Multifamily Real Estate Central California

[Joseph Bonanno]

Hello everyone,

I am a young investor. Purchased my first single family home at 20 and sold it 3 year later. Currently 24 and have about $100,000 capital to re-invest. I'm currently living in California and I just feel like the market here is way to high for me to get in. Just curious what you guys think if I should keep saving to invest in a multifamily unit in California or take my capital somewhere else and start investing sooner than later.

Thank you for your response in advance!

-Joseph

[Tina Tsysh]

Congratulations on selling your first deal and getting your capital ready! I have worked at a multifamily firm here is SoCal as well as a research firm and learned a lot about multifamily investing in different markets, especially California because this is where I am looking for my first deal (SFR).

I have mixed feelings about California. It is definitely less scary to invest somewhere you live rather than going out of state, BUT here are my concerns with investing in multifamily in California: 

1. Cap rates for multifamily in CA are at an all-time low. If you are unfamiliar with what cap rates are, this is a metric that investors, buyers, sellers, and other real estate professionals use to value commercial real estate. Cap rates and property values move in an opposite direction, meaning that the lower the cap rate, the higher the property value is. In short, multifamily prices in CA are extremely high right now. 

2. Laws in CA are extremely friendly for tenants. If someone is not paying you rent, it is extremely hard to evict them and it takes a very long time (even longer now because of the virus). If you are trying to do a value-add strategy, you need to get the units vacant before you start renovating. You cannot renovate the units if the tenants are still there. In short, it is extremely difficult to deal with evictions in CA for landlords. 

3. Instead, focus on markets that are experiencing high migration from places like CA. The truth is that a  lot of people are leaving CA because they are able to work from anywhere. These people are moving to places like Phoenix AZ, Nashville TN, Austin TX, or even places in FL or NV. These would be my markets where I would start doing my research. In short, CA is experiencing out-migration and markets like Phoenix and Austin are benefiting from this shift. 

Hope this is helpful for you as you are thinking of where to begin building your real estate empire!