Living in LA and investing in Indy

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Hi fellow Angelenos,

I'm starting a meetup in El Segundo (by LAX).  First networking event will be Saturday January 11th at 3pm.  This first meeting will be pretty informal... just getting to know each other, asking questions, and sharing information.  We can modify from there for future events. 

We can talk about different neighborhoods, property criteria, what's working, what isn't.

https://www.biggerpockets.com/forums/521/topics/788607-los-angeles-sfr-investor-meetup-and-networking-event

I invest in Indy and live 10 minutes away from you (la crescenta)
Originally posted by @Graziano Casale :

Hello, I'm currently investing in Indianapolis from LA (Pasadena). I know there are a lot of us out here, and it would be beneficial to all to connect and maybe get together to share experiences and make our network even stronger

Please reply to this post if you are interested and I'll be glad to organize something

Graz

 

Originally posted by @Jason Allen :
Originally posted by @Graziano Casale:

Well if you live in LA I'd say that the only option you really have is to invest out of state.

 

Why do you say that?   Case shiller lists LA as the 2nd best in nation for buy n hold return for this century.   historically its appreciation has been outstanding g producing outstanding cash flow.  

Originally posted by @Dan Heuschele :
Originally posted by @Jason Allen:
Originally posted by @Graziano Casale:

Well if you live in LA I'd say that the only option you really have is to invest out of state.

 

Why do you say that?   Case shiller lists LA as the 2nd best in nation for buy n hold return for this century.   historically its appreciation has been outstanding g producing outstanding cash flow.  


P.T. Barnum said that “a sucker is born every minute.”

Originally posted by @Jason Allen :
Originally posted by @Dan Heuschele:
Originally posted by @Jason Allen:
Originally posted by @Graziano Casale:

Well if you live in LA I'd say that the only option you really have is to invest out of state.

 

Why do you say that?   Case shiller lists LA as the 2nd best in nation for buy n hold return for this century.   historically its appreciation has been outstanding g producing outstanding cash flow.  

P.T. Barnum said that “a sucker is born every minute.”

 Do you know the source case shriller?   Respected source.  I think you know nothing about LA RE investing.  Have not done any research on actual returns.   Makes me question why you bother to post on the subject at all except to troll.   

Originally posted by @Dan Heuschele :
Originally posted by @Jason Allen:
Originally posted by @Dan Heuschele:
Originally posted by @Jason Allen:
Originally posted by @Graziano Casale:

Well if you live in LA I'd say that the only option you really have is to invest out of state.

 

Why do you say that?   Case shiller lists LA as the 2nd best in nation for buy n hold return for this century.   historically its appreciation has been outstanding g producing outstanding cash flow.  

P.T. Barnum said that “a sucker is born every minute.”

 Do you know the source case shriller?   Respected source.  I think you know nothing about LA RE investing.  Have not done any research on actual returns.   Makes me question why you bother to post on the subject at all except to troll.   

I'm just trying to help you. Your state just passed a law that says you can give people aids and it's not a crime, your governor has allowed San Francisco to be taken over by bums, your taxes are up to 13% state income, it's 25% more expensive to do business in CA from day one, the prices are over inflated (we're talking -2% cap rates!), there's no value add unless you buy in a dump or ghetto which unless you've got millions for a down payment and acquisition costs that's all you can afford. 

I used to live there. I know a thing or two. But good luck.

Originally posted by @Jason Allen :
Originally posted by @Dan Heuschele:
Originally posted by @Jason Allen:
Originally posted by @Dan Heuschele:
Originally posted by @Jason Allen:
Originally posted by @Graziano Casale:

Well if you live in LA I'd say that the only option you really have is to invest out of state.

 

Why do you say that?   Case shiller lists LA as the 2nd best in nation for buy n hold return for this century.   historically its appreciation has been outstanding g producing outstanding cash flow.  

P.T. Barnum said that “a sucker is born every minute.”

 Do you know the source case shriller?   Respected source.  I think you know nothing about LA RE investing.  Have not done any research on actual returns.   Makes me question why you bother to post on the subject at all except to troll.   

I'm just trying to help you. Your state just passed a law that says you can give people aids and it's not a crime, your governor has allowed San Francisco to be taken over by bums, your taxes are up to 13% state income, it's 25% more expensive to do business in CA from day one, the prices are over inflated (we're talking -2% cap rates!), there's no value add unless you buy in a dump or ghetto which unless you've got millions for a down payment and acquisition costs that's all you can afford. 

I used to live there. I know a thing or two. But good luck.

 Yet somehow every RE investor I know who has invested at least 5 years in coastal Ca RE has made millions from RE.  The 3 cities at the top of Case Shriller for buy n hold properties this century are coastal CA cities.  If we were a country, we would be 5th largest GDP.  Of the 5 cities that comprise 90% of tech growth, 3 are coastal CA cities.  When someone decides to leave Ca, I celebrate as our biggest issue is too many people wanting to live here. 

https://www.google.com/amp/s/w...

Invest where you want.  I suggest most investors should invest local.  But to think CA has not been great for buy n hold RE is simply incorrect.  Case shriller indicates it has been the best, but all reliable sources indicate it has been great. 

@Dan Heuschele @Jason Allen

This is more a debate of strategies and preferences. You are both right.

Many California markets are some of the best in the country for organic appreciation (gain) but are some of the worst for cash flow (yield). Many see buying for appreciation akin to speculating and leaving your destiny up to the market to provide that organic return. Just like the stock market, the prices continue to go up, until they don't and there's nothing you can do about it. Some of the wealthiest RE investors have made fortunes buying for appreciation, so there's nothing wrong with it.

Markets like Indy and others are some of the best in the country for cash flow. While the appreciation is not like the coasts, there still is positive organic appreciation. Cash flow is seen as protection against downside as it leaves headroom in the deal and doesn't require the owner to carry the costs of the mortgage/taxes, etc that aren't fully covered by rent.

Return = Yield (cash flow) + Gain (appreciation).

Also, Return = Risk

Meaning that a high return from appreciation means a higher risk to assume large organic growth. Higher cash on cash also indicates more operational risk.

It's really up to ones tolerance for risk and strategy.

Originally posted by @Spencer Gray :

@Dan Heuschele @Jason Allen

This is more a debate of strategies and preferences. You are both right.

Many California markets are some of the best in the country for organic appreciation (gain) but are some of the worst for cash flow (yield). Many see buying for appreciation akin to speculating and leaving your destiny up to the market to provide that organic return. Just like the stock market, the prices continue to go up, until they don't and there's nothing you can do about it. Some of the wealthiest RE investors have made fortunes buying for appreciation, so there's nothing wrong with it.

Markets like Indy and others are some of the best in the country for cash flow. While the appreciation is not like the coasts, there still is positive organic appreciation. Cash flow is seen as protection against downside as it leaves headroom in the deal and doesn't require the owner to carry the costs of the mortgage/taxes, etc that aren't fully covered by rent.

Return = Yield (cash flow) + Gain (appreciation).

Also, Return = Risk

Meaning that a high return from appreciation means a higher risk to assume large organic growth. Higher cash on cash also indicates more operational risk.

It's really up to ones tolerance for risk and strategy.

 >Many California markets are some of the best in the country for organic appreciation (gain) but are some of the worst for cash flow (yield)....  Markets like Indy and others are some of the best in the country for cash flow.

Wrong.  I would put my coastal So Cal cash flow per unit up against any zero appreciation market RE investor’s.  This would be especially true if I used purchase price versus current rent.  Many of our RE has been refinanced so that we have pulled out all of our investment and extracted cash.  Doing this results in a reduction of cash flow because of the increase in loan amount. 

Actual cash flow is the cash flow defined over the hold period.  It is not the initial cash flow nor the projected cash flow.  The organic appreciation you indicate is why the cash flow is so great.  Associated with market appreciation is rent appreciation.

The higher appreciating market will always eventually have the better cash flow as long as 1) the appreciation exceeds appreciation of expenses (a virtual certainty in Ca where property tax is basically a fixed cost and with most investors using fixed rate loans) 2) money is not extracted from the RE.  

Markets like Indy could have a better initial cash flow, but only for short hold terms have they achieved a better cash flow  


>Meaning that a high return from appreciation means a higher risk to assume large organic growth.

Wrong.   The high price of a market is a key indicator of the market perceived risk and reward.  Higher priced markets are higher priced because the market believes them to be less risky and better reward than lower priced markets.  Curious what factors you believe result in the higher RE price?


@Dan Heuschele I hope no one is investing in a negative appreciation market! Right

It sounds like you've had some great success investing locally in So Cal. That's great and congrats, you've got a great strategy for your market. A lot of other strategies with different return attributes (not necessarily lower) don't work in your market. I guarantee you that there are other strategies in other markets that can yield the same returns that you achieve. Some lower, some higher.

Maybe you are achieving the highest returns in the USA, I don't really know. 

You're right, cash flow is all the cash that comes out of a property. When speaking to most investors and we're talking about cash flow, though, we're not talking about the total return or IRR that will be realized when you sell or refi, we're usually speaking of the cash on cash or dividend return that is being produced during ownership. The cash that the deal will put off in year 1,2,3,etc before selling in year 5,7,10 etc.

It's assumed that the asset will appreciate over the hold period either by organic growth or by forcing appreciation via a value add / rehab. What I don't do is speculate on organic appreciation since I'm typically a longer term holder and I don't have the luxury of having a crystal ball at my disposal that can tell me what the market will look like in 5-10 years. What I can tell you though, however, is what the rent roll and T12 look like, and what is a reasonable increase of market rent can be achieved over a given time to increase NOI after a rehab.

One of the main reason why a lot of people invest in RE is for the tax sheltered cash dividend that is paid monthly, quarterly, etc. Some don't want to wait until they refinance or sell. That doesn't seem like a priority for you. Different strokes.

OUT OF TOWN INVESTORS PLEASE READ, 

Do not buy properties in Indianapolis based on zip codes. In MANY different parts of the city, you can walk one block and go into the complete ghetto. 


Originally posted by @Spencer Gray :

@Dan Heuschele I hope no one is investing in a negative appreciation market! Right

It sounds like you've had some great success investing locally in So Cal. That's great and congrats, you've got a great strategy for your market. A lot of other strategies with different return attributes (not necessarily lower) don't work in your market. I guarantee you that there are other strategies in other markets that can yield the same returns that you achieve. Some lower, some higher.

Maybe you are achieving the highest returns in the USA, I don't really know. 

You're right, cash flow is all the cash that comes out of a property. When speaking to most investors and we're talking about cash flow, though, we're not talking about the total return or IRR that will be realized when you sell or refi, we're usually speaking of the cash on cash or dividend return that is being produced during ownership. The cash that the deal will put off in year 1,2,3,etc before selling in year 5,7,10 etc.

It's assumed that the asset will appreciate over the hold period either by organic growth or by forcing appreciation via a value add / rehab. What I don't do is speculate on organic appreciation since I'm typically a longer term holder and I don't have the luxury of having a crystal ball at my disposal that can tell me what the market will look like in 5-10 years. What I can tell you though, however, is what the rent roll and T12 look like, and what is a reasonable increase of market rent can be achieved over a given time to increase NOI after a rehab.

One of the main reason why a lot of people invest in RE is for the tax sheltered cash dividend that is paid monthly, quarterly, etc. Some don't want to wait until they refinance or sell. That doesn't seem like a priority for you. Different strokes.

>Maybe you are achieving the highest returns in the USA, I don't really know. 

According to Case Shiller, San Diego is the number 3 return for buy n hold this century (behind San Fran and Los Angeles).  So unlikely the average San Diego RE investor has out performed the average San Francisco RE investor but I like to think I have done better than the average San Diego buy n hold investor.

> we're not talking about the total return or IRR that will be realized when you sell or refi, we're usually speaking of the cash on cash or dividend return that is being produced during ownership. The cash that the deal will put off in year 1,2,3,etc before selling in year 5,7,10 etc.

We have the same definition of cash flow.  It does not include profits from a sale.  We have only sold one investment RE in San Diego and that was a long time ago (late 1990s) and we sold it to purchase another San Diego RE investment (not because it did not have good cash flow).

>One of the main reason why a lot of people invest in RE is for the tax sheltered cash dividend that is paid monthly, quarterly, etc. Some don't want to wait until they refinance or sell. That doesn't seem like a priority for you. Different strokes. 

I think you are missing the part where I have outstanding cash flow every month and every investor that I am aware of in my market that has owned at least 5 years has good to great cash flow. I question if anyone knows a buy n hold San Diego investor who has owned at least 5 years and not extracted money that does not have good cash flow??? How do they all have good cash flow? In the last 5 years the average rent increase for an SFR is over $700/month (source Zillow). So, unless you purchased an RE with HUGE negative cash flow, the property purchased >=5 years ago now has good to great cash flow. All of my RE currently meet the 1% rule. Our best RE purchase currently is well over 4% rent to purchase ratio.

Also the tax sheltering of cash flow is not as easy as the tax sheltering from RE appreciation.  I say this even though we qualify as RE professionals and get the full advantage of any cash flow sheltering (i.e. we do not have to bank any loses against future profits).  We end up paying taxes (IMO a lot of taxes) on some of our cash flow.  I have yet to pay any taxes on RE appreciation (the few times we have sold we have reinvested the profits into other RE).

>I don't have the luxury of having a crystal ball at my disposal that can tell me what the market will look like in 5-10 years. 

As for the crystal ball, you are assuming that your rent will never go down but this was not the case in all markets during the GR.  Check out Detroit or Las Vegas in the GR if you want two extreme examples.  No one really knows the future but with research/knowledge we can increase our odds of accurately forecasting the future.  This is not the same as hoping for or using a crystal ball.  I think you can understand the difference.

In addition, if your rent increase is not at least as great as inflation, the rent has in effect gone down.  According to neighborhood scout, Indianapolis rents have appreciated 40% this century.   Needless to say that is significantly below the inflation rate for this century (which is approximately 50%) so the rents in inflation adjusted dollars in Indianapolis have declined for this century.  This is not necessarily the lone indicator of future behavior, but in the absence of any further research is one indicator.

BTW I am very much an advocate of buy n hold RE investors choosing to invest in their market.  This is especially true of newer RE investors.  I believe virtually every market has a means to be profitable in RE investing.  So I am not intending to hate on Indianapolis RE investing for the locals.  What I am intending is to educate the Coastal So Cal investors.  What I often see in Midwest markets are absurd pro forma, often reflecting zero cap expenses and not the realities for the OOS investor.  Each of these pro forma should be evaluated against the 50% rule (which I consider aggressive for low unit count in low rent markets such as Indianapolis).  I believe many of the OOS RE investors in these markets are intentionally being deceived.

Good luck with you Indianapolis RE investments.

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