small multi family in california vs your state

16 Replies

I have been looking and analyzing duplexes and triplexes in northern california for close to a year using the parameters I learned from Biggerpockets. I have found none that met the "good buy" parameters, and only a couple that still had a cash flow after deducting the recommended percentages for the costs. My question is how are the other states doing? 

My plan was to make my first purchase a duplex so I can start off my portfolio, but at this rate, I may have to buy a single family home.  I get that I'm new at this and don't have an in on the off market buys, but....this is very disheartening. 

I'm not an expert on every state, but I am fairly confident California has to be one of the worst places to invest for cash flow. I am sure there are people that will fight me on this, but I'll put Texas MF against anywhere for cashflow!

Welcome to California, the land of no cash flow. It does suck, but it's not just you--it's the reality of California. I'm impressed you found a couple that cash flow. Remember though too, it gets worse--even if you find at least minimal positive cash flow, you're also in one of the most tenant-friendly states in the country, which means one bad tenant-- that cash flow is gone. A lot of California investors, myself included, buy out-of-state for these reasons. You'd be hard-pressed to find another state that does worse than California for cash flow. A lot of other states don't cash flow either, but plenty do. If you buy the single-family home, what would your plan for a profit be? Would that be a primary residence for you or something you rent out rooms or something?

Originally posted by @Jason Hirko :

I'm not an expert on every state, but I am fairly confident California has to be one of the worst places to invest for cash flow. I am sure there are people that will fight me on this, but I'll put Texas MF against anywhere for cashflow!

I agree about California, for sure. But Texas MFs? Cash flow? What kind of cash flow are we talking about and what kind of properties?

@Ali Boone Of course Texas! Downtown Austin? No, not as much. But you can find 25% gross annual returns in almost every secondary market in Texas from duplexes on up. I would rather spend $4MM on a 150 unit in Brownsville than $4MM on a 8 unit in some silly California market!

Originally posted by @Jason Hirko :

@Ali Boone Of course Texas! Downtown Austin? No, not as much. But you can find 25% gross annual returns in almost every secondary market in Texas from duplexes on up. I would rather spend $4MM on a 150 unit in Brownsville than $4MM on a 8 unit in some silly California market!

By "25% gross annual returns"  do you mean Cash on Cash or GRM?

Cashflow vs appreciation has been argued here on and on for years. It all depends on your market and timing. I've got a property here in NJ bought in 97 that cashflowed early on as a househack AND has appreciated CoC >56X. Yes, I put down $60k and it's now worth $3.5m (and is probably a teardown at this point). NJ, NY & CA have seen returns like that over the last 2 decades, TX not so much. Could I do that today? No. But I bought one in 2012 that has tripled in price. Appreciation markets are a real thing not to be scoffed at if you don't need the cash to live on. That's the bind that a lot of BP folks are in, they want to quit their day jobs rather than increase their equity.

 

Ali Boone, the single family would be owner occupied. I'm just starting out and was hoping my first buy would be a duplex. Also the ones I did find that had +cash flow were in neighborhoods where I would not want to live or own. Going to look into building one.. see if I can get the numbers to work that way. Any advice in terms of building? what are somethings I need to consider?

Originally posted by @Jason Hirko :

@Ali Boone Of course Texas! Downtown Austin? No, not as much. But you can find 25% gross annual returns in almost every secondary market in Texas from duplexes on up. I would rather spend $4MM on a 150 unit in Brownsville than $4MM on a 8 unit in some silly California market!

Are you talking specifically about commercial MFRs, not residential MFRs? If you're talking about residential (which is all I'm familiar with in this context), I'd want to know the net returns, not the gross. TX is notorious for high property taxes and insurance, which in today's market can kill off the cash flow pretty hard.

Originally posted by @Ali Boone :
Originally posted by @Jason Hirko:

@Ali Boone Of course Texas! Downtown Austin? No, not as much. But you can find 25% gross annual returns in almost every secondary market in Texas from duplexes on up. I would rather spend $4MM on a 150 unit in Brownsville than $4MM on a 8 unit in some silly California market!

Are you talking specifically about commercial MFRs, not residential MFRs? If you're talking about residential (which is all I'm familiar with in this context), I'd want to know the net returns, not the gross. TX is notorious for high property taxes and insurance, which in today's market can kill off the cash flow pretty hard.

I am talking about 1 unit SFR and more. You can go on the MLS and find a $50,000 house in Beaumont that you can rent for $1,000.

And I will put up my Texas property tax bill against anyone's California State Income Tax bill any day!

 

Originally posted by @Jason Hirko :

I am talking about 1 unit SFR and more. You can go on the MLS and find a $50,000 house in Beaumont that you can rent for $1,000.

And I will put up my Texas property tax bill against anyone's California State Income Tax bill any day!

 

Well obviously, but no one claims that CA has cash flow (or at least they shouldn't).

 

Originally posted by @Ali Boone :

Well obviously, but no one claims that CA has cash flow (or at least they shouldn't).

 

What do you mean 'obviously?' That was the question in the original post - what states have better cashflow than California...

 

Originally posted by @Jason Hirko :

What do you mean 'obviously?' That was the question in the original post - what states have better cashflow than California...

Sorry, I meant that just in thinking of us talking about Texas having cash flow... not in response to the original question.

 

Why would I want to encourage investors to come to CA?  Of course it's absolutely terrible here.  You'll never make any money.  The taxes are horrendous.  Definitely, you should invest anywhere else but here. Please.  Save yourself the headache of being too good to actually buy somewhere other than perfect when you're first starting out.  You deserve to own a Beverly Hills type of home right out of the gate.  How unfair to actually have to sacrifice to start out in life.  Life will definitely be more fair and greener on the other side of the border.  And be sure and trust everyone who encourages you to do so and that you can make money even if you do nothing except hire someone else to do everything for you.  Why waste precious time learning laws and such.  That works out in every other area of life, right?

@Jason Hirko

How confident are you that your TX property taxes are less than what you would pay for CA income taxes? Without knowing your income or portfolio I have absolutely no clue. I just find this debate humorous because people throw it out like an absolute in cost savings.

Originally posted by @Will Dixon :

@Jason Hirko

How confident are you that your TX property taxes are less than what you would pay for CA income taxes? Without knowing your income or portfolio I have absolutely no clue. I just find this debate humorous because people throw it out like an absolute in cost savings.

I'm 100% confident. If you $60k-$250k, you pay 9.3% state income tax, then the next bracket is 10.3%. The average property tax rate in California is just under 1%. My portfolio in Texas is just over 2%, which is right around average. So I am trading ~1% in property value for ~10% in profit. Very simplistically, if I only invested in 10% ROI, it would be about a wash (not factoring in depreciation, etc.). But my goal on value-adds is 25% YoY. So I guess if you are getting 5% returns, California is fine, but then you might as well just by bonds.