Cash Flowing in Southern California

17 Replies

Hi All,

I have been looking at properties across LA (Long Beach, Hawthorne, Inglewood, etc.) and I have found that the vast majority, if not all of the properties do not cash flow. I talked with my agent about this and she said it was normal in California to not have a property cash flow especially in the first few years. She mentioned that her other investors buy solely for the tax benefits and appreciation.

 Conversely, I talked with a few others in the real estate community (investor & agent) and they definitely disagree and provided examples of properties cash flowing in those same areas. Those other properties also had rents that were below market which could be a contributing factor. Is this just a matter of the properties I am being sent aren't good deals or should I adjust my expectations for cash flow? I get this isn't the midwest or south, but I was at least expecting some cash flow especially for properties where the rents are below market. Any wisdom is appreciated.

Thanks!

@Wiley Strahan

Did you ask the real estate agent or investor how they came across the properties that are cash flowing or the strategies they used to make it that way? 

There are a lot of different ways to make cash flow in So Cal. It just depends on the individuals' situation, sweat equity, network, proximity/ geography of property etc, all can play a factor into how investors find cash flow in properties out here. I have two in A neighborhoods which people tend to not believe is possible, it just takes creativity and looking outside the box sometimes. 

If your #1 priority is to find cash flow deals you will find them easier outside of LA/CA. BUT it doesn't mean you cant out here.. you just have to work harder and possibly with people that will guide you in the right direction. Have you been to any of your local meet ups? That would be my first suggestion. 

Anyways. Good luck with the hunt. 

In watching all my clients in LA close deals with me, they are spending months closing the ownership challenged properties to get a deal that's worth it. There are always the exceptions to the rule, but most of my clients are finding the properties that no one wants to take on (because of deaths, probate, chain of title issues) and they are creating equity in properties that would otherwise be foreclosed or sold at tax sale.

@Nabil Suleiman In most cases, the owners have not been raising rents with the market and so there is opportunity for upside in the rent. Thanks for the suggestions. Have been to a few meetups but will continue to hit the pavement.

@Andy Cross @Shannon Wright Thank you for the insights. Definitely seeing prices that are insane for most of the CA properties and can understand the upside is mostly found in the more difficult properties. I will do my best to keep this thread updated as I learn more.

Some thoughts:

  • So Cal is a big area.  OC, San Diego, and Los Angeles have expensive RE.  However, there are areas in So Cal with much cheaper RE.  Temecula and Murrieta are a little cheaper.  Cities in Imperial county or more remote areas of Riverside county are often much cheaper.
  • Whenever I hear cash flow without a reference to a level of financing, I find it a vague and useless term. Virtually everything cash flows with 0% LTV. I know an investor that considers a property as positive cash flowing only if it would cash flow at 100% financing. My view is that it should cash flow at 80% LTV.
  • My belief is that finding an SFR at retail that has positive cash flow in San Diego, OC, or LA with realistic expense estimates (vacancy, maintenance, cap ex, misc.) is unlikely (using 80% LTV). Finding duplex to quads that have positive cash flow is starting to get to be challenging but I regularly find them. Most are not properties I desire to purchase for some reason.
  • The best deals are achieved by not paying retail. These either take luck or work or the combination of the two. They mostly are not on the MLS.
  • The best retail purchases are the ones with big value adds.  Value adds are work.  If I purchase a RE and after the value add and associated refinance have no money into the RE then even a small cash flow is providing infinite return.  This is in addition to the return achieved by the RE value increase due to the value add.

It takes work to find RE that is a low risk and provides outstanding return in San Diego, LA, or OC (if it does not project at least 20% short-term return then I am not interested - goal is getting at least 50% short-term return).  Everyone is seeking these properties.  You either need to work hard and smart to find these properties or expand the search area.

I would not expect most realtors to find properties that are not on the MLS. I would expect most realtors to not recognize the potential of many/most value adds. The more creative the value add, the less likely the realtor will be able to recognize the opportunity. Finding a realtor that recognizes the value of value adds is not easy.

Good luck

Hi @Wiley Strahan  

There are still cash flowing properties all over the Inland Empire. As the director of business development and investor relations, I have found multiple cash flowing properties for my investors. With almost 300 doors under management, we continue to see opportunities available out here in the Inland Empire. 

@Dan Heuschele thank you for the amazing response! That was super insightful. I am looking at a 75% LTV scenario which you would think would make the cash flow equation better. Pretty much all of the properties are coming from the MLS where most of the properties are either overpriced or get that way once the bidding war starts. Do you have any suggestions for finding off the MLS properties besides your typical meetups and networking?

@Tyler Hungerford thanks for the insights! I would love to get your perspective on where there is still opportunity to be found. I will send you over a PM. Thanks!

Originally posted by @Wiley Strahan :

@Dan Heuschele thank you for the amazing response! That was super insightful. I am looking at a 75% LTV scenario which you would think would make the cash flow equation better. Pretty much all of the properties are coming from the MLS where most of the properties are either overpriced or get that way once the bidding war starts. Do you have any suggestions for finding off the MLS properties besides your typical meetups and networking?

@Tyler Hungerford thanks for the insights! I would love to get your perspective on where there is still opportunity to be found. I will send you over a PM. Thanks!

In San Diego I see cash flow positive duplex to quad semi regularly on the MLS but the best values are off market properties and require networking, work and/or luck. Meetups/networking, bandit signs, purchase letters, drive for properties are all possible means to find off market properties but it is work (or sometimes luck).

You may find it easier to find a value add purchase that will cash flow after the value add.  We recently (just before summer) considered a mixed use commercial residential purchase where we would convert the entire upstairs commercial area to dorm style residential living (4 units).  This value add would have the rent of the upstairs equal to the previous entire building rent ($4k).  The issue was I was leaving town for 10 weeks so could not take on such an effort, even though we were going to go in with another experienced investor.  Even thrashed units have value add of a rehab.  Rehabbing a non-commercial multiplex could convert a negative cash flow property to positive cash flow.  

My advice is to consider value adds in addition to positive cash flow properties.  

This property is a fourplex that sold, in Los Angeles, for $350,000. I toured the property. It was completely trashed. We estimated that it would take $250,000 to get it refurbished.

That means that someone got this building for $600,000. Rents are going to be about $6,000 (if you care about the 1% rule) expenses will be about 25%, so NOI will be $54,000, for a cap rate of 9%. If the building sells at a 5% cap rate it will sell for $1,000,000.

The barrier to entry is the amount of cash required.

Originally posted by @Wiley Strahan :

Hi All,

I have been looking at properties across LA (Long Beach, Hawthorne, Inglewood, etc.) and I have found that the vast majority, if not all of the properties do not cash flow. I talked with my agent about this and she said it was normal in California to not have a property cash flow especially in the first few years. She mentioned that her other investors buy solely for the tax benefits and appreciation.

 Conversely, I talked with a few others in the real estate community (investor & agent) and they definitely disagree and provided examples of properties cash flowing in those same areas. Those other properties also had rents that were below market which could be a contributing factor. Is this just a matter of the properties I am being sent aren't good deals or should I adjust my expectations for cash flow? I get this isn't the midwest or south, but I was at least expecting some cash flow especially for properties where the rents are below market. Any wisdom is appreciated.

Thanks!

I disagree also. It will take time and patience, but you need to find a property with a value-add opportunity. Also, it takes time to build up a team that can rehab properties quickly and at significantly lower than retail....which is what you need in order to make this strategy work. My contractor does this for me because me and a group of my friends consist of 90% of his business and have been working with him for over a decade.

@Wiley Strahan we've been talking to a lot of people lately about this bill. This is going to affect the California rental market tremendously. 

You should check out the article from the LA Times: "What a rent control fight in Silicon Valley could mean for the rest of California" 

Great discussion! There are CF properties in the Inland Empire area but you have to buy it right. Value add is key as you have the ability to force appreciation. There are some deals in the MLS but finding the off market deals is better.

Robert Mendieta 

@Andy Cross obviously Prop 10 isn’t great for most investors. It would definitely make investing in CA much less lucrative in my opinion due to the caps on rental income. There are always going to be “deals” but there just may be fewer of them and tenants are going to be less likely to leave (who wouldn’t be) in cities where rental control gets enacted. I personally don’t think it will pass but you never know until you know.