Impossible to invest for cashflow in California? Maybe not...

18 Replies

Hey there!

I've read quite a few things here and there and it seems that there's a consensus that California is terrible for cash flow investing. But I got caught in some interesting stuff.

Sure, Bay Area, LA, Sacramento have scary prices like 3 bedroom houses for $1M and rent at 3,000.00 (far from the basic 1%), but I looked over cities like Fresno - the fifth largest in California, with 500k+ habitants and a lot of good looking demographic and economics numbers - and I've found several properties in the 100 ~ 200k range with some close to %1 rental numbers.

Fresno is just one city and California is a big state. It seems that there are indeed some hidden gems in areas different than Bay Area, LA & Sacramento. 

What you guys think? I'm counting in the awesome bigger pockets community to find some local and out-of-state opinions! Does it make sense or am I ignoring something crucial and getting it completely wrong?

Midwest have some decent opportunities : "out-of-state opinions"

I would attend your local REIA and biggerpockets meetings for

other investors solution to California cashflow concerns.

Originally posted by @Bruno Tavares :

Fresno is just one city and California is a big state. It seems that there are indeed some hidden gems in areas different than Bay Area, LA & Sacramento. 

What you guys think? I'm counting in the awesome bigger pockets community to find some local and out-of-state opinions! Does it make sense or am I ignoring something crucial and getting it completely wrong?

 What is a hidden gem?  If that what your looking for you can dig in my back yard at $50 a shovel full and I guarantee you hidden gems.  LOL  Yes, you can get IMMEDIATE cash flow in CA.  But generally you are going to have to put some work or smarts in and a little risk to get it in places like LA and the Bay Area.  In other places of CA you are just trading appreciation for immediate cash flow.  IN the Bay Area you may be able to BANK on 9-11% appreciation.  Other parts of CA may only see 4-6% appreciation and that is why they are more likely to have immediate cash flow.  Now if you can make a good business guess on a CA area that will have an increase in it's typical appreciation rate then yes, you found a hidden gem. 

I'm about to purchase my first MFR in Fresno. The math says I should have a cash flow of about 10k/year after debt service on a 340k 7plex, so yes, you can get good cash flow here. Let me know if you need someone to show you around.

Hi @Bruno 

@Bruno Tavares  undefined,

I live and invest in the East Bay and just closed on a beat-up 4plex last week for $385K, w/ another $40K in rehab, I'll be sitting around $425K. And projected rents of about $5K /mo. So that's better than 1% (about 7X GRM, 8-9% cap, 10%+ CF). And it's in an area with no buildable land, lots of spillover higher rents from nearby areas, and very high rental demand, with essentially no vacancy. But I have also heard there is no CF in the Bay.. shhhh, don't tell anyone.. I actually just had a meetup in one of my vacant units. Check out my website for the next one..

But some people go inland also.

Bruno the best opportunities/gems are finding problems, rehabbing, placing tenants and refinancing. That is if your paying cash or having the seller carry. The values have gone up alot in the Valley but you can still find deals at the trustee sales or auction.com. If you want better cashflow you have to check out the humble areas in Fresno.

Frank Romine, Real Estate Agent in CA (#01957844)

I'm a fairly finicky investor as I'm a big believer in lifestyle design and business automation (ask Frank ^^^). I'd say it really all boils down to your goals & comfort level. I'll almost always target a cash flowing property with a target return in mind that needs as little work as possible. Totally different approach than most BUT even with this criteria I see many decent cashflow opportunities in Tulare/Fresno counties. I have not purchased a MFR yet but have run numbers on numerous MFR listings over the last couple years and in my humble opinion, returns on SFRs still greatly outperform MFRs in this area when vacancy, utilities, maint. & landscaping costs are considered, especially if the building is full of 1/1's. I will quickly concede to Frank's point that seller carry is a game changer depending on your financing situation and is more available in the MFR side.

Originally posted by @Jeff Zimmerman :
I'm about to purchase my first MFR in Fresno. The math says I should have a cash flow of about 10k/year after debt service on a 340k 7plex, so yes, you can get good cash flow here. Let me know if you need someone to show you around.

Jeff , I'm also interested in the Fresno area. Please beak down your 7 plex 340k purchase so I can better understand how you came to the 10k cash flow. Also, did you do all cash, loan, or seller financing? Trying to get as much info as possible so when I purchase something I'll know it's a good buy. Thanks for your help.

Originally posted by @J. Martin :
Hi @Bruno

@Bruno Tavares undefined,

I live and invest in the East Bay and just closed on a beat-up 4plex last week for $385K, w/ another $40K in rehab, I'll be sitting around $425K. And projected rents of about $5K /mo. So that's better than 1% (about 7X GRM, 8-9% cap, 10%+ CF). And it's in an area with no buildable land, lots of spillover higher rents from nearby areas, and very high rental demand, with essentially no vacancy. But I have also heard there is no CF in the Bay.. shhhh, don't tell anyone.. I actually just had a meetup in one of my vacant units. Check out my website for the next one..

But some people go inland also.

Hello Jeff, good to hear you are making it happen in the Bay Area. I've seen deals similar to yours and they were all flips , where the buyer bought some beat up unit for 500k fixed it up for 100k and sold for 700k or so. My concern is if you're trying to buy and hold if there's enough cash flow to pay everything and still make a healthy profit. How are you purchasing these units? All cash , loans, or hard money? Please provide a break down of expenses for your deal above so I can better understand. I know Bay Area has crazy potential for appreciation in the long run, My uncle bought his home in SF for 60k in the 80s and now worth over 1mill. He regrets not buying more back then. Right now I find it hard to pull the trigger on potential deals that costs 500k and generates 5k in rents. First would be the 100k in down payment (20%) , severely limiting me to only 3 until I'm out of money. Unless I used hard money which would eat into my cash flow and require me to refi soon. Oh, so complicated.

It's all relative to area & the amount of work you're willing to put in to find the deals. Most of the buy & hold properties that i wholesale will have a 12-18% net return for middle-income houses.

Also, what's this about appreciation? I ran the numbers on the mls & the average sales price for SFRs in Fresno rose about 20% in 2013!

@Tou V.  ,

I bought this with a conventional loan: 25% down. Wish you could have come out for the meetup I held in a vacant unit there! Projected the numbers on the wall, tour, everything! (Not selling it or anything. Just showing people around). 

Unfortunately, I don't know a good way to copy and paste from excel into these programs. It's always messed up. But I plan on putting up pics and numbers on BP eventually. Just busy supervising rehab, leasing up units, and planning the big RE Networking Summit later this year (putting down deposit today on venue!). Check back with me..

I like the East Bay vs. inland where the GRM's are lower because there is no land to build any closer to SF and any other land is very expensive, tight rental market with increasing rents and prices, close commutes to major, growing employment centers, positive household formation, and being a special little place in the US and the world. If I can get all that in my backyard, all the better..

But I think there's good money to be made out there too. Same with @Chris Williams  , I'm sure there are good numbers in Fresno, and appreciation has been great all the way around in Cali and most of US. Great time to be in RE! And amazingly, just closed on my best deal ever a couple weeks ago!

This is great info! Thanks everyone for your posts.

@Jeff Zimmerman   10k/year is an awesome number. It would be great to have someone experienced in the area. I'll ping you.

@J Martin  Thanks for the info! I'm a huge fan of meetups. Already signed in for yours and will certainly try to show up.

@Frank R.  I'm counting on some sort of financing for my first deal in the area. I've hear about all cash auctions, but I'm not that close to this goal. In my area even a 20% down payment is prohibitive for me at the moment (800k SFR, 160k down, ouch!).

@Charles M.  Great to hear that you've found some cash flow positive opportunities. It seems that I need to get more info on seller carry finance. I've always thought that sellers would prefer money on the hand, and seller will carry could be very difficult to find.

Hi Bruno, 

You can definitely find cash flow in and around the Bay Area. Oakland and Vallejo are the two cheapest areas in the Bay. Santa Rosa, Union City, and San Leandro are bit more expensive but still close to home. For a little further drive, Sacramento, Modesto and Fresno has particularly good cash flow. However, the further you leave the bay, most likely you will have a bit less appreciation and the local market could be dependent on certain industries that you need to figure out and be aware of. Some investors stay in San Francisco and invest in slightly rougher areas but still have great cash flow. 

Just to let you know, I have a meetup in San Francisco on Thursday, June 19! Come by if you can, details in the link.

http://beta.biggerpockets.com/forums/521/topics/131314-san-francisco-meetup---thursday-6-19-14

I'd say if the numbers work, the numbers work! I think Fresno is a decent area actually. Just make sure you run the numbers as detailed as possible...make sure you use actuals for taxes and insurance. Those both can be high in CA but they could be fine and not hurt the cash flow too. If you're running numbers accurately and they work out for positive cash flow, rock it out! Just be aware of the tenant-friendly issues in CA and that should cover you.

@Charles M.

I never hear anyone on here talk about lifestyle design! My eyes got wide when I saw you mention it. I'm a huge advocate of it! No rehabbing and landlording for me. Doesn't fit into my lifestyle design preferences :) But yes, we are most definitely the minority on this site.

@Ali Boone

I've read most, if not all of your blog posts and noticed you've mentioned it a time or two. ;) Love it!

It just makes too much sense if you have a choice to go for a 60k listing needing 20k of repairs and possible surprises OR the rehabbed listing for 80k down the street...close, place and automate...done! And from what I see, even with tight inventory, selection is still available for cashflowing properties. Some call it lazy or spoiled or soft...but why work so hard if the same return can be made w/o the time & effort. Life is short...enjoy it!!!

@Ali Boone   makes sense to me. I don't discard turnkey companies, for example, as long as the fees don't eat up all cash flow. I've seen some offering $300+ cash flow month, others offering as low as $50 bucks. 

@Charles M.  I'm curious if this a simple example or actual numbers from your area? 

@Charles M.

Glad we met then! :) I'm with you on the numbers. Same with using property managers versus landlording. Thanks but no thanks. Haha. I value my time way more than I do $100/month in PM fees. But, not everyone agrees. My feelings certainly don't get hurt when they knock me tho, I still hang out at the beach every day and never deal with tenants :) All I know is if I had to deal with rehabs and tenants and all that other DIY self, my lifespan would be dramatically shortened due to stress. Or I'd become an alcoholic.

@Bruno Tavares

Oh yeah, no thanks on $50/month. I think you are talking about property managers more than turnkeys specifically? But yeah, there are plenty of cash-flow properties out now that give a good enough margin. $50, not a pretty margin to me.

@Bruno Tavares

Just a random example. I try to stick with 3/2's but I do often see (& am tempted by) 80k rehabbed 2/1's here in more humble areas. The rub is that they usually will only command 650-725mo. due to size & location. Better returns can be found but again, that's all relative to your specific investing goals.

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