon S. There's so many factors to be considered when purchasing property. The great things about O.C. specifically are:

    • Very low unemployment rate (4-5%)
    • Broad based economy
    • High average household incomes (means qualified buyers/tenants)
    • High demand for properties (helps drive up appreciation)
    • Perfect year round weather (draws tourists all year)
    • The ocean!
    • Amusement parks, Major sports teams, Cultural events, etc.
    • World class universities and medical care
    • Transportation hub serviced by every major airline
    • Lowest crime rates in the country

    All of those things help properties maintain value, and keep the demand for real estate strong. When looking at other areas, you want to be sure to look at the "quality of life" issues, as well as all of the economic factors. A house that's super cheap doesn't do you any good if a tenant can't pay the rent to cover your expenses.

    1Reply
  • Matt R.
    Sherman Oaks, CA · Member since 2013 · 3k+ posts · 2k+ votes
    12y

    I agree with the above advice except that ignoring appreciation factors is not normally how one would invest. That is not to bank on appreciation but one should factor appreciation or depreciation into any investment. If your investments don't appreciate that is traditionally a warning sign to sell or adjust.

    Thanks,

    Matt

    0Reply
  • Brandon S.
    OP
    Irvine, CA · Member since 2014 · 19 posts · 4 votes
    12y

    @Matt R. - great thoughts. Can't get the returns you want without exposing yourself to some types of risk.

    @Karen Margrave - great points as well. There is a reason why I choose to live in such an expensive area. I LOVE IT HERE!

    @Kimberly T. - thanks for sharing your experiences. Would love to hear more about your experiences on venturing into different markets without a TK provider!

    0Reply
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