Dear California Rental property Investors

30 Replies

Dear BP Family,

I am looking for Cities in CA, to invest in rental properties, all the calculations I learnt from BP and elsewhere is not making sense in almost all the properties I have been searching(mls, realtor sent listings, etc) the ones that fit are either very old ones, 1900s etc.,

So, requesting your take on the Investments when you invest in properties that you own in CA?

What are you looking for? other than the Cashflow, caprate etc., Interms of when it was built etc.,? 

Do you own properties in Northern California? and If Yes, do you dont mind sharing the analysis before you bought it?

Thanks and appreciate the help.

You're not imagining the {lack of} numbers on rental properties. It's just kind of how it is out here. 

So your options are- invest for appreciation (likely taking a monthly cash flow hit), or invest out-of-state. I've always done the latter and a lot of people do.

It's about what will best fit your goals, given the realities of what's available. So finding what options best fit your goals and comfort levels.

You are right, the chance to find a property in California that fit in the calculation you learn from BP is very slim.

I might have never found a deal if using the calculation from BP like 1% rule or 2% rule.

However, I was able to buy a lot of properties because I lower my expectations, I didn’t follow their rule. And I still able to reach the goal of financial freedom already. I have enough cash flow and left my W-2 job after 5 years of investing.

I purchased properties with 0.7% or 0.8%.
Sometimes, I purchased with -$100 negative cash flow each door for appreciation, and it worked.

Account Closed Thank you for your feedback. So the properties that you own, I am assuming in CA, you are counting on the appreciation in CA that will make the deal worthwhile in the long run? is that why you buy these though the cash flow is not much?

Yes, that’s right.

My thinking is, make less money is better than make no money.

Today, I have 43 doors.

If I followed the 1% rule, I might have only 5 doors instead of 43 doors.

Lower the profit expectations, I obtain 43 doors now, and have 4 more doors pending in escrow, total of 47 doors.

@ Mary L. That is an impressive achievement for California today. My hat is off to you.

When you say that you’ve purchased some properties with negative cash flow and “it worked,” do you mean that you have since sold those for a profit? Refinanced into a lower rate that made them into positive cash flow properties?...

I am curious what worked for you and in what years? Is this the same strategy you are applying to the latest purchases?

It sounds like Suresh is just starting out. There are different strategies that work for different people in different markets - and at different times in economic cycles. But specifics of each property vary from its location to deferred maintenance to the ability to do some work and management yourself.

Are you getting short-term loans that you keep refinancing and getting more cash out as values keep going up? Buying all-cash?

And what is your exit strategy today? If all cash, you may have a leg up on others in that you don’t have to worry about the next downturn as much as they may... Have you stress-tested your portfolio for a 10-20-30% correction in valuation/rent for 1-3 years?

Thank you.

Your real options are; become a better buyer (investor) or risk losing all your money buying overpriced dog crap properties in some far away place you wouldn't ever imaging wanting to visit with the exception of passing through on your way to someplace better. For example, I drove through St. Louis to get to Maine where I bought 20 fresh from the ocean lobsters. Had it not been for those delicious lobsters, I wouldn't of ever had the displeasure of having to drive through St. Louis.

So far this year, I bought 5 properties in SoCal that I kept as rentals. In the process, I captured more than $500K in equity. Just because a property is worth X, doesn't mean you pay X. Regardless of what business you are in, you won't ever making any money paying retail for inventory. 

Again, learn to be a better buyer.

If you want to invest in CA, you have to be realistic with your expectations.  If you are looking for the 1% or 2% rule, you are approaching this all wrong.  Rural Kentucky, sure, but not CA.  I lost out on a lot of deals by sending lowball offers, being overly picky, etc. until I became realistic with my expectations.  Now I have 6 in Central CA and the cash flow is great.  I never would have acquired this if I stuck with my original irrational understanding that I could find the "perfect deal" if I was patient enough.  No, you wont, you'll just stay on the sidelines while everyone else plays ball on the field.  When a good deal came into my sights and it made sense, I pursued it FAST before anyone else could compete (finding off market leads helps a lot with this).  The other thing is that, as others have mentioned, sometimes you MAKE the deal work.  Newbies are often too apprehensive about this concept.

Originally posted by @SURESH KANNAN :

Dear BP Family,

I am looking for Cities in CA, to invest in rental properties, all the calculations I learnt from BP and elsewhere is not making sense in almost all the properties I have been searching(mls, realtor sent listings, etc) the ones that fit are either very old ones, 1900s etc.,

So, requesting your take on the Investments when you invest in properties that you own in CA?

What are you looking for? other than the Cashflow, caprate etc., Interms of when it was built etc.,? 

Do you own properties in Northern California? and If Yes, do you dont mind sharing the analysis before you bought it?

Thanks and appreciate the help.

 This what happens when demand out strips supply typically. Some investors look for those conditions and locations to "invest" in. Sometimes the initial rent to price ratios are sub 1% as rent appreciation lags market appreciation. Many like Mary are aware that could be improved shortly or like Aaron find off market stuff and improve rent ratios immediately. The good part with Cali is it may have both good cash flow and good appreciation and like your market is top 10 nationally for total returns ( cash flow + equity) since 2000. 

At any rate CA is a massive market with every type of ratio. It would not be required to go outside CA to get the same ratios as anywhere else. It just depends on what the location can offer. Deserts could have high initial cash flow, coastals low low or zero initial cash flow. It may take several trys before you get in but if you take a step back and consider the bigger picture many find the extra effort ends up being significantly more profitable longer haul. Which circles back to partly why it could cost more in the first place. 

Good luck! 

CA is a bit unique given the very high barriers to investment. Making + cash flow is hard but appreciation is a higher possibility if you are willing to hold out 10 + years. It is possible to still get investments that are selling below their market price (5 - 10% discount) and that depends on the circumstances of the seller. Sometimes sellers are motivated to sell and they have enough equity built in, that they are not reaching for the stars when it comes to the sale price. That said, positive cash flow is a tough proposition esp in sought after areas in Nor Cal (SF, Bay Area in particular).

No offense to anyone who has chimed in so far, but the OP said that what he has learned on this site so far has not worked for him. I think he is asking for help.

In your replies, I do not see how he is supposed to put your wise words into actions - and safely enough for him to not lose his investments when the next correction/recession comes.

I can talk about how properties I bought in the SF Bay Area in 2010 quintupled since then - while I was also getting 1-2+% on those. How I exited half of them by now. That is not going to help him today.

I’ve been buying exclusively out of state since last year. I am staying away from Stockton, Sacramento, San Bernardino, Fresno, etc - where I have friends who are barely back to the pre-Recession levels (at least as of last time we had these painful for them discussions. Perhaps these areas again have boomed. But that’s even more reason for me to stay away from them.) Those areas got hit hard, and I don’t have enough money for a real crystal ball, having spend a large sum on Miss Cleo in the 90s.

We all have opinions, and I know that they differ. I don’t know it all.

So, for those who are telling the OP to invest in California - why, where specifically, under what terms? My reading comprehension skills tell me that this is what he’d like to read here.

Thank you.

Account Closed,  impressive performance on getting to 43 properties. I was wondering if you could share how you financed them. I have 4 duplexes and closing a fourplex, all in Sacramento. Adding my primary residence bay area (with tons of equity) in to the mix gets me to 6 active mortgages. The lender that I work with from US Bank tells me that it would be very hard to get another loan now that I have 6 loans already. What would be the best way to finance next properties? Thanks.

I second @Al 

@Al D.

How are the successful california investors analyzing their deals? What are the metrics in this unique market that is allowing investors to buy and cashflow these great properties?

@Benny B,

You can finance up to 10 conventional loan if your pass the debt-to-income ratio.
Keep your W-2 job, it definitely help to get more conventional loan.
What I did on my tax return is, I only deducted the basic expenses like HOA, property tax and mortgage interest, I didn’t deduct any repairs expenses and willing to pay more taxes, because it show my tax return has good looking number, and it increase my borrowing power on the debt-to-income ratio when I did the conventional loans long time ago.)

Long time ago, I read an article, many homeowners or self-employ try to reduce their taxes by listing as many as expenses on their tax return, but it would hurt you when you want to borrow the conventional loan.

If you want more conventional loans, you need to show a good income tax return to the lender by paying slightly more tax.

After exhausted with 10 conventional loan, I purchased more properties using hard money lender.

After more equity is built, then I used portfolio loans to replace all previous hard money loans.

I have been very aggressive on leveraging.
I just keep buying and buying and buying.
Yes, I agree that my portfolio is very leverage.

A while ago, I did stress-test my portfolio. My portfolio passed 10-15% correction, but failed on 20-30% correction for 1 to 3 years rent.

I was thinking about and could have used the cash-out refinance from the portfolio loans to be the reserve to prepare for the next downturn.

But then I reminded myself that, I have never plan to buy and hold the portfolio forever.
I only need the big reserve if I plan to ride out the next downturn, but that is not me.
I plan to sell all properties immediately right after the market data show that it is heading to the South direction.
Therefore, I used the cash-out refinance to purchase more properties again.

If you plan to ride it over to the next downtown, like @AD mention, yes, an Investor should constantly stress-test the portfolio and have enough reserve for 3 years 10-20-30% correction.

Good luck

I own in Fresno, i like doing long term holds and I'm not much of a handyman so the properties I purchase don't need a lot of work. I'm not real concerned about the first 1 or 2 years of NOI. I heard Josh say on a podcast one time that he tries to make $100/month/door at the beginning. I thought that sounded like a pretty good measurement and i've found that's pretty easy to achieve. The properties I buy usually have an ROI of 18% AAR (Average Annual Return) over 10 years, which I'm happy with, but my first year COC usually holds between 5-6%.

CAP rate is only one means of measurement and is really helpful when you first look at a property. Loan terms, closing costs, deferred maintenance, rent and expense increases all factor into your return over time. Being able to estimate all your costs as related to how the deal gets put together is how you can see how the deal really does over time. You will also have different costs than the previous owner, taking some time to know what YOUR costs will be after closing is really helpful.

My advice is to not get caught up in what your first and second year returns look like, but learn to build or use a great financial model where you can run scenerios as to how the property will perform over time.   Feel free to message me if you want to talk further. 

I have a few multi units

Account Closed what cities are your properties located in? Also, are you using variable rate loans or loans with ballon payments? Because those up your risk as well. 

As for giving th OP specific advise, it doesn't work that way. If it was that easy...'buy these type of properties in x and y cities', everybody would be doing it! That's the whole point. You have to study, work hard, and develop your specific competitive advantages and niches.  now, go git'ur done! (Heh heh easier said than done ;)

Mary L. Some lenders can add back those expenses into your DTI ratios because you could justify them as one time expenses.

I try not to analyze property based on there current performance.  It’s easy to skip over properties that currently do not cashflow.  I have many examples of purchases where current rent were 30-50% below market and the property needed a little fix up.  

Franklin

Suresh,

Sacramento is a good place to start looking if you have enough capital to get involved with multifamily. A handful of areas there have cap rates above the cost of debt, allowing you to leverage up and get a decent return. 

Thank you my friends for responding and sharing your thoughts.

Originally posted by Account Closed:

You are right, the chance to find a property in California that fit in the calculation you learn from BP is very slim.

I might have never found a deal if using the calculation from BP like 1% rule or 2% rule.

However, I was able to buy a lot of properties because I lower my expectations, I didn’t follow their rule. And I still able to reach the goal of financial freedom already. I have enough cash flow and left my W-2 job after 5 years of investing.

I purchased properties with 0.7% or 0.8%.
Sometimes, I purchased with -$100 negative cash flow each door for appreciation, and it worked.

Really? Are there banks these days that allow 0.8% down payment? Only VA (Military) loans i have seen have 0% down i guess, other folks who did out 3% down only had to pay PMI of $1000/year.

@Varun Parkash I think @Mark L was referring to return, I mentioned about the 1% rule the rough method to see if the property returns 1% of the purchase price as monthly rent. 

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