Southern California Real Estate Rentals

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Southern California Real Estate Rentals

Pete Perez
Engineer/Real Estate Investor · Renton, WA · Member since 2015 · 368 posts · 120 votes

Hello All,

 I had a question regarding rentals in southern california, primarily the inland empire. I am just starting out in real estate and read a few books and decided that I'd like to start out in Buy & Hold investing. I met with an agent whom was recommended to me by a close friend. He suggested purchasing a duplex and living in it short term while renting out one of the units. He showed me several listings that cash flow just over $1000 monthly. I am meeting with a lender to see what I can get approved for. 

My question is regarding my exit strategy. Ultimately I'd like to rent this property entirely. So the agent suggested living in the property until I get married (currently engaged and date set in Nov 2016), then purchase the 2nd home under my wife's name so that we can qualify for an additional FHA loan. That home would be our primary residence. Does this sound like a viable strategy? This was my first ever meeting with an agent, so what he said makes sense in theory, but my lack of experience makes me a little worried.

Any insight or guidance is much appreciated. Thank you, Bigger Pockets Community.

1Reply
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Aaron Mazzrillo
Investor · Riverside, CA · Member since 2011 · 2k+ posts · 3k+ votes
10y
Originally posted by @Pete Perez:

Hello All,

 I had a question regarding rentals in southern california, primarily the inland empire. I am just starting out in real estate and read a few books and decided that I'd like to start out in Buy & Hold investing. I met with an agent whom was recommended to me by a close friend. He suggested purchasing a duplex and living in it short term while renting out one of the units. He showed me several listings that cash flow just over $1000 monthly. I am meeting with a lender to see what I can get approved for. 

My question is regarding my exit strategy. Ultimately I'd like to rent this property entirely. So the agent suggested living in the property until I get married (currently engaged and date set in Nov 2016), then purchase the 2nd home under my wife's name so that we can qualify for an additional FHA loan. That home would be our primary residence. Does this sound like a viable strategy? This was my first ever meeting with an agent, so what he said makes sense in theory, but my lack of experience makes me a little worried.

Any insight or guidance is much appreciated. Thank you, Bigger Pockets Community.

 Be careful listening to real estate agents and getting investment advice. We're talking about someone who wants to be in real estate in order to earn highly taxable income (commission). That is not a smart strategy. I've been investing in the IE for 10+ years. $1,000 cash flow per month at these prices? Maybe if you put 50% down. 

You might consider finding a new agent. Sounds like this one has only his/her commission check in mind. Once you press hard and make 3 copies on that loan and escrow closes, there's no going back. You'll be on the hook for that property for many years - especially with a 3.5% down FHA loan. You do realize the day you close escrow, you're officially underwater right? As in, you're upside down on your loan. You have zero equity. You're only option to sell over the next 2 years (IF we see any appreciation) is a short sale or subject to to a shark like me. It costs about 10% to sell a property so you'll be writing a check for that 6.5% if you decide you don't like the way that property fits.

Ask your agent how many rentals he/she owns. If the answer is less than 3, you're taking advice from someone with about as much knowledge as landlording as you have.

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  • Jerry Padilla
    Lender · Rochester, NY · Member since 2014 · 3k+ posts · 1k+ votes
    10y

    @Pete Perez 

    I would recommend living in the unit for a year, before trying to purchase another one so quickly. Congrats on the upcoming wedding. If they are both in your individual names and title, it may not be too much of an issue. 

    0Reply
  • David Friedman
    Property Manager · San Bernardino, CA · Member since 2014 · 473 posts · 238 votes
    10y

    That situation should be plausable assuming you can each qualify individually. If she has good income and credit as well, then it should be no problem. Maybe she should talk to a lender as well to see if she would qualify. If she does, stay the course (Keep the same job, don't take on too much debt, etc.) until November 2016 and then execute your plan.

    Where is this duplex that will cash flow $1000 per month? Are you sure you are looking at all of the costs?

    0Reply
  • Chris Reitzel
    San Diego, CA · Member since 2015 · 22 posts · 8 votes
    10y

    Is there a reason you are not just going to rent the entire thing out immediately?

    House hacking is a perfectly fine strategy. Is the $1,000 factoring in that you are living in one of the units, or is that based off renting both of the units out? $1,000 in SoCal monthly cash flow is something that comes with a lot of questions for me.

    I think in order for us to really help you decide if this route is best for you, is really more dependent on the deal, the numbers of the deal, and what your goals are with the property. For example, are you also in search of a place to live? Does this property need rehab work? How much is the rehab, if any?

    The short answer is yes, this is a viable strategy. The long answer is where your 'legwork' lies to determine if it is the right strategy for you - regardless of what we say or what your agent says.

    0Reply
  • Pete Perez
    OP
    Engineer/Real Estate Investor · Renton, WA · Member since 2015 · 368 posts · 120 votes
    10y
    Originally posted by @David Friedman:

    That situation should be plausable assuming you can each qualify individually. If she has good income and credit as well, then it should be no problem. Maybe she should talk to a lender as well to see if she would qualify. If she does, stay the course (Keep the same job, don't take on too much debt, etc.) until November 2016 and then execute your plan.

    Where is this duplex that will cash flow $1000 per month? Are you sure you are looking at all of the costs?

     David this is good to hear. I was worried that the plan wasn't attainable. We found a couple triplexes that cash valued at $1000 in Moreno Valley. I believe I misspoke in my previous post. The duplexes that were shown to me were closer to $600-800 range. But the difference in price between the duplexes and triplexes didn't seem to be that much. Most cap rates I saw today were between 3.5%-5%. In your experience does this seem normal? Thank you again for responding, David.

    0Reply
  • Pete Perez
    OP
    Engineer/Real Estate Investor · Renton, WA · Member since 2015 · 368 posts · 120 votes
    10y
    Originally posted by @Chris Reitzel:

    Is there a reason you are not just going to rent the entire thing out immediately?

    House hacking is a perfectly fine strategy. Is the $1,000 factoring in that you are living in one of the units, or is that based off renting both of the units out? $1,000 in SoCal monthly cash flow is something that comes with a lot of questions for me.

    I think in order for us to really help you decide if this route is best for you, is really more dependent on the deal, the numbers of the deal, and what your goals are with the property. For example, are you also in search of a place to live? Does this property need rehab work? How much is the rehab, if any?

    The short answer is yes, this is a viable strategy. The long answer is where your 'legwork' lies to determine if it is the right strategy for you - regardless of what we say or what your agent says.

     Chris the reason that I can't rent out the property immediately is that I don't have the 20% required for a conventional loan. Which is why the agent suggested living in one of the units for a period of time (6 months was what he recommended). The $1000 cash flow would be if I rented all the units out. I apologize for being unclear on this point. 

    For instance, we saw a property worth $280,000 and the agents calculated the monthly payment under and FHA loan to be about $1950. The current owner posts that he currently collects $3000 in rent. So without factoring in maintenance costs that gave me $1000. Part of my research will be to determine what a good estimate of maintenance costs would be in the financial model. With my lack of experience I am just unsure what that would be.

    0Reply
  • Pete Perez
    OP
    Engineer/Real Estate Investor · Renton, WA · Member since 2015 · 368 posts · 120 votes
    10y
    Originally posted by @Chris Reitzel:

    Is there a reason you are not just going to rent the entire thing out immediately?

    House hacking is a perfectly fine strategy. Is the $1,000 factoring in that you are living in one of the units, or is that based off renting both of the units out? $1,000 in SoCal monthly cash flow is something that comes with a lot of questions for me.

    I think in order for us to really help you decide if this route is best for you, is really more dependent on the deal, the numbers of the deal, and what your goals are with the property. For example, are you also in search of a place to live? Does this property need rehab work? How much is the rehab, if any?

    The short answer is yes, this is a viable strategy. The long answer is where your 'legwork' lies to determine if it is the right strategy for you - regardless of what we say or what your agent says.

     Also, Chris my fiance and I will be looking for a place to live towards the end of the year. I wanted to get a rental property under my belt at the start of this year, and purchase a second home for us to live in closet to november. I hope this clarifies the points you were raising. 

    0Reply
  • Chris Reitzel
    San Diego, CA · Member since 2015 · 22 posts · 8 votes
    10y
    Originally posted by @Pete Perez:
    Originally posted by @Chris Reitzel:

    Is there a reason you are not just going to rent the entire thing out immediately?

    House hacking is a perfectly fine strategy. Is the $1,000 factoring in that you are living in one of the units, or is that based off renting both of the units out? $1,000 in SoCal monthly cash flow is something that comes with a lot of questions for me.

    I think in order for us to really help you decide if this route is best for you, is really more dependent on the deal, the numbers of the deal, and what your goals are with the property. For example, are you also in search of a place to live? Does this property need rehab work? How much is the rehab, if any?

    The short answer is yes, this is a viable strategy. The long answer is where your 'legwork' lies to determine if it is the right strategy for you - regardless of what we say or what your agent says.

     Chris the reason that I can't rent out the property immediately is that I don't have the 20% required for a conventional loan. Which is why the agent suggested living in one of the units for a period of time (6 months was what he recommended). The $1000 cash flow would be if I rented all the units out. I apologize for being unclear on this point. 

    For instance, we saw a property worth $280,000 and the agents calculated the monthly payment under and FHA loan to be about $1950. The current owner posts that he currently collects $3000 in rent. So without factoring in maintenance costs that gave me $1000. Part of my research will be to determine what a good estimate of maintenance costs would be in the financial model. With my lack of experience I am just unsure what that would be.

     As a general rule of thumb, you should be trying to put about 50% of the income generated by the property (after the monthly loan payment), back into the property to cover expenses. So if you are figuring that the property is going to bring in about $3,000 a month and $1,950 is your monthly payment, you have $1,050 coming in and you generally want 50% of that to go back into the property to cover those expenses - so that in the event you need a large capex, the money will be there. Using that rule you are likely looking at about $500 cash flow a month for when both units are rented.

    Keep in mind though, that the 50% rule is not binding. Over time, you will be more familiar with the property to where you can scale that back if you need to/want to.

    1Reply
  • Aaron Mazzrillo
    Investor · Riverside, CA · Member since 2011 · 2k+ posts · 3k+ votes
    10y
    Originally posted by @Pete Perez:

    Hello All,

     I had a question regarding rentals in southern california, primarily the inland empire. I am just starting out in real estate and read a few books and decided that I'd like to start out in Buy & Hold investing. I met with an agent whom was recommended to me by a close friend. He suggested purchasing a duplex and living in it short term while renting out one of the units. He showed me several listings that cash flow just over $1000 monthly. I am meeting with a lender to see what I can get approved for. 

    My question is regarding my exit strategy. Ultimately I'd like to rent this property entirely. So the agent suggested living in the property until I get married (currently engaged and date set in Nov 2016), then purchase the 2nd home under my wife's name so that we can qualify for an additional FHA loan. That home would be our primary residence. Does this sound like a viable strategy? This was my first ever meeting with an agent, so what he said makes sense in theory, but my lack of experience makes me a little worried.

    Any insight or guidance is much appreciated. Thank you, Bigger Pockets Community.

     Be careful listening to real estate agents and getting investment advice. We're talking about someone who wants to be in real estate in order to earn highly taxable income (commission). That is not a smart strategy. I've been investing in the IE for 10+ years. $1,000 cash flow per month at these prices? Maybe if you put 50% down. 

    You might consider finding a new agent. Sounds like this one has only his/her commission check in mind. Once you press hard and make 3 copies on that loan and escrow closes, there's no going back. You'll be on the hook for that property for many years - especially with a 3.5% down FHA loan. You do realize the day you close escrow, you're officially underwater right? As in, you're upside down on your loan. You have zero equity. You're only option to sell over the next 2 years (IF we see any appreciation) is a short sale or subject to to a shark like me. It costs about 10% to sell a property so you'll be writing a check for that 6.5% if you decide you don't like the way that property fits.

    Ask your agent how many rentals he/she owns. If the answer is less than 3, you're taking advice from someone with about as much knowledge as landlording as you have.

    2Reply
  • David Friedman
    Property Manager · San Bernardino, CA · Member since 2014 · 473 posts · 238 votes
    10y

    @Pete Perez In theory, the way in which you want to apply for the two loans is attainable. Can lending policies change by November? Yes, but we can't plan for everything. When looking at cash flow, make sure you are calculating for vacancy rates, maintenance, property management, utilities that are the responsibility of the landlord, escrow closing costs, etc. I've worked with many new investors who want to jump right in, but don't realize the actual cost to invest. A deal that may look good on the surface might actually have many flaws. Honestly, if you can go for a fourplex, you are going to have an easier time managing your tenants, spread your risk over more units, pay less in maintenance and bring in more income per unit. I don't think you will find many properties in the Inland Empire with a cap of 3.5%. If you are, they are probably nit very good deals. If interest rates are at 4.5% you'd be losing money. That's a little too low. I can purchase a McDonalds and get a super safe 4.5% return. 3.5% would be for something on the beach. I would be looking for 7+ cap rates in Moreno Valley.

    Best of luck investing. If it doesn't work out with that first agent, give me a call.

    2Reply
  • Logan Drew
    Flipper/Rehabber · Pittsburgh, PA · Member since 2014 · 144 posts · 21 votes
    10y
    Originally posted by @Pete Perez:

    Hello All,

     I had a question regarding rentals in southern california, primarily the inland empire. I am just starting out in real estate and read a few books and decided that I'd like to start out in Buy & Hold investing. I met with an agent whom was recommended to me by a close friend. He suggested purchasing a duplex and living in it short term while renting out one of the units. He showed me several listings that cash flow just over $1000 monthly. I am meeting with a lender to see what I can get approved for. 

    My question is regarding my exit strategy. Ultimately I'd like to rent this property entirely. So the agent suggested living in the property until I get married (currently engaged and date set in Nov 2016), then purchase the 2nd home under my wife's name so that we can qualify for an additional FHA loan. That home would be our primary residence. Does this sound like a viable strategy? This was my first ever meeting with an agent, so what he said makes sense in theory, but my lack of experience makes me a little worried.

    Any insight or guidance is much appreciated. Thank you, Bigger Pockets Community.

    Congrats on making real steps towards your real estate investment future, Pete. The first thing that I'll mention is that FHA guidelines 'require' that you remain in the residence for 12 months (you certify it as your primary residence when you sign loan docs and any violation of this could be a problem). If you certify that you will live in the dwelling for 12 mos knowing you will not/ do not plan to, that is a form of mortgage fraud. Also, if you attempt to buy the 2nd home under your then wife's name, you may run into a few stickler underwriters that look at the fact that you are both going to be on the same tax return, California is a community property state, you have less than 20% equity in the duplex that you just purchased under your own name having just used an FHA loan as a primary residence, and that underwriter (or several underwriters) could deny your wife's FHA loan request. Don't get stuck in the duplex... make sure your plan works first. The good news is that there are 3% conforming/ conventional loans available for you on a primary residence purchase and that should be an option after your duplex acquisition. No sense using the FHA loan if you are buying a primary residence and have decent to excellent credit. You can do 3% down on a conforming 30 year fixed with no monthly mortgage insurance (paid by the lender with a slightly higher note rate to you... much cheaper than monthly MI).

    All that said, you have made quite a bit of ground on your very first meeting with an agent.  That is to be commended.  My suggestion is that you meet with a few experienced investors and a few good mortgage professionals first as they may be a little more apt to tell you what you should hear and not just what you want to hear.

    0Reply
  • Pete Perez
    OP
    Engineer/Real Estate Investor · Renton, WA · Member since 2015 · 368 posts · 120 votes
    10y

    @Logan Drew

    Is that the same as the Conventional 97 that I have been reading about? Also thank you for your praise. I am simply looking for a way to attain financial independence. I have a meeting with a lender scheduled for Friday morning and I will ask about this type of loan. I was not aware of the 1 year rule with FHA loans. I will need to consider this when meeting with the agent again in the future.

    Taking a step back though. In general am I crazy to want to make an investment purchase at the beginning of this year and want to purchase a primary residence for my fiance and I to live in towards the end of the year? 

    0Reply
  • Melissa Gittens
    Real Estate Broker · Windsor, CT · Member since 2015 · 1k+ posts · 268 votes
    10y

    @Pete Perez i really think that is a great idea. If you plan on purchasing more investment properties, you may want to have your wife purchase another investment property as opposed to the home of your dreams. It all depends on your long term goals

    0Reply
  • Pete Perez
    OP
    Engineer/Real Estate Investor · Renton, WA · Member since 2015 · 368 posts · 120 votes
    10y

    @Melissa Gittens

    Thank you for your reply! Long term we would like to be landords and keep our rental properties. As we acquire more properties than we can handle we will transition into property management. We both work full time in careers outside of Real Estate, so this strategy to me seems like a good way to get started towards the ultimate goal of financial independence. We currently live with our parents (we graduated this past June and got engaged in November '15). So the home purchase we make in November would be modest to keep living expenses down. 

    0Reply
  • Melissa Gittens
    Real Estate Broker · Windsor, CT · Member since 2015 · 1k+ posts · 268 votes
    10y

    What about purchasing a second multi family instead of a single family home for your second purchase? So that mortgage will be paid by the tenant on the second property as well. 

    0Reply
  • Pete Perez
    OP
    Engineer/Real Estate Investor · Renton, WA · Member since 2015 · 368 posts · 120 votes
    10y

    @Aaron Mazzrillo

    I do realize that I will be underwater immediately. The agent has helped a friend of mine with several of his rentals and owns several of his own, but I am still weary of him as you mentioned. That particular property is still being rented by tenants, and I suspect the tenants would be willing to carry over to me. I am a rookie & you are right to point it out, but if this property generates positive cash flow and I could potentially already have tenants immediately, isn't that a good situation to be in? The $1000 cash flow was a quick high level number that I through out in error. To find the actual cash flow, will require more due diligence on my part. 

    0Reply
  • Pete Perez
    OP
    Engineer/Real Estate Investor · Renton, WA · Member since 2015 · 368 posts · 120 votes
    10y

    @Melissa Gittens

    That is a really really good idea that I would love to come to fruition. My fear was pointed out by @Logan Drew earlier. I don't want to get stuck in the 1st multi family property we purchase. I don't know if we would be able to qualify for a second home, but if we could that would definitely be my first choice. Two multi-family homes would be great. The problem is that in California these homes start in the mid 200s (for a rough area) and I don't know if a lender would like to give of a loan that high. 

    0Reply
  • Melissa Gittens
    Real Estate Broker · Windsor, CT · Member since 2015 · 1k+ posts · 268 votes
    10y

    The best way to find out is figuring out what you qualify for as well as your wife. 

    0Reply
  • Logan Drew
    Flipper/Rehabber · Pittsburgh, PA · Member since 2014 · 144 posts · 21 votes
    10y
    Originally posted by @Pete Perez:

    @Logan Drew

    Is that the same as the Conventional 97 that I have been reading about? Also thank you for your praise. I am simply looking for a way to attain financial independence. I have a meeting with a lender scheduled for Friday morning and I will ask about this type of loan. I was not aware of the 1 year rule with FHA loans. I will need to consider this when meeting with the agent again in the future.

    Taking a step back though. In general am I crazy to want to make an investment purchase at the beginning of this year and want to purchase a primary residence for my fiance and I to live in towards the end of the year? 

     Hi Pete:

    Yes, Conventional 97 is the conforming loan with 3% down.  Sorry for the delayed response.  Have a great weekend!

    0Reply
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