CA - how are you guys achieving cash flow
Member since 2019 · 24 posts · 5 votes
Hello investors in CA,
Just wondering, how are you guys getting cash flow after so much investment and most of the rent goes to mortagage itself.
I live in corona, average home price is $570K and rent will be approximate of $2700, if i do my calcualtion with taxes, mortage, insurance etc, for the 20% down, i get negative cash flow.
Am i missing anything here? Please let me know.
is investing in CA worth?
Aariff
Options for initial cash flow:
We have used each of these to some degree (we never purchased as low as 70& ARV). We also do not self manage our STR units but they produce enough cash flow to pay for a PM which would be less the case for units purchased today.
Most Coastal So Cal investors are relying on Market and Rent appreciation. They purchase as a forecast negative cash flow with the belief that rents are rising fast enough that in a few years they will have positive cash flow and significant equity via market appreciation. Recently San Diego SFR rents had risen $500/month in the previous 3 years. This implies that if you purchased at the beginning of that window with projected $200 negative cash for that 3 years later you would be experiencing on the order of $300/month positive cash flow.
The issue is that last 7 or 8 years have been outstanding in terms of market and rent appreciation. What are the odds it can continue? I certainly would not project it continuing at that pace in any of my investment projections. Therefore, expecting rent appreciation to turn a cash flow negative RE to cash flow positive could take a decade.
Therefore, we stay with items 1 through 4 above.
Good luck.
Hi Aarriff,
You don't invest for cash flow in CA. Unless you are doing some major rehab with upside in rents there is no cash flow plays for SFRs. Maybe some condos will work but its got to be the perfect setup. You must venture out of state if you want cash flow.
You don’t have look out of state you need to look for value add property also in less expensive areas that have quality renters . It does exist in ca . The Central Valley area has opportunity as well as Sacramento too.
Options for initial cash flow:
We have used each of these to some degree (we never purchased as low as 70& ARV). We also do not self manage our STR units but they produce enough cash flow to pay for a PM which would be less the case for units purchased today.
Most Coastal So Cal investors are relying on Market and Rent appreciation. They purchase as a forecast negative cash flow with the belief that rents are rising fast enough that in a few years they will have positive cash flow and significant equity via market appreciation. Recently San Diego SFR rents had risen $500/month in the previous 3 years. This implies that if you purchased at the beginning of that window with projected $200 negative cash for that 3 years later you would be experiencing on the order of $300/month positive cash flow.
The issue is that last 7 or 8 years have been outstanding in terms of market and rent appreciation. What are the odds it can continue? I certainly would not project it continuing at that pace in any of my investment projections. Therefore, expecting rent appreciation to turn a cash flow negative RE to cash flow positive could take a decade.
Therefore, we stay with items 1 through 4 above.
Good luck.
Not saying you can do it while sitting on the couch, but one way is to buy stuff like this (listed on the MLS in this case):
https://www.redfin.com/CA/San-Diego/3905-National-Ave-92113/home/147880176
If you'd like to go through the exercise of penciling this out and posting, I'll share my POV on why a property like this makes sense.
Hello Justin,
If I understand the property correctly. It can be rent it as 2 units each renting for approximately $1700 each.
20% of 460,000 is 92000. Total investment might be 100k including closing cost and other charges.
I am getting approximate of $2400 as monthly expenses that includes mortgage, property tax and home insurance.
So you might have a positive cash flow of $1000 approximately.
Hello Justin,
If I understand the property correctly. It can be rent it as 2 units each renting for approximately $1700 each.
20% of 460,000 is 92000. Total investment might be 100k including closing cost and other charges.
I am getting approximate of $2400 as monthly expenses that includes mortgage, property tax and home insurance.
So you might have a positive cash flow of $1000 approximately.
Maintenance/Cap ex and misc will take a big byte of that cash flow projection. My projections would be slightly less than half of that projection but that is not taking into account any value add opportunities that could provide sweat equity. As I indicated in my post, it is possible to find duplex to quad that have some cash flow (I see them semi regularly on MLS but usually they do not meet what we are looking for in some other area).
Justin did you purchase this in December? If so do you have a rehab value add in mind or something else and what is the current state?
I am interested in Justin's cash flow projection. Justin has shared his cash flow worksheet in the past with me and we have had fairly similar projections.
Hi Aarriff,
You don't invest for cash flow in CA. Unless you are doing some major rehab with upside in rents there is no cash flow plays for SFRs. Maybe some condos will work but its got to be the perfect setup. You must venture out of state if you want cash flow.
I completely agree with him. You can't expect cash flow in CA, especially in SFH. You only hope for a higher appreciation. If you want to expect a cash flow, you need to invest in MF units or small apt bldgs.
Hello investors in CA,
Just wondering, how are you guys getting cash flow after so much investment and most of the rent goes to mortagage itself.
I live in corona, average home price is $570K and rent will be approximate of $2700, if i do my calcualtion with taxes, mortage, insurance etc, for the 20% down, i get negative cash flow.
Am i missing anything here? Please let me know.
is investing in CA worth?
Aariff
California (most parts) is a "trophy" location. When you see "Trophy", "Pride of Ownership", or "Irreplaceable location" in a listing, that's code for "no cash flow"
People don't buy in Cali because they're looking for (day 1) cash flow. They're buying because they
1) want to own in Cali
2) are hoping that over time, rent and property values go up to 'save' them.
Some people think that's a terrible idea. Others think it's brilliant. Obviously people keep buying at these #'s (or they'd fall) so the market has spoken so to speak. Personally I think you can find markets that have great appreciation and cash flow (and more favorable business climate and less punitive landlord laws) but just like people opt to live all over the US for their own pros/cons reasons, people invest all over as well. So I've given up on saying one location is better than another. They're all just different. You gotta find what works for you.
I agree with everyone. Equity building is a plus for Cali.
I own a house and i have an equity to make down to anothe property and i am planning to rent this property and it seem like i will be in negative cash flow if i rent it.
Above lines are the initiative point for this thread.
Hello Justin,
If I understand the property correctly. It can be rent it as 2 units each renting for approximately $1700 each.
20% of 460,000 is 92000. Total investment might be 100k including closing cost and other charges.
I am getting approximate of $2400 as monthly expenses that includes mortgage, property tax and home insurance.
So you might have a positive cash flow of $1000 approximately.
That's a reasonable start but, from my point of view at least, measuring "positive cash flow" is not meaningful. Instead, look at two things: Free Cash Flow and Cash-on-Cash. Or, even more important, projected IRR (but that's out of scope for this convo).
In this case, the Free Cash Flow -- that is, real, actual monthly cash you can reasonably count on having at the end of the year after paying and reserving for everything -- is about $500/m. And, CoC returns are 5%. If you can beat 12% vacancy rate (remember: half of this is commercial), maybe you get that up to 8.5% or so.
And, remember that a 15% return on $1000 doesn't means you can treat your SO to see Avengers in the theater at the end of the year. A 5% return on $100k starts to matter.
If you want, drop $70k on renovations to turn the commercial space into a duplex.
Since @Dan H. mentioned it, here's the Year1 proforma for this. I share this only as a data point to suggest which metrics to focus on and the type of things available on the local MLS. I'm sure Dan would agree - way more important than which market you invest in is understanding which metrics to use, what they mean, and accurately modeling them.
Your total earned ROI is about 9.35% on $120k cash. Throw in rent appreciation and inflation / market-driven value increases if you want and you're in the teens. I'd say that's a fine place to park $100k as a buy-and-hold mostly-armchair investor.
What's not shown on the proforma is that this is a corner lot with two driveways, 2 existing water meters, on a main transit corridor, with a 40' height limit and a 1.35 max FAR...
Hey folks, another total newbie here. I've been watching the BP videos on YouTube and reading the guides here. I have been doing the math on properties across various areas of California. I have yet to come across any property that would net me positive cash flow. I kept thinking I was doing the math wrong or I was just not looking at the right properties. Looks like Cali just isn't the place for it. Maybe I need to branch out like the Central Valley as someone else here suggested.
MFRs in secondary / tetriary markets still cashflow at 4% to 5% and as high as 6% in borderline neighborhoods
I know this isn’t the smartest way but it’s what we was comfortable with. My fiancé and I tried to get a mortgage from Wells Fargo but we couldn’t. So we just bought a house all cash in Sacramento.
Paid $365,000
Repairs ~$25,000
A similar house (same architecture) across the cul de sac is already pending with a listing price of 437,000. We don’t know what it will exactly sell for.
My guess for rents are ~1,700 - 2,000. It is in a great school district so not many houses listed for rent. Rentometer said the rent was average for the range.
Are we (going to) cashflow? Yes. We plan to continue this strategy using a heloc or cash out refi.
Whenever I ran the numbers “normally”, I got no where near the 1% rule. This clearly isn’t the right method to maximize cashflow but the location is close (1-1.5 hr drive). We feel good that we can “keep an eye on it”.
My guess to increase cash flow from here on out is to find off market deals by knocking on doors. I like it when I see those properties with over grown lawns, old paint. Etc.
I’m looking to create cash flow in San Diego by selling my remaining 4 unit buildings in San Diego. I sold one in the City of San Diego in April and have two buildings currently for sale, one in Lakeside and the other Spring Valley. The appreciation on all the buildings has been great but when people are buying for negative cash flow and further “appreciation” at this point in the cycle it’s time for me to cash in. I may be proven wrong but I wouldn’t buy my buildings at their current value. Tenants are struggling as it is to pay current rents so thinking the rent will keep going up without high turnover or default is not something I want to deal with. I want to take advantage of my equity and try to find higher cash on cash returns out of state which has proven to be a huge learning curve. I have been actively looking in Phoenix but the returns there aren’t that impressive so far. I’m going to keep looking and keep researching. I’m not going to completely get out of the San Diego market since it has been good to me but I’m just looking to diversify a little.
Hello Justin,
If I understand the property correctly. It can be rent it as 2 units each renting for approximately $1700 each.
20% of 460,000 is 92000. Total investment might be 100k including closing cost and other charges.
I am getting approximate of $2400 as monthly expenses that includes mortgage, property tax and home insurance.
So you might have a positive cash flow of $1000 approximately.
That's a reasonable start but, from my point of view at least, measuring "positive cash flow" is not meaningful. Instead, look at two things: Free Cash Flow and Cash-on-Cash. Or, even more important, projected IRR (but that's out of scope for this convo).
In this case, the Free Cash Flow -- that is, real, actual monthly cash you can reasonably count on having at the end of the year after paying and reserving for everything -- is about $500/m. And, CoC returns are 5%. If you can beat 12% vacancy rate (remember: half of this is commercial), maybe you get that up to 8.5% or so.
And, remember that a 15% return on $1000 doesn't means you can treat your SO to see Avengers in the theater at the end of the year. A 5% return on $100k starts to matter.
If you want, drop $70k on renovations to turn the commercial space into a duplex.
Since @Dan H. mentioned it, here's the Year1 proforma for this. I share this only as a data point to suggest which metrics to focus on and the type of things available on the local MLS. I'm sure Dan would agree - way more important than which market you invest in is understanding which metrics to use, what they mean, and accurately modeling them.
Your total earned ROI is about 9.35% on $120k cash. Throw in rent appreciation and inflation / market-driven value increases if you want and you're in the teens. I'd say that's a fine place to park $100k as a buy-and-hold mostly-armchair investor.
What's not shown on the proforma is that this is a corner lot with two driveways, 2 existing water meters, on a main transit corridor, with a 40' height limit and a 1.35 max FAR...
Justin, what program is that your using to analyze this deal? That looks like a lot cleaner spreadsheet than the one I’m using currently. Thanks
I know this isn’t the smartest way but it’s what we was comfortable with. My fiancé and I tried to get a mortgage from Wells Fargo but we couldn’t. So we just bought a house all cash in Sacramento.
Paid $365,000
Repairs ~$25,000
A similar house (same architecture) across the cul de sac is already pending with a listing price of 437,000. We don’t know what it will exactly sell for.
My guess for rents are ~1,700 - 2,000. It is in a great school district so not many houses listed for rent. Rentometer said the rent was average for the range.
Are we (going to) cashflow? Yes. We plan to continue this strategy using a heloc or cash out refi.
Whenever I ran the numbers “normally”, I got no where near the 1% rule. This clearly isn’t the right method to maximize cashflow but the location is close (1-1.5 hr drive). We feel good that we can “keep an eye on it”.
My guess to increase cash flow from here on out is to find off market deals by knocking on doors. I like it when I see those properties with over grown lawns, old paint. Etc.
This cash flows because you have 0% LTV. Have you run cash flow projection at 80% LTV? How about ROI or COC projections? Once you HELOC or cash out refinance, if you go at 80% LTV, this will be cash flow negative. Based on the midpoint of the rent projection you have a cost to rent ratio of 1850/365000 = for a 0.51% ratio (so basically half of the 1% rule). I do not believe at that cash ratio, at an 80% LTV, you can be cash positive even if you self manage and do all of the maintenance activities yourself. For our projections we use 0.75% as our cash neutral SFR at 80% LTV (0.7% if attached multiplex) with us self managing but hiring our virtually all work.
Fortunately, based on the house across the cul de sac, you appear to have gained significant equity. This equity can compensate for many months of negative cash flow (if you have $70K equity you can have years of negative cash flow and still have a positive return).
Good luck
@Dan H. I realize it isn’t the “best deal”. It’s a lot better than having money sitting In the bank getting a pitiful interest rate. I did get an itchy trigger finger because I wanted my first property. I know I need to find better deals for my next one. Is the 0.75% you use for projections the cost to rent ratio? I will try to aim closer to that.
@Dan H. I realize it isn’t the “best deal”. It’s a lot better than having money sitting In the bank getting a pitiful interest rate. I did get an itchy trigger finger because I wanted my first property. I know I need to find better deals for my next one. Is the 0.75% you use for projections the cost to rent ratio? I will try to aim closer to that.
I think with your equity build up (either by purchasing below market, value add, and/or market appreciation), if anywhere close to the comp you provided, you did great. $365K (cost) + $25k (rehab/repairs) = $390K. If it is worth $437K then you have achieved $47K of equity build up.
I was only remarking on the cash flow aspect that you indicated was positive; virtually all RE has positive cash flow with 0% LTV. This amounts to purchasing cash flow. Your $390K produces would produce (using the mid range rent) a return of 5.7% ($390K/(12*$1850)) if there were no expenses (i.e. no maintenance/cap ex, no vacancy, no PM fees, no misc expenses). This of course is not real and your rate of return will be significantly less than 5.7%. It, however, is going to beat the FDIC interest rate.
With that much equity build up you can have negative cash flow a long time (many years if negative less than a few hundred per month) before the poor cash flow makes this a poor investment. Ideally rent appreciation makes this RE cash flow positive in not too long.
Also if you learn along the way such that your next RE investment provides a better return then that is a bonus.
Good luck
I know this isn’t the smartest way but it’s what we was comfortable with. My fiancé and I tried to get a mortgage from Wells Fargo but we couldn’t. So we just bought a house all cash in Sacramento.
Paid $365,000
Repairs ~$25,000
A similar house (same architecture) across the cul de sac is already pending with a listing price of 437,000. We don’t know what it will exactly sell for.
My guess for rents are ~1,700 - 2,000. It is in a great school district so not many houses listed for rent. Rentometer said the rent was average for the range.
Are we (going to) cashflow? Yes. We plan to continue this strategy using a heloc or cash out refi.
Whenever I ran the numbers “normally”, I got no where near the 1% rule. This clearly isn’t the right method to maximize cashflow but the location is close (1-1.5 hr drive). We feel good that we can “keep an eye on it”.
My guess to increase cash flow from here on out is to find off market deals by knocking on doors. I like it when I see those properties with over grown lawns, old paint. Etc.
Could you build an ADU or convert garage into an ADU?
What's not shown on the proforma is that this is a corner lot with two driveways, 2 existing water meters, on a main transit corridor, with a 40' height limit and a 1.35 max FAR...
love it!
I know this isn’t the smartest way but it’s what we was comfortable with. My fiancé and I tried to get a mortgage from Wells Fargo but we couldn’t. So we just bought a house all cash in Sacramento.
Paid $365,000
Repairs ~$25,000
A similar house (same architecture) across the cul de sac is already pending with a listing price of 437,000. We don’t know what it will exactly sell for.
My guess for rents are ~1,700 - 2,000. It is in a great school district so not many houses listed for rent. Rentometer said the rent was average for the range.
Are we (going to) cashflow? Yes. We plan to continue this strategy using a heloc or cash out refi.
Whenever I ran the numbers “normally”, I got no where near the 1% rule. This clearly isn’t the right method to maximize cashflow but the location is close (1-1.5 hr drive). We feel good that we can “keep an eye on it”.
My guess to increase cash flow from here on out is to find off market deals by knocking on doors. I like it when I see those properties with over grown lawns, old paint. Etc.
Luckily when trying to caculate the 1% rule, there is nothing to run or calculate. You paid $390k for the house, so you'd want to get $3,900 to hit the 1% rule. At the rent you can get, that's more like .5%
I like the 1% rule when buying property as it seems to be a price I can pay, with an aggressive amount of debt (say 80%) and comfortably cash flow with all the costs, and bumps and bruises you might expect. I've bought a LOT of properties and when I've paid (financed) over what I'd get ith the 1% rule, they simply don't cash flow after debt service. Obviously if you pay cash that's a different story. But the return on your $390k is so low that it's painful to suggest anyone copy. For that $390k you could have easily bought a 6+ CAP $1.5m+ multi and likely made 10x the cash flow. Or more if you figure you have 1.5m of property that appreciates at x% vs. a $390k home that appreciates at x% a year. The fact leverage allows for 4-5x the appreciation is what normally sets RE apart from other investments.
Can i upload your brain into my brain?
I'm not excited to make a ton of newbie mistakes, but unfortunately that's the only way i learn.
Sounds like i need to think outside of the box to survive in SoCal.
...... and i probably need to save a little more money.
Thanks for sharing
At the same time, Buying a SFR for a first investment is not a bad idea at all. Luckily there are ways to pull out equity. I get that there are a bunch of fancy things to do in RE but I find the idea of property management "fun". Therefore I started with a SFR. My journey with real estate does not end here and I fully plan to take advantage of leverage.
At the same time, Buying a SFR for a first investment is not a bad idea at all. Luckily there are ways to pull out equity. I get that there are a bunch of fancy things to do in RE but I find the idea of property management "fun". Therefore I started with a SFR. My journey with real estate does not end here and I fully plan to take advantage of leverage.
If you find PM fun, move to Houston. I’ll give you all the fun you can possibly handle :-)