Dec032013

Where to look in Riverside County for cashflow properties

Traditionally, mom and pop investors owned and managed single-family homes as an investment. Large institutions stuck with large apartment complexes, which were easier to manage. When house prices fell due to the housing bust, cash returns on single-family homes increased so much that it was wiser for institutions to buy homes earning 6% or more instead of buying apartments where they might earn 4% or less. Thus, institutional buyers entered the housing market with billions of dollars and helped form a bottom in house prices.

The rising tide of prices caused by institutional buying did not lift all boats. These buyers followed strict deal underwriting criteria that focused their efforts on specific property types in certain areas. If an area or a type of property didn’t fit their parameters, they didn’t buy it. This left many gaps where prices haven’t risen so much that the investment opportunity completely disappeared.

In Riverside and San Bernardino Counties, single-family investment has always been an opportunity. Prices in those counties typically sell at a discount to rental parity even in good times. Whenever California is not gripped by a housing bubble mania, cashflow properties abound in the Inland Empire; Add in the patchwork impact of institutional buying and the general undervalued condition, and cashflow investment in these areas is still a profitable endeavor.

From 2010 through early 2013, it really didn’t matter where you bought in Riverside County. All the markets were undervalued, and all of them were poised for future growth. Now that institutional money has inflated prices in several markets, buyers still interested in these markets must be more selective. Some markets have more cashflow properties than others, and some have more to rise than others before they are no longer undervalued.

The list below shows the markets where the average homes are the most cashflow positive. It’s calculated by comparing average rents to the median cost of ownership. If you plan to hold the properties for life and live on the rental income in your retirement, I would ignore whether or not the market is over- or under- valued and focus solely on where rents are most cashflow positive.

The chart below shows those markets where prices are most undervalued relative to historic norms. Ideally, you want to target areas that appear high on both lists if you plan to sell the investment property at a later date.

I recommend looking in Cathedral City (if you’re willing to own that far east), Hemet, Moreno Valley, and Perris. The properties are largely cashflow positive and undervalued. So far the investment funds have avoided these markets. They may turn their attention there as returns diminish in other markets, or they may collectively chose to stop buying and leave those opportunities to investors like you.

Riverside County Market Update

Prices in Riverside County are up significantly this year. As a result, properties are not nearly as undervalued as they used to be. My market timing indicator has cooled to a more average reading.

Lenders hope to push prices back up to the peak in order to get out from under their bad loans. It looks unlikely they will push prices that high any time soon. House prices rose to high during the bubble,0 and the new ceiling on appreciation is likely to be more rigid. In fact, between rising rates and rising prices, Riverside County will likely hit this ceiling next year.

But for now, prices are continuing their steady climb.

Since so many rentals have come on the market due to the institutional buying, rents have been flat for well over a year.

Rental growth slowed to a crawl compared to historic norms for the County. This has less to do with weakness in the economy than it does with the flood of rental properties coming to market.

The cost of ownership is still less than half of what it was at the peak of the housing bubble.

The cost of ownership relative to rent is not as good as it was over the last 3 years, but it’s still very good by historic standards.

Despite only earning a 6 from my rating system, that is still better than any previous reading from the system prior to the housing bust.

The window of opportunity is closing, and I expect the large funds to dramatically slow it’s purchasing of rental properties in 2014. Unless prices drop again, their buying activity is largely over. These funds already pulled out of Phoenix due to high prices, and Riverside County is not far behind.

Are you interested in cashflow properties?

Over the last few years, many people have contacted me about buying properties in California. At the time, I was too busy working in Las Vegas, but now I am focusing on California. With the new tools I am developing for the website, I will be able to quickly and easily find good cashflow investment properties anywhere from Carpenteria to Coachella. If you are interested in working with me to help you find, secure, renovate, and manage an investment property, contact me at [email protected]. I will work with most buyers personally.

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[idx-listing mlsnumber=”PW13237266″]

10421 BOCA CANYON Dr Santa Ana, CA 92705

$950,000 …….. Asking Price
$860,000 ………. Purchase Price
1/30/1998 ………. Purchase Date

$90,000 ………. Gross Gain (Loss)
($76,000) ………… Commissions and Costs at 8%
============================================
$14,000 ………. Net Gain (Loss)
============================================
10.5% ………. Gross Percent Change
1.6% ………. Net Percent Change
0.6% ………… Annual Appreciation

Cost of Home Ownership
——————————————————————————
$950,000 …….. Asking Price
$190,000 ………… 20% Down Conventional
4.88% …………. Mortgage Interest Rate
30 ……………… Number of Years
$760,000 …….. Mortgage
$195,311 ………. Income Requirement

$4,024 ………… Monthly Mortgage Payment
$823 ………… Property Tax at 1.04%
$0 ………… Mello Roos & Special Taxes
$198 ………… Homeowners Insurance at 0.25%
$0 ………… Private Mortgage Insurance
$0 ………… Homeowners Association Fees
============================================
$5,046 ………. Monthly Cash Outlays

($1,116) ………. Tax Savings
($934) ………. Principal Amortization
$357 ………….. Opportunity Cost of Down Payment
$258 ………….. Maintenance and Replacement Reserves
============================================
$3,610 ………. Monthly Cost of Ownership

Cash Acquisition Demands
——————————————————————————
$11,000 ………… Furnishing and Move-In Costs at 1% + $1,500
$11,000 ………… Closing Costs at 1% + $1,500
$7,600 ………… Interest Points at 1%
$190,000 ………… Down Payment
============================================
$219,600 ………. Total Cash Costs
$55,300 ………. Emergency Cash Reserves
============================================
$274,900 ………. Total Savings Needed
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