Cash flow California investors
Member since 2019 · 4 posts · 1 vote
Cash flow California investors
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Dan H.Pro Member
Investor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votesI live in San Diego and I invest in San Diego area. You may think it does not cash flow but I know of zero investors who have owned for at least 5 years that do not have significant cash flow. San Diego historically has produced near top of nation ROI for buy and hold investors. How?
- The item you do not want to rely on, appreciation. Market and rent appreciation. San Diego's long-term appreciation goes back more than 60 years. When market prices rise, rents increase (usually with a time lag). SFR rents have been rising at a rate greater than $100/month annually for at least the last 4 years.
- They are investors. They do not typically purchase an SFR at retail. They either buy MF or below retail. If you are purchasing for an investment, why pay retail? Does the store you purchase you groceries at pay retail? Investors are purchasing for an investment and should only consider retail if there is a value add or something else special about the purchase.
My suggestion is you start your RE investing local in Northern CA. The prices reflect the value. The value takes into account the risk as well as the expected return. There is a reason the cheap locations are cheap.
Good luck
30 Replies
- Real Estate Agent · Brentwood, CA · Member since 2018 · 285 posts · 225 votes7y
@Nick Meyer - Sent you a PM
@Carson T. - Crescent City is beautiful. We just went up to that area (and Ferndale) not too long ago. The Goleta cheese factory was awesome.
- 7yDan H.Pro MemberInvestor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votes
I live in San Diego and I invest in San Diego area. You may think it does not cash flow but I know of zero investors who have owned for at least 5 years that do not have significant cash flow. San Diego historically has produced near top of nation ROI for buy and hold investors. How?
- The item you do not want to rely on, appreciation. Market and rent appreciation. San Diego's long-term appreciation goes back more than 60 years. When market prices rise, rents increase (usually with a time lag). SFR rents have been rising at a rate greater than $100/month annually for at least the last 4 years.
- They are investors. They do not typically purchase an SFR at retail. They either buy MF or below retail. If you are purchasing for an investment, why pay retail? Does the store you purchase you groceries at pay retail? Investors are purchasing for an investment and should only consider retail if there is a value add or something else special about the purchase.
My suggestion is you start your RE investing local in Northern CA. The prices reflect the value. The value takes into account the risk as well as the expected return. There is a reason the cheap locations are cheap.
Good luck
- San Diego, CA · Member since 2019 · 9 posts · 2 votes7y
Thanks Dan, I'm a newbie here as well, and in San Diego and been researching the market more deeply and looking at other cheap markets too. Like you said, appreciation isn't what I'd like to rely on, but I realize that if I can just sit through a downturn, then San Diego could still be a good place over the long term.
Sorry about a stupid question, but I couldn't figure out what you meant by "MF" in #2.
- 7yDan H.Pro MemberInvestor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votes
Originally posted by @Priyanshu R.:
Thanks Dan, I'm a newbie here as well, and in San Diego and been researching the market more deeply and looking at other cheap markets too. Like you said, appreciation isn't what I'd like to rely on, but I realize that if I can just sit through a downturn, then San Diego could still be a good place over the long term.
Sorry about a stupid question, but I couldn't figure out what you meant by "MF" in #2.
MF means multi family. Multi family is often broken into two categories that is based on the typical financing used. Duplex to quad are financed similar to SFR and have their values set via comps. These units can be financed via commercial loans but the best terms are the conventional financing so mostly conventional financing is used. More than 4 units use commercial loans and are valued based on the income (not including debt service) and the Gross Rent multiplier. The GRM for an area reflects the expected risk and return.
If you do not calculate for appreciation you are in effect eliminating one of the profit sources for buy n hold investing and, in most of the best producing ROI markets, the primary profit source. An analogy would be to obtain a baseball player but not to look at their past power numbers. Maybe tomorrow they stop hitting for power. However, if they are not past their prime it is more likely that the past power numbers reflects the power they will display until they get injured or are past their prime.
Buy n hold implies long term hold. Short-term cycles should have little effect on the buy n hold investor that is not over leveraged. San Diego has over 60 years of long-term appreciation. This appreciation track record is taken into account on the RE price along with many other aspects (great climate, culturally diverse, limited land, high cost of building, expect population growth, expected income growth, vacancy rate, etc.)
The top buy n hold markets for ROI this century are San Francisco, Los Angeles, and San Diego (source Case-Shiller). Each of those markets had much of the ROI produced by market appreciation and the associated rent appreciation that is typically associated with market appreciation.
I have heard that appreciation is not guaranteed but
- Over 60 years of on-going appreciation for San Diego seems like long term appreciation is likely.
- Cash flow is not guaranteed. Just look at Detroit or Las Vegas in the Great Recession (for 2 extreme examples).
I recommend all RE buy n hold investors start local regardless of whether their market is a cash flow market, appreciation market, or some of both. There are many reasons for my belief but some are
- It leverages your local knowledge base
- You can be your own PM saving money that is critical when starting out.
- You can do some of the tasks yourself saving money.
- You do not need to build a remote trusted team, instead build the local trusted team where it is easier to provide oversight.
- You can house hack if you choose.
Good luck
- Real Estate Coach · Venice Beach, CA · Member since 2012 · 6k+ posts · 3k+ votes7y
I'm sure I'm not the first to say it, but a lot of Californians are buying out-of-state for cash flow. Some folks in CA swear there is good cash flow in various places, but so far no one has really been able to show me any (I've asked several times).
Regardless of where you end up investing, congrats on starting at 22 years old! That will pay dividends down the road.
- 7yDan H.Pro MemberInvestor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votes
Originally posted by @Ali Boone:
I'm sure I'm not the first to say it, but a lot of Californians are buying out-of-state for cash flow. Some folks in CA swear there is good cash flow in various places, but so far no one has really been able to show me any (I've asked several times).
Regardless of where you end up investing, congrats on starting at 22 years old! That will pay dividends down the road.
I find the variables in cash flow calculations to vary so significantly that cash flow numbers are useless to compare unless you know it is an apple to apple comparison. One person may have 100% LTV versus the other has no loan (all paid off). One may use no cap expense estimate and the other may use a very conservative cap expense estimate. One may use a PM and the other may not. One could be a STR with its higher maintenance/management costs and the other could be an LTR. One could be class A and the other class D with the associated problems that are associated with class D.
I will say by virtually anyone's definition of cash flow, my RE has good cash flow (all coastal So Cal). You can look at my profile and look at purchase cost versus current rent. My goal is not too have a lot of individual units. My goal is to have the best ROI I can achieve for the least amount of effort. My RE has had significant market appreciation, has had significant positive cash flow, and has had the tenants significantly pay down the equity.
Note there is a difference between initial cash flow and actual cash flow. Value adds and rent appreciation are two ways to improve initial cash flow. Market appreciation and equity pay down are two mechanisms to increase the ROI beyond that achieved via cash flow alone.
Good luck
- 7yBrandon SturgillBusiness MemberReal Estate Broker · Columbus, OH · Member since 2013 · 3k+ posts · 1k+ votes
@Dan H. Your acquisition numbers are not that far off from A-class Columbus properties...makes me curious why folks are so anxious to invest out of state. You've obviously found a pocket in Escondido...
Cheers
- Rental Property Investor · San Francisco, CA · Member since 2015 · 236 posts · 156 votes7y
Congrats @Nick Meyer on starting your Real Estate journey! Below is an article from earlier this year regarding your topic.
https://www.forbes.com/sites/andrewdepietro/2019/01/31/best-cities-own-rental-property-california/
I personally have investments in the Sacramento and Stockton areas and yes...they do cash flow! A good majority of the people I've met that say you can't find deals in California haven't really looked for deals here. With some strategy in place, good investors MAKE their own deals. Whether it be OOS or here in CA, there are lots of deals out there. You just have to find the ones that best suit your goals and needs.
Below is another article about a year ago that goes into a little more depth in the numbers of some cities in CA. Would be interesting to compare these numbers from last year to current numbers now.
https://www.forbes.com/sites/ingowinzer/2018/03/01/investing-in-california-real-estate-here-are-a-few-things-you-should-know/
I hope this helps!
- 7yDan H.Pro MemberInvestor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votes
Originally posted by @Brandon Sturgill:
@Dan H. Your acquisition numbers are not that far off from A-class Columbus properties...makes me curious why folks are so anxious to invest out of state. You've obviously found a pocket in Escondido...
Cheers
Some items:
- I would classify most of Escondido as class C. There are pockets better and worse (but none that I would assign an A class). My areas of Escondido are B- to C. So that is one big difference (A class should cost more than B- to C class).
- In my market the duplex to quad often sell for significantly less than SFR. I do not know if that is true for Columbus. The STR prices would be higher per BR/Ba/footage.
- My last acquisition was almost 1.5 years ago. Prices have risen some since then but not like the previous 6 years so that does not result in a very significant mis-impression of value, but it does account for some.
- I purchase value add properties. The easiest/safest value add for us is the rehab. This implies that I seek out thrashed RE. However, our last duplex purchase only had one of the two units a good value add; the other was in too good shape to provide the type of return we expect on our value add. So you may be comparing RE that is thrashed (most of our purchases) to RE that has been prepped to sell for top dollar.
So the comparison of Columbus RE to my purchases may not be very apple to apple. It, however, does not diminish that my RE rents are high compared to the purchase/rehab price and definitely cash flow. In addition, approximately half of our RE has 0 of our initial investment left in it and one of the ones that has investment still in it only does because the loan is so ridiculously low we do not desire to refinance to extract out our initial investment (we could get all our initial investment out of this RE easily and pocket maybe 6 figures).
Even if I eliminate the 2 STR units, I have nice cash flow. I could possibly retire on the 2 STR units' cash flow (over $10k/month above expenditures) alone if my family did not like to spend money so much :=).
My point in referencing my purchases is there is a difference between initial cash flow and cash flow after value adds and appreciation. I know of no San Diego buy n hold investor who has owned the RE at least 5 years that does not have positive cash flow. In addition, they have experienced outstanding appreciation resulting in a great ROI.
People who post that Coastal So Cal RE does not cash flow I suspect have not followed the market 5 years, probably are not looking at properties from an investment perspective (i.e. are looking at retail SFR on the MLS), and if they went OOS 5 years ago or more would have done much better if they had invested in San Diego.
My recommendation is for investors to start local. Columbus investors should start in Columbus and San Diego investors should start in San Diego. They should leverage their local knowledge. Recognize money can be made with RE via multiple ways. I like value adds because it can reduce my investment amount early which results in optimized ROI.
- San Diego, CA · Member since 2019 · 9 posts · 2 votes7y
Originally posted by @Dan H.:
Originally posted by @Priyanshu R.:
Thanks Dan, I'm a newbie here as well, and in San Diego and been researching the market more deeply and looking at other cheap markets too. Like you said, appreciation isn't what I'd like to rely on, but I realize that if I can just sit through a downturn, then San Diego could still be a good place over the long term.
Sorry about a stupid question, but I couldn't figure out what you meant by "MF" in #2.
MF means multi family. Multi family is often broken into two categories that is based on the typical financing used. Duplex to quad are financed similar to SFR and have their values set via comps. These units can be financed via commercial loans but the best terms are the conventional financing so mostly conventional financing is used. More than 4 units use commercial loans and are valued based on the income (not including debt service) and the Gross Rent multiplier. The GRM for an area reflects the expected risk and return.
If you do not calculate for appreciation you are in effect eliminating one of the profit sources for buy n hold investing and, in most of the best producing ROI markets, the primary profit source. An analogy would be to obtain a baseball player but not to look at their past power numbers. Maybe tomorrow they stop hitting for power. However, if they are not past their prime it is more likely that the past power numbers reflects the power they will display until they get injured or are past their prime.
Buy n hold implies long term hold. Short-term cycles should have little effect on the buy n hold investor that is not over leveraged. San Diego has over 60 years of long-term appreciation. This appreciation track record is taken into account on the RE price along with many other aspects (great climate, culturally diverse, limited land, high cost of building, expect population growth, expected income growth, vacancy rate, etc.)
The top buy n hold markets for ROI this century are San Francisco, Los Angeles, and San Diego (source Case-Shiller). Each of those markets had much of the ROI produced by market appreciation and the associated rent appreciation that is typically associated with market appreciation.
I have heard that appreciation is not guaranteed but
- Over 60 years of on-going appreciation for San Diego seems like long term appreciation is likely.
- Cash flow is not guaranteed. Just look at Detroit or Las Vegas in the Great Recession (for 2 extreme examples).
I recommend all RE buy n hold investors start local regardless of whether their market is a cash flow market, appreciation market, or some of both. There are many reasons for my belief but some are
- It leverages your local knowledge base
- You can be your own PM saving money that is critical when starting out.
- You can do some of the tasks yourself saving money.
- You do not need to build a remote trusted team, instead build the local trusted team where it is easier to provide oversight.
- You can house hack if you choose.
Good luck
Dan, thank you SO much for such a detailed reply. MF = Multi Family, should've realized that!
I agree on the appreciation, and always thought that if I hold something long-term (which I would), it'll happen but that doesn't add to the bottom directly other than through raising rents as that happens. So like other people here, I've thought of RE investing as a way to build passive income primarily and any appreciation is additional. I like your thinking - buy properties for appreciation, and cash will follow through rent as well.
About Detroit and Las Vegas, you're right. I didn't know about Vegas specifically but that's a good point you make that hadn't occurred to me either. Being in San Diego myself, and having lived here for over 10 years now, and following the real estate market somewhat casually over that period, I have been leaning towards local investments initially even if the initial investment is higher - though I've been exploring areas like Escondido as well.
Are there any resources you'd recommend for SD newbies like myself, such as meetup groups or other tools/sites to research the market in depth?
- 7yGordon CuffePro MemberInvestor · Roseville, CA · Member since 2009 · 1k+ posts · 583 votes
@Nick MeyerThere is a small town 40 minutes from Downtown Sacramento where you still can buy a duplex in the mid 200k range. A new Hard Rock casino and hotel is currently being built just outside of Marysville. Dont tell too many people or that will drive the prices up too much.
- Encinitas, CA · Member since 2011 · 191 posts · 252 votes7y
@Dan Heuschele, I completely agree. There does seem to be a tendency to say XXX does not "cashflow" in California without considering nuances such as financing, property type, value add opportunities, and perhaps most importantly, time in the investment. Some California investments I have made that started out as break even turned into very nice cash flow properties over time.
I too have rentals in Escondido, 18 units, which I have owned for almost 10 years which took a lot of work in the early years, but now are netting me 5 figures a month with full service management. It's not that Escondido is particularly magical in its returns. Like you said, starting local is a very good way to both leverage your knowledge and learn the ins and outs up close. I can't imagine doing it any other way.
- 7yDan H.Pro MemberInvestor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votes
Originally posted by @Rob K.:
@Dan Heuschele, I completely agree. There does seem to be a tendency to say XXX does not "cashflow" in California without considering nuances such as financing, property type, value add opportunities, and perhaps most importantly, time in the investment. Some California investments I have made that started out as break even turned into very nice cash flow properties over time.
I too have rentals in Escondido, 18 units, which I have owned for almost 10 years which took a lot of work in the early years, but now are netting me 5 figures a month with full service management. It's not that Escondido is particularly magical in its returns. Like you said, starting local is a very good way to both leverage your knowledge and learn the ins and outs up close. I can't imagine doing it any other way.
I am also heavily in Escondido with just over half as many units as you have (11 Escondido units out of our 17 units) starting in Escondido less than 7 years ago (2012). Your timing was very good. Prices probably had not quite hit the bottom but it was close. You now have 5 digits of cash flow, but you also may have achieved 7 digits of appreciation (if not 7 digits it should be close to that). I guarantee you that the low appreciation markets are not cash flowing per unit like you are if they purchased when you did. By definition of them being low appreciation markets they have not experienced the appreciation that you have experienced.
I agree that Escondido is not special other than being blue collar. I chose it because it was the blue collar area near my home. If I lived near El Cajon, I may have chose El Cajon. Blue collar people are often lifetime renters. I had an inherited tenant move out of one of my units somewhat recently. Time in unit: 27 years. Raised his family there. Moved out after retiring to move to another state to be near his daughter. Large rental market. I have been happy with all of my San Diego county purchases but the Escondido RE has the highest rent per value of my LTR
Question: Do you know anyone invested in San Diego county buy n hold for at least 5 years that does not have positive cash flow? It would seem hard to do. Yet I hear all the time how it does not cash flow.
- Encinitas, CA · Member since 2011 · 191 posts · 252 votes7y
Well, you have the record for time in unit. I had a tenant stay in an Encinitas condo for 21 years. It was dated when she moved in and needed quite the rehab when she finally left. In the meantime, my mortgage was almost completely paid off.
No, I don't think San Diego investors that have held the last 5 years are experiencing anything other that positive cash flow if they did not make mistakes. The last 5 years have been pretty exceptional though with record increases in rental rates and historically low interest rates. I can understand the difficulty of trying to find properties in San Diego that cash flow now from the inception with typical 80% or so financing. I have not been buying anything myself lately, but would not settle for investing out of state either unless I had pre-existing relationships or family on the ground that could help me manage things in a particular area so that I had a local "feel". Long ago I came to the conclusion that in a very real sense investing out of state was more of an investment in people you have to trust than in the real estate itself.
When I was younger, I started out with properties that broke even after financing costs with a long time buy and hold perspective. I would consider doing that now too if I were starting out and had another job for my source of income. When I was doing this in the early 1990s, I hardly even noticed that we had a downturn.
- 7yDan H.Pro MemberInvestor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votes
Originally posted by @Rob K.:
Well, you have the record for time in unit. I had a tenant stay in an Encinitas condo for 21 years. It was dated when she moved in and needed quite the rehab when she finally left. In the meantime, my mortgage was almost completely paid off.
No, I don't think San Diego investors that have held the last 5 years are experiencing anything other that positive cash flow if they did not make mistakes. The last 5 years have been pretty exceptional though with record increases in rental rates and historically low interest rates. I can understand the difficulty of trying to find properties in San Diego that cash flow now from the inception with typical 80% or so financing. I have not been buying anything myself lately, but would not settle for investing out of state either unless I had pre-existing relationships or family on the ground that could help me manage things in a particular area so that I had a local "feel". Long ago I came to the conclusion that in a very real sense investing out of state was more of an investment in people you have to trust than in the real estate itself.
When I was younger, I started out with properties that broke even after financing costs with a long time buy and hold perspective. I would consider doing that now too if I were starting out and had another job for my source of income. When I was doing this in the early 1990s, I hardly even noticed that we had a downturn.
No one has a crystal ball to know what the prices will do in the future but I expect on-going rent increases due to the low vacancy, shortage of housing, and increasing minimum wage. I also expect long term market appreciation. I will be very surprised if in 10 years the value of the property today does not seem cheap compared to the price in 10 years. Why do I have this belief? It has held true for over 60 years. If you purchased in San Diego just prior to the Great Recession (GR), the purchase looks good today. If you purchased as we were coming out of the GR like you did, the purchase looks great today. That was the worst recession of our lives and if you purchased at the worst time possible, it still looks like a good investment.
Like you, I have not purchased for a while (almost 1.5 years) but it is mostly because I do not need to and we have been busy. If the right RE presented itself tomorrow, I would consider purchasing it. I believe 10 years from now I will be very glad I made the purchase.
In 2004, I purchased an RE for $751K. it fell to ~$620K in the GR. Today it is worth ~$1M. Not quite the worse time as it was still a couple of years prior to the GR but demonstrates my point.
In 1993, I purchased a home for $167K. It fell to ~$140K. Today it is worth over $600K.
Two examples of purchases that were made at less than the ideal time, both losing close to 20% that both look like great purchases today. I suspect 10 years from now, regardless of what happens in the short term, we will look at purchases made today in San Diego as good purchases.
- 7yBrandon SturgillBusiness MemberReal Estate Broker · Columbus, OH · Member since 2013 · 3k+ posts · 1k+ votes
@Dan H. Thanks for qualifying...yeah, we're in different worlds. We were just in Bird Rock looking for a value add SFR or MF as a live-in...nothing under $1,000/ sq. ft. pretty amazing.
- Real Estate Agent · San Diego, CA · Member since 2016 · 52 posts · 29 votes7y
@Rob K. @Dan H. not to take a detour, but our firm recently sold a building that had a tenant in one of the units for 50 years. His rent for a 3bd in true North Park was $900. And to speak about this acutal thread, the reason his rent was so low is because of the long term appreciation of the building and the positive cash flow the owner was already receiving.
- Real Estate Agent · San Diego, CA · Member since 2016 · 52 posts · 29 votes7y
@Brandon Sturgill Beach property in general is expensive. A recent MF sale in Ocean Beach was over $700/SF. Are you still looking for a value add SFR in San Diego?
- 7yDan H.Pro MemberInvestor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votes
Originally posted by @Tiffany Hoffman:
@Rob K. @Dan H. not to take a detour, but our firm recently sold a building that had a tenant in one of the units for 50 years. His rent for a 3bd in true North Park was $900. And to speak about this acutal thread, the reason his rent was so low is because of the long term appreciation of the building and the positive cash flow the owner was already receiving.
What would you place market rent in move-in condition on that RE. I suspect more than $3K but I am not that familiar with the North Park rental market (so educated guess). That is a lot to leave on the table.
My 27 year tenant was also significantly below move-in market rent (~$500/month) but his unit was a long ways from move-in condition. He told us when he gave notice that he was not expecting any of his deposit back. When he moved out we rehabbed the unit but much of the rehab items were required items. The flooring, doors (including most closet doors), and paint were done. The bath vanities were cheaper to replace than they would have been to fix. There were maybe a dozen large dry wall holes to patch (larger than nail holes). I do not know if it would have even been possible to rent it in the condition it was in so it makes it difficult to place a value on how much below market his rent was but I suspect, if I could have found a tenant (which would have been tough) in the condition it was in, I could have got maybe $200/month addition (at most). So him staying there was a win-win.
Letting someone stay in a 3 BR for $900/month in North Park is a win for the tenant and reflects an issue with the landlord/PM.
- 7yBrandon SturgillBusiness MemberReal Estate Broker · Columbus, OH · Member since 2013 · 3k+ posts · 1k+ votes
Hey @Tiffany Hoffman thanks for the response...part of our exit strategy is to own 4 properties in different climates free and clear we can travel to and spend 3-months at each one...we like San Diego and go there fairly often...I love the SoCal cost in general, so we're open to options...
- Real Estate Broker · East TN Loudon/Lenoir City/Tellico Village · Member since 2014 · 363 posts · 222 votes7y
Hi Nick and welcome to BP. Congrats on starting your journey.
I first started investing when in SoCal. We lived there 15 years. I started in vesting diving distance from our place in St George, UT. Beautiful and full of locals and tourists. funny enough most are from CA.
Then we invested back home in Huntsville, Alabama because with the military and influence from all over the globe this place is always growing but remains affordable. NIce cash flow for long term rentals.
Then we discovered and started investing in Pigeon Forge, TN because I wanted more return from my investments and either needed to diversify into multi family or Short term rentals. Now
with 5 of each we are settled for a little while.
Hope that helps inspire you for your first investments.
- Member since 2019 · 4 posts · 1 vote7y
I wasn’t getting notifications and came back to this post to see if anybody had even replied and was very pleasantly surprised.. thank you all very much for your time in replying to my post!!
These ideas have all given me something to think about. I guess everyone here has the mindset that the deals are still out there in CA— you just have to find them! I like that a lot.
However, I still would not have the $$$ to purchase anything here in San Jose, CA for at least a few years and so will look at other cities semi-nearby <2hrs to begin this real estate journey. Perhaps around Stockton or Sacramento.
Thanks again everybody!
- Investor · El Dorado Hills, CA · Member since 2012 · 1k+ posts · 1k+ votes7y
@Nick Meyer. I have a client closing on a 3/2 in Rancho Cordova that cash flows $427/mo and the sale price is $10k under the appraisal. Purchased off of MLS with some negotiation.
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