I live in one the most expensive places in the U.S. – real estate wise. Southern California, and especially in the Los Angeles area, has seen a sharp increase in property prices. Just across the street from me, an apartment building was sold a few months back for $850,000 a door. Yes, $850,000. It was not the nicest not the most centrally located building in Santa Monica. You might say “OK, but the property’s income is probably high because rents are higher in California than in most states”. As true as this statement is, income from multifamily properties in California don’t always cover the expenses and debt the property has. I buy in Florida and Texas, where multifamily properties are traded for $80,000-$120,000. Real estate prices are 10 times higher in Southern California than in Texas and Florida, but I can guarantee you that rents here are not 10 times higher. Ant yet many investors choose to invest in California, and I personally know a few that lose money every month, or barely break even.
So how come those investors still invest Southern California? Because they belong to a certain type of investors: The Appreciation Investor. This type of investor is someone who is not looking to make money on the short run, but rather, expects the property’s value to SIGNIFICANTLY increase over time. These are speculative investors, because let’s face it – nobody has a crystal ball. Yet if investors know the market well, how it behaved in the last recession and have a strong belief that it will improve significantly, they invest in this market. They are not looking for immediate returns. Amon those investors you will find foreign investors, who need to park their money somewhere, and any alternative is better than what they have right now in their hometown. Another type are REITs and large real state companies.
The second type of investor is The Cash Flow Investor. This investor is more conservative than the Appreciation Investor and look for short term returns. This investor doesn’t put a large emphasis on the future appreciation of the property, and will never invest in a property that does not produce positive cash flow (money left after all expenses and debt have been paid). Some Cash Flow Investors are willing to accept no or little cash flow during a rehab period if they invest in a value add deal – because they expect to get a much higher cash flow once the rehab period is over.
As for me? I am a classic Cash Flow Investor. When I look at a deal, I always assume that when I plan to exit (in 5-7 years from the purchase date), the market is not strong and that real estate prices are falling. If the property is not cash flowing from day 1 – I pass on the opportunity.
There is no right or wrong here. It’s a matter of personal preference, appetite for risk and investing philosophy. What type of investor are you?
About the author
Ellie is the founder of Blue Lake Capital LLC, a real estate company specializes is multifamily investing throughout the United States. She is also the host of a weekly podcast called "That REllie Happened?! Unbelievable Real Estate Stories with Ellie". She started her career as a commercial real estate lawyer, leading real estate transactions for Israel’s largest development company. Later, as a property manager for Israel’s largest energy company, she oversaw properties worth over $100,000,000. Ellie is an experienced entrepreneur who helped build and scale companies by improving their business operations. She graduated from the MBA program at MIT Sloan School of Management and holds Masters in Law from Bar-Ilan University in Israel.