Investing in southern california

27 Replies

I've lived in SoCal my whole life (43 years) and currently own a townhome smack in the middle of Orange County. That said, despite the decent year-round weather I personally would never buy residential investment property in this area. Not only is California one of the most tenant-friendly states around, but compared to the rest of the country, prices are super-inflated at the moment (my dad just sold a 1600sqft tract home in Cerritos, CA for $880k!) so any SFRs you buy will be lucky to meet even the 1/2% rule. I can't speak for commercial or MFR since I'm not in that space, but I imagine those scenarios are similar.

If you're hell-bent on finding something in this area, there are many counties to choose from: high-priced Los Angeles, Orange, and San Diego counties, mid-priced Riverside and San Bernardino counties, and low-priced Imperial county (out in the desert). Cap rates would probably be more reasonable in the latter counties, but you're still going to pay elevated prices regardless.

You would honestly do better in other states where laws are more friendly to landlords and communities are still becoming established. You'll receive way more bang for your investing buck. (Bought my first investment SFR in Arizona last year and it's off to a great start.)

Originally posted by @Khristopher Kyle Garay :

Ive heard a lot of negative comments about investing in southern california. So is it true? Is so cal not the best place to invest in rental property?

Opinions....?

 Case Shiller has historical profit metrics for buy n hold RE for all major cities.  Guess which cities have produced the best return for this century?  San Francisco, L.A., and San Diego.   How is that possible with such poor to rent ratios?   That poor ratio really is a poor initial ratio. 

Here are some thoughts on the San Diego market

  • appreciation on SFR has produced between $1k to over $4k per month of hold. This is true even for a property purchased at the height of market just prior to the Great Recession.
    Rent appreciation prior to 2020 had been over $100/month average per year over the previous 6 years. 
    A unique trait of investing in CA is the virtually fixed property tax from prop 13.  I have properties that are taxed at ~0.3% of value.  
    Low vacancy rates result in better tenants.  Do you know where San Diego ranks in rent delinquency and evictions?  Near the best in nation.  Tenant friendly policies result in very few problems due to the low vacancy rate/high demand for housing.  
    Initial cash flow sometimes has little correlation to actual cash flow.  Actual cash flow is the cash flow realized over the hold period.  
    The RE market is an efficient market.  This is important because it implies price is based on numerous parameters.   High in these parameters is expected return and expected risk.  
    San Diego is geographically constrained.  To the west we have the ocean.  To the South we have Mexico.  To the North we have Camp Pendleton and OC.  To the East the climate quickly gets harsh in Anza Borrego.  
    San Diego is economically diverse with a wide range of quality jobs from tech to biomed.  
    San Diego has multiple quality universities: UCSD, USD, SDSU.
  • San Diego has always seemed expensive.  For financed purchases San Diego is currently more affordable than many times in the past.

Historically Southern Ca has produced outstanding return for buy n hold RE investors.  I see little reason to believe this will change going forward. 

Owner Occupied financing (high LTV) such as FHA make the cost of entry in the home market (house hack) cheaper than many OOS markets.

Good luck

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    Nothing wrong per se in investing in southern California. It's just that you could do much better in other markets. You could buy 5 60k properties in Ohio versus 1 300k property in California. If you're investing for cash flow, this would make more sense and you could scale your business much faster.

    Originally posted by @Stephen Brown :

    Nothing wrong per se in investing in southern California. It's just that you could do much better in other markets. You could buy 5 60k properties in Ohio versus 1 300k property in California. If you're investing for cash flow, this would make more sense and you could scale your business much faster.

     >It's just that you could do much better in other markets.

    Can you identify any reputable 3rd party that depicts this for a long term hold?   Case Shiller, Neighborhood Scout, etc.  

    Neighborhood scout has the appreciation from every coastal So Cal city as a 10 for the nation for this century.  The highest Ohio city that I am aware of is Columbus as a 6.  I do not know where Columbus ranks for total return by Case Shiller, but it is no where near San Diego (#3 in nation for this century) or L.A. (#2 in nation for this century).  

    Statistically the coastal So Cal cities have produced outstanding buy n hold returns.  This can be confirmed by looking at various sites that collect the various buy n hold statistics.  

    @Dan Heuschele California and Ohio are appreciating at the same clip...people in Central Ohio make 75% of the wage of folks in San Diego and property prices are 35% the cost (for valid reason)...but what @Stephen Brown is saying is spot on...not a lot of room for argument here. Either buy a 4-unit in San Diego for $1.2m or a 40-unit apartment complex in Central Ohio...not sure how this even compares

    Originally posted by @Khristopher Kyle Garay :

    Ive heard a lot of negative comments about investing in southern california. So is it true? Is so cal not the best place to invest in rental property?

    Opinions....?

    This is the most common question after "should I start an LLC?". It's really this simple:

    If you want day 1 cash flow (using any more than modest leverage), you typically don't buy in So Cal.

    If you're playing the long game and want to bet on rental and asset appreciation, then buying in So Cal might be a good move.

    There is literally nothing more to it then that. 

    Personally I've found some good niche submarkets in Houston where I've got a ton of asset appreciation by buying correctly that's given me nice day 1 cash flow with 75% LTV day one and often 100%+ LTV after a refi, with strong appreciation. But that doesn't change the 'rule of thumb' above.

    Originally posted by @Khristopher Kyle Garay :

    Ive heard a lot of negative comments about investing in southern california. So is it true? Is so cal not the best place to invest in rental property?

    Opinions....?

    California is great for investing if you want negative cash flow and desire to speculate on the appreciation.

    Ohio is better if you want cashflow.

    @Dan Heuschele

    You mention you see little reason for the historical appreciation to change moving forward, but isn’t it also a stretch to say that 10% appreciation will continue for years to come? Past performance isn’t indicative of future returns.

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    Originally posted by @Brandon Sturgill :

    @Dan Heuschele California and Ohio are appreciating at the same clip...people in Central Ohio make 75% of the wage of folks in San Diego and property prices are 35% the cost (for valid reason)...but what @Stephen Brown is saying is spot on...not a lot of room for argument here. Either buy a 4-unit in San Diego for $1.2m or a 40-unit apartment complex in Central Ohio...not sure how this even compares

    My initial question was "Can you identify any reputable 3rd party that depicts this for a long term hold?"  I added the bolding in this post.

     Your stats show for 12 months they have appreciated nearly the same (San Diego: 11.8% (12.7% is using the county), Columbus: 10.8% (11.4% is using the county)).  I have seen that the appreciation is not significantly different between Columbus and San Diego over the last couple/few years (both have appreciated well for the last couple/few years).  This in no way places San Diego and Columbus in a similar category in terms of long term appreciation.  San Diego has appreciated 160% since 2000 (10/10), while Columbus has appreciated 59% (4/10), Source Neighborhood Scout.  So San Diego is top of nation (10/10), Columbus is just below average (4/10).  

    Applying these appreciation differences to the current San Diego average home price would result in a $656K difference to the future value of the San Diego property.  I consider that a significant difference!

    Buy n hold is a long term strategy.  3 years would be a very short hold period (1 year is a blip) and less than I expect virtually all buy n hold investors plan to hold.  You source does not show anything for a long term hold (unless you consider 1 year long term).

    Originally posted by @Fred K. :

    @Dan Heuschele

    You mention you see little reason for the historical appreciation to change moving forward, but isn’t it also a stretch to say that 10% appreciation will continue for years to come? Past performance isn’t indicative of future returns.

    10% would be tough to imagine continuing too long, but San Diego has not appreciated 10% long term (maybe 10% over the last decade which is fairly long term).  I look at the appreciation rate that spans down cycles and come to almost 6% (4.7% for this century that includes the Great Recession).  What do I think of the 6% going forward?  I think over the long term it looks likely.  Why?  I can go back 60 years and see that the 6% holds fairly accurate over long durations and the current indicators are similar to the past indicators.

    Note maybe we are about to hit a depreciation cycle.  Maybe homes are about to lose 20% of their value over the next 4 or 5 years.  If they do, it would not change my long-term expectation.  On my most recent acquisition (December 31, 2020), I did my pro forma with 0 appreciation (property or rent) for 5 years due to uncertainty with the time, but by year 10 I was showing a 4% annual appreciation over the entire time (I want my pro forma to be conservative so I used 4% but I expect closer to 6%).

    >Past performance isn’t indicative of future returns.

    I largely agree with this statement.  The reason "I see little reason to believe this will change going forward" is not only based on past performance but also the current indicators.  I use current parameters to determine the numbers used in our pro forma.  The indicators that I listed show San Diego is likely to have long term appreciation above most areas and above the inflation rate.  Note the word likely.  Who knows what tomorrow brings.  All an investor can do is research real numbers and invest accordingly.

    My view of the indicators is that they are similar to the indicators of San Diego's past.  As such, the likely scenario is similar long term RE performance.  I did not base the predicted appreciation only on the past appreciation.


     

    Originally posted by @Brandon Sturgill :

    Dayton Ohio is appreciating faster than San Diego...

    Maybe for one year Dayton has had better appreciation.   Neighborhood Scout for this century: Dayton 14.9% (1/10), San Diego 159.6% (10/10).  One year is a blip to buy n hold investors.  Dayton annual appreciation rate (0.67%) for this century is far below the rate of inflation.  This means in inflation adjusted dollars, Dayton RE has depreciated significantly for this century.

    San Diego has appreciated 10 times more than Dayton for this century.

    Applying this to current San Diego average home price results in a $936K difference in value.  That is huge.

    I just bought a multi-home in Julian, CA in San Diego county. I’m also looking into Boreggo Springs which are both in the San Diego County lines just more far out east. Those spots are pretty good for short term rentals because its a common place for local San Diego people to go on vacation without having to travel to far away for a total change of scene. Appreciation is also really high in these areas. I’m just getting in the real estate game. I'm active duty and am going to be stationed in San Fiego for the next four years. To me, it's not the most ideal location for my first real estate investments in comparison to other places but since I'm stuck here for awhile, might as well make the most of it and see if I can leave here better than when I got here :)

    @Khristopher Kyle Garay

    I own two condos purchased back in 2015 in the Pasadena area. Solid gains / returns. Cash flow wise you can do better elsewhere. Both my condos are now 50-75% return.

    Would I do it again? Probably not. I was clueless and had not discovered biggerpockets so went in blind. Got lucky. I now only invest in cash flowing areas with some appreciation. Markets for me are part of TX and FL. Following the masses in terms of where they are moving to.

    CA also not tenant friendly. I’m blessed to be in A class area with tenants having white collar jobs. Knock on wood for no issues in future.

    Good luck.

    @Khristopher Kyle Garay I can not think of a single place in the world I would rather invest in than Southern California. I have had many amazing deals both for Flips and brrrr's and STR's. That being said I don't do LTR's here because of the weak cashflow. I either flip or Brrrr to Short term rentals. Our STR's make crazy great cashflow have had insane appreciation of rents and also crazy high property appreciation. My holds in California made well over 100% ROI last year alone even with being shut down a few months. I'm currently in escrow for an amazing deal and have another property I'm offering on that would also be great.

    @Dan Heuschele I wish I would have bought in SoCal 10-years ago, lol...I talk to a lot of SoCal guys that were flipping back then and not holding assets...or that sold off their properties...there is always remorse for what could have been. Those guys would probably have $5m in equity right now if they would have held...pretty amazing.

    @Brandon Sturgill Yes I purchased it with a VA loan at 575,000. 2,000sq ft two units. Started listening to bigger Pockets podcast about 3 1/2 weeks ago and I put in an offer after using the calculator analysis on about 100 properties until I found this one.

    I've purchased 2+ properties in California and Ohio for > 5 years. My Duplex in southern California was bought for 440k in 2015, it was appraised this year at 660k (I did make several improvements). Nearly 50% appreciated and It cash flows about 200$/mo after mortgage/expenses etc. but the appreciation has gave me leverage/capital to invest in other properties.

    I have several properties in Ohio that I had refinanced into 15 year loans and they each cash flow 200$-500$ after mortgage and expenses. They've appreciated 20-30% since I bought them in 2016.

    It really depends what you're looking for. The Ohio properties will be paid-off and I'll be financially free in my 40s, but I couldn't acquire those Ohio properties without the appreciation I received from my California properties.

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