Rental Investment For many entry level investors trying to pick up flips and/or rental properties in California it’s nearly impossible. If you have deep pockets, sure, you’re in better shape. But even then, it’s hyper competitive, though not impossible, unless you’re wrongly buying high, renting, and praying for your equity levels to continue to move up. It’s true people in CA have made money off equity, and it’s tempting in today’s market to use the possibility of equity growth as a metric, but as we also know, many have lost money, or their entire home, due to declining equity. According to the article “Real Estate Investment Market Index,” by Scott Trench, “Los Angeles, CA…[is on] the list of the top 10 worst markets for residential real estate investors, though it managed to see a decent appreciation rate of about 2.9% year over year. Los Angeles is notable for its extremely unfavorable rent-to-price ratios. Investors can expect to receive less than 3.5% of the value of their property in gross rental income.” So, if you live in California, and you want to invest, what do you do? For starters focus on the right metrics. The metrics investors should pay attention to are cash flow, the possibility of sweat equity, and the ability to add utility. If you buy a house for $50K, and it rents for $1K a month, which is a great deal, you have to figure a year worth of property management (usually around 10%), annual taxes and annual insurance, and also unexpected repairs and vacancy (10-20% depending on the age of the home and the class of tenants). So in this scenario you end up with roughly $8K of yearly cash flow. Not a bad deal. But, good luck finding this in California. Sweat equity would include checking the math on doing some upgrading on the property that might bring in higher rents for that particular area. Utility, which is less common, yet something to pay attention to, would be finding a way to add an income stream, like utilizing an extended yard for RV storage, or leasing out space to a small business, or allowing for a small billboard or cell tower (obviously more likely with a multifamily property w/the right zoning), and/or building another unit on a longer lot. This cash flow scenario is nearly impossible to create in CA. My focus, over the last year, has been to start researching and creating relationships with investors in parts of the country with more favorable cash flow opportunities. According to Zillow the “Top 10 Cities Offering the Most Opportunity for Real Estate Investors, for 2015 are the following: 1) Dallas, TX, 2) Denver, CO, 3) Miami, FL, 4) Houston, TX, 5) Atlanta, GA, 6) Tampa, FL, 7) Detroit, MI, 8) Austin, TX, 9) Las Vegas, NV, 10) Orlando, FL.” One of the most promising investors I have formed a relationship with is based out of Jacksonville, Florida, which did not make the list, yet is very similar to Tampa market. Some investors say never to invest out of state. I think that’s safe advice. Yet, if you have a trusted set of vetted boots on the ground in that area you really minimize that risk. The investment group I’ve used here in my example has a trusted list of contractors and sub-contractors, and they have an experienced property management company. The home featured in the picture was built in 1986, so it’s not so old that it’s going to need as much work—like something with galvanized plumbing, for example. It brings in rents between $725-$775 a month, and it appraised for 60K. They are selling this property for 46K. Their business model is to find undervalued properties, and resell them under market value. Their focus is volume. Their margins are small, so these homes are typically not great for you to come in and flip, but they are good for coming in and fixing up for rental cash flow. Equity building is not part of the equation, but that’s obviously a possibility. Their inventory typically ranges from 11K to 200K+. If all cash deal are out of the question, I also have a connection with a group in Memphis that puts together more traditional deals, which also are set up for cash flow. If you have some money saved, and you’re interested in this type of rental investment opportunity give me a call, or send me an email. caselectrealestate@gmail.com myagentdouglas.com
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