What is your cash-on-cash return in CA?

Question

Hello everyone, I live in Southern California and am new to real estate investing. I've been looking for my first house hack all over Southern California for several months now and...the math isn't adding up. Given today's interest rates, even with a DADU and JADU play, it looks like I won't be cash flowing for years to come.

Is there anyone in California that's actually cash flowing in today's market? If so, I'd be fascinated to understand how that's happening and what your CoC return is. And if there's anyone else out there who can confirm my sentiments on the negative cash flow in SoCal even with a DADU and JADU play, that'll be helpful too. Any insight from seasoned investors is much appreciated as I'm really just here to learn and absorb as much from those who are several years ahead of me.

Thank you so much!

Dan H. · Answer

I see a lot of responses from people who I suspect have never invested in Ca. Post saying that they see a lot of CA investors investing elsewhere are not wrong but miss that CA has the highest investor owned residential RE rate in the country. Are all these investors stupid? I invest almost exclusively in San Diego area and have done well (generational well)

Now to the realities of the current market, it is challenging everywhere. My underwriting (and the 50% rule) shows that 1% monthly rent ratio is cash negative. My underwriting shows 1.5% monthly rent ratio at rents under $1500/month is cash negative. I personally would not consider rent ratios above 1.5% except for potential unicorn finds (off market often with risk or requires work). What does this mean? It means virtually every market has 0 COC at purchase if buying rent ready off the mls.

This implies excluding unicorn finds (off mls or real lucky on mls), passive efforts (no value add) that a sane investor would purchase have 0 initial cash flow and 0 COC.

Next examine what dictates the cash flow over a long hold. Do you think it is the initial cash flow? It is not. Good initial cash flow have that good initial cash flow because they have poor appreciation and rent growth outlook. Many of the best initial cash flow markets have historical appreciation and rent growth below inflation implying the value and rent are declining in inflation adjusted dollars. Nothing correlates to cash flow over a long hold better than rent growth and rent growth has a tight coupling to appreciation.

My last purchase was the most negative non commercial property I ever heard of. $2.5 m value, $6.2k fully occupied rent. It needed some light rehab, but more it needed operational changes in one of the more difficult markets to make operational changes. Today it is up over $1m above purchase and rehab costs. I expect rents to exceed $20k/month. It has positive cash flow even with my underwriting but still a modest COC (even though monthly cash flow is significant).

Initial COC is a terrible benchmark for the reasons I already stated, but I claim COC is a very incomplete benchmark. Cash flow gets taxed annually, other sources of RE return do not. In addition most high wealth (I will randomly use have achieved the 1%ers and have net worth in excess of $10m) RE investors did not make the bulk of their return from cash flow but from appreciation.

Note appreciation has a tight coupling with long term cash flow. This implies coastal So Cal has historically provided great long term cash flow and great appreciation.

City of San Diego median rents

- 2025: $2995/month. 2 Beds $3,095, 3 Beds $4200.

- 2020: $2344/month

- 2010: $1323/month

- 2000: $747/month

Note over $600/month rent increase between 2020 and 2025, so an average of over $100/month increase YOY (($2995 - $2344)/5= $130/month average YOY increase). Average YOY rent increase since 2010 ($2995 - $1323/15 = $111 month YOY increase. Average YOY rent increase since 2000 ($2995 - $747/25 = $90/month YOY increase.

Doing the math $650/month higher rent between 2020 and 2025 (note 2026 is not included). That results in a significant cash flow increase (my WAG is ~500/month increase to the 2020 cash flow). Do you think the good initial cash flow market units even have $500/month? I will tell you typically they do not.

I gave you lots to ponder.

Good luck

Ashish Acharya · Answer

Tiffany, your frustration makes sense. In a lot of Southern California deals right now, the numbers can look weak if you’re expecting traditional cash flow from day one.

For a house hack, I’d separate “does this cash flow?” from “does this meaningfully reduce my own housing cost while building equity?” Those are not the same thing. A property can be negative on a pure investment basis and still improve your personal housing economics if the rents from an ADU, JADU, or other units cover a meaningful portion of the mortgage.

That said, I would not force a deal just because it has a house-hack angle. I’d still underwrite the full picture: taxes, insurance, vacancy, repairs, CapEx, utilities, management if needed, and what happens if one of the units sits empty.

From the tax side, if you live in part of the property and rent out the rest, it becomes mixed-use. Certain expenses and depreciation generally need to be allocated between the personal and rental portions. If the ADU/JADU is rented, that portion can generate depreciation, but the tax benefits should support a good deal, not be the reason the deal works.

In California, I’d probably focus less on chasing a specific cash-on-cash target and more on whether the property gives you acceptable housing cost, manageable downside, and a realistic path to stronger economics over time.

Feel free to DM me, I’d be happy to send over a few resources that might help you compare house-hack scenarios.

Jason Wray · Answer

Tiffany,

Your math is not adding up because 90% of California does not offer very lucrative REI cash flow deals. This is due to the over inflated housing market, insane property taxes and in most cases HOA fee's. What I have seen over the last 5-10 years with my CA clients is they are picking states like TX, FL, TN, OR, IN, OH, NC/SC and a few others. If you want to stay close to home in CA I would suggest looking North to Oregon and its Coastline becuase its a current hot market for STR's. I work with a seasoned agent in Oregon - Anthony "AJ" Wong he has a strong hold on the majority of OR STR rentals he has several blogs here on the Bigger Pockets forum.

One of the stronger states is Florida because of its 365 amenity style atmosphere and Non-stop tourism. Pinellas County is having a huge bump in rental traffic and tourism from 2025 to 2026, Kissimee, Citrus County, Cape Coral, Panama City Beach etc. One big part of the math you will see and appreciate is the "Purchase to Cash Flow Ratios" in these states. Why spend $850K to $950K on a home in Cali and barely cash flow $300 to $500 a month when you can buy (3) $300K properties in Florida that each bring in $1500 a month NOI. You can buy a Duplex (2 unit) in several counties under $250K either rent ready or turn key.

My advice is do not fall victim to the "Gross" annnual income or monthly rents, "Do The Math" run the full costs. You want the NOI so after the PITI principal, Interest, Taxes, Insurance. Also look to see if there is Flood, HOA, Quarterly or Semi Quarterly fee's, insurance quotes based on property type and number or units. Never buy into the listing or MLS verbiage, do your own home work. I have seen several investors buy a home and read the home feature and it says "short term rental" but may not be "Daily rental" approved. You need a seasoned agent and County knowledge to see if its approved or available with application or grandfathered.

If you ever have any questions feel free to check out my Profile, or send me an email or message! Always happy to talk REI and share loopholes avoid pitfalls and save time and money!

What is your cash-on-cash return in CA?

What is your cash-on-cash return in CA?

Most Popular Reply

3 Replies