Rental Property Investor · Los Angeles, CA · Member since 2019 · 25 posts · 52 votes
Hi BP,
I've just bought a property in Rancho Cucamonga in California and rent it out from last year. Since I live in Southern California, the price of real estate is kind of high. Therefore , although I've already put 25% for my down payment and the value of the house is about $500k , I've still got month negative cash flow. I rent it for $ 2,200 but my expense is around $2,500 ( included tax , property management fees, insurance and mortgage). I would like to listen to your advise how to make cashflow break even or become positive. Thank you
A primary factor that will impact future real estate growth in most of CA is the fact that wage increases are not keeping up with appreciation or rental rates. The questions is whether there will be a tipping point or will business growth at some point in time move away from or out of state causing a stagnation in growth. Some large companies are showing a slight move to relocate outside of CA already. The question is will this continue and will it effect appreciation 5, 10, 15 years into the future. Will property tax laws be changed at some point in time. With the passing of the present generation of home owners will the taxes cause a downward pressure on values.
Is the present upward motion sustainable indefinitely or are income/wages, business investment and taxes at some point in time going to take effect.
Anything can happen and one thing to add is I think 15% of the US lives in CA. And maybe 70% of that is in SoCal. The place is a zoo and half are renters. Where this house is located the projections for growth are noteworthy for REI to say the least.
The original poster said “help I am cash flow negative, how do I fix this?”
When someone says that then they are not “investing for appreciation,” they are investing for cash flow and they have failed, they know it and they want to fix it. The correct answer is then to rework (Airbnb) or sell this money losing business and move on.
But no, everyone has instead convinced him that he is a brilliant “investor for appreciation” and he is going to hit a million dollar pay day!
Complete nonsense.
Best not to factor in AirBNB into if its a good deal or not, just ask anyone in Anaheim
A primary factor that will impact future real estate growth in most of CA is the fact that wage increases are not keeping up with appreciation or rental rates. The questions is whether there will be a tipping point or will business growth at some point in time move away from or out of state causing a stagnation in growth. Some large companies are showing a slight move to relocate outside of CA already. The question is will this continue and will it effect appreciation 5, 10, 15 years into the future. Will property tax laws be changed at some point in time. With the passing of the present generation of home owners will the taxes cause a downward pressure on values.
Is the present upward motion sustainable indefinitely or are income/wages, business investment and taxes at some point in time going to take effect.
Just to follow up on companies bailing CA. For sure this happens. Toyota HQ with 6k workers bailed Torrance, CA (South Bay LA) for Plano Texas. But guess what stayed.? All the highest paying jobs, designing, engineering, marketing etc. How did that effect Torrance housing values? As far as I can tell there was not one cent in housing value or rental value drop. Not a penny, where many places this would have killed the entire town, abandon homes is the ultimate flip side of that equation almost nationwide.
You can never be sure whether the value of a property is going to increase or not. So you're best off choosing properties with the best return on investment possible, in markets that you hope are going to increase in price (and rent). That way, even if the market doesn't increase, and rents don't go up, you still are making money.
Almost all these arguments seem to ignore the amount of leverage you have in favor of what cashflow you have. Leverage is what makes this machine work! Look at it this way, I've said this numerous times here:
Say you buy a neutral cashflow property on a 15 year note with 25% down, and over the 15 years it never appreciates and the rents don't go up. Zero cashflow either way. At year 15 you've made 9.68% on your investment, according to excel formula RRI. An equities investor would consider that a fantastic 15 year return, Madoff territory!
What this makes clear is anything above that through cashflow or appreciation is gravy. Few properties will not have rents and/or value increase at all over 15 years. But this is also why those higher appreciation properties don't cashflow well, their price has been driven up by the market for appreciation rather than the market for cashflow.
It's worth noting however that a 30 year note framed as above will only return 4.73%. You're taking cashflow now against later returns. Some will argue that they can make that money work harder that way. Some are investing to make their living rather than for retirement.
Investor · San Diego, CA · Member since 2015 · 435 posts · 421 votes
7y
Interesting point, about the "let the tenants pay the mortgage, so that I build equity" principle. I agree, but it is very feasible to do this with strongly positive cash flow, too, and be making money as you let the tenants pay off the mortgage. Better yet, if you can buy something that needs some work that is close by, so you can do it cheaply - then you have made your money up front, before even considering cash flow and letting the tenant pay off your mortgage.
Real Estate Agent · Chantilly, VA · Member since 2016 · 245 posts · 61 votes
7y
You're saving money on Taxes
Also, assuming your property value goes up more than the amount of money your paying in a month for a year, then you're playing the appreciate game. Can still win