California Positive Cash Flow?

General Real Estate Investing
1

[i]Hello to all,

This is a Topic that has been posted in my group, that has gotten mixed answers.

I thought I would post it here for the Experts to answer to show this gentleman “rk” the quality of this group.[/i]

California Positive Cash Flow:

Greetings all,

Let’s talk about positive cash flow in markets similar to the CA central valley and bay area. Being as I am in Sacramento lets use that as an example…

Lets take a medium priced home in a decent area of town…

1500± sq ft, 3bd, 2ba: Roughly $340,000 Fair Market.

Best case scenario the rental market currently will support $1200 a month… and even at that your looking at a 2-5 month lead time on a tenant.

Ok so let’s do a little conservative math:

Lets say we find a good deal and buy for $320,000

Lets put $20,000 down and figure we get your plain jane 30 year mortgage at 6%.

Your looking at roughly $1800 a month P&I(principal and interest), and say another $200 for T&I(taxes and insurance).

$1200 month income - $2000 debt service = -$800 a month. (that’s not positive :wink:

Even if we put together a fancy interest only payment loan you can still expect to be -$200+ monthly.

AND, we haven’t even taken into consideration vacancy, repairs, or other unforeseen money sucking problems ;). AND you have 20k sitting like a granny in a wheelchair.

Now, the CA markets traditionally make up for the lack of positive cash flow in appreciation but that still does not solve the cash flow problem… Appreciation is great, but it doesn’t buy food ;).

So far I haven’t heard a solid, real life solution to creating cash flow in this type of environment. I know it’s because I haven’t ‘found’ it yet… and I am constantly surprised by the advice I get from experienced professionals such as: “can’t be done, don’t even try it”, “find a different market”, “just suck it up and hold it for two years”.

Any Ideas? ???

rk

2

This is when creative financing kicks in. In our case it’s pretty limited. Even with interest only loans it’s still pretty hard to get any kind of cash flow. Sooner or later it will bust and come back to normal. I can’t see how people buy these homes unless your some kind of executive you really can’t afford anything. Even properties in gang land are going for 450-550k in the bay area. Wages are not keeping up and something will have to give.

3

First, we need to look at what a “good deal” really is and it’s not getting a whopping 5 to 6% off of retail. In general, a real estate investor should pay no more than 70% of FMV, 80% if you really know what you’re doing. Using that figure you’ve cut your costs to around $240K for the purchase. That’s a good deal.

Second, even at $240K, using your figures, you’re not at positive cashflow (but a whole lot closer). Sacramento is, in my humble opinion, in a bubble situation, and is due a price correction. When value far exceeds rent return, the most common reason is overvalued properties. Now, if a price correction happens, home prices will either fall drastically or completely stagnate. The most likely thing that will happen will be a mixture of both, a major slowdown in the sell side of the market, with price reductions coming as necessary to get the sells. Hardly the place that you want to be if you paid $320K for a $340K home.

Now, as I’ve said before, if you’re in a market like this, it is not the best time to buy rental properties, however, it’s a great time to buy those minor fixers and do quick resales. The market should determine your investing strategy.

Raj

4

Roger J

Thanks for you input it is always welcome. :slight_smile:

5

I’am so glad you put that out there. I live in Natomas and work in Elk Grove. I recently help a buddy rent a brand new home in the Laguna Area and I was completly surprised at how low the rents were for an area that boost home sales of 425 and up.

6

just because you live in CA doesn’t mean you have to invest there. with the internet and the telephone and southwest arlines, you can pretty much invest anywhere in the country.

i would strongly recommend staying away from places which have appreciated 50-100% and where rents and salaries havent seen a similar jump. [ in san diego where i live, prices have jumped 125% in past 5 yrs. rents are up 33% and the median income is up 21%. somethings gotta give! and i’m not getting a 75% bump in salary :wink: ]
in particular i would stay away from CA, NV, AZ, WA, the east coast of florida,NY. i also don’t like TX since in the past 25 yrs its up 89% which isn’t even inflation. coupled with its high taxes and insurance its a loser!
i really really like Utah. historically it follows an opposite cycle from CA and now is a great time to get in. after being flat since 1998, it just went up 5% last year. its on the start of an upward move.

i’ve hooked up with builders in utah who give me a wholesale
discount of 10% and pay my closing cost. i go via an agent and so the agent gets a commission. as part of his commission, my agent gets me a lease-option tenant-buyer. i get 100% financing with literally nothing down[credit needs to be over 680] and the tenant-buyer pays 2-5k at move-in plus all my monthly costs[and maybe an extra $50-100]. build-out is 4-6 months so we see some appreciation while its being built! plus property tax is only 0.7%.

the alternative is to spend twice as much money to buy a CA condo thats half the size of the house in Utah and rents for the same. how is that a good investment? well you could spend countless hours looking for that one deal in five thousand, but if you have a full-time job, thats not a likely scenario. or you could buy an older floorplan like 3 beds and 1 bath and spend 40k fixing it up to a 4 bed, 2 bath and increase the value 100k, but thats more like a job than an investment.

live where you want, invest where it makes sense!!!
in general!

7

Hello Niravmd! Thank you for your input, I live in San Fernando Valley where prices are pretty high too, the cheap & bad area is in low 400K. I am new here, and I don’t think that I can buy an investment property here in California until the market calms down. That UT investment you mention sounds interesting, Can you give me more information on that. I have a very good credit score so that won’t be a problem. Thanks!