In a nutshell, the four reasons that I will go over in detail are:
One, the High Cost of Property Taxes, Utilities, State Specific Taxes, Super High Cost of Living
Two, No such thing as Positive cash flowing property unless you over leverage or purchase property in all-cash but still doesn’t make any financial sense to do so
Three, Being over-invested, your investment is at risk in only one or two properties at these high costs
Four, You are risking your investments when purchasing property as passive income investing in California because of local laws, tenant protections, and anti-Landlord legislations
In Real Estate the saying is and always has been, location, location, location. But at what point does the conversation shift to thinking, ok, yeah this is a great location, but not THAT great! I listened to a CNBC interview from former Facebook Exec Chamath and I’m not even going to attempt to pronounce his last name, and I thought this was a great analogy to the San Francisco Bay Area and its Real Estate. Essentially it feels like a brand, it is expensive because the location is like a Luis Vuitton, Prada, or Gucci product in that they do not bear the cost of the raw materials that go into them.
For example, a house that should cost maybe $32,000 in Cleveland for a 3/2 single-family home with 1,254 square feet, what we call in the real estate industry a bread and butter home, would cost $1.2Million here in the Bay Area on average. Granted the home I am quoting in Cleveland needs a little work, but the work needed was estimated at under $7,000, and the ARV, and for what an ARV is refer to my Real Estate Terms Every Real Estate Investor Should Know VIdeo linked below, again the ARV is $55,000. After that work is done it will have a rental income of $700 a month and $101 a month in property taxes and insurance combined and after property management fees you are looking at a net income of $529 or $529 in your pocket. That’s positive income or positive cash flow and for a property that costs about the same as a brand new car, but unlike the car, instead of costing you money, this would be making you money every month.
The duplex that I owned and sold in Redwood City during the summer of 2020 had an annual property tax rate of just a hair under $17,000 a year, that’s enough to buy 2 properties cash in another market every 2 years. We also pay way too much for electricity, gas, garbage, sewer, and in general, are gouged for any work we need to be done on our properties in California because of the astronomical costs of living here, the consequence is higher labor costs. To break even every month on my 50% ownership of the unit in Redwood City after I spent $100,000 taken out using the CARES Act in 2020 to rehabilitate my portion of said property would have had to be rented out for no less than $5,500 a month, again, just to break even and that’s with over 50% down on that property and not 25% down. If it doesn’t make dollars, it doesn’t make sense.
The real estate bubble I believe is also about to burst in my opinion here in the San Francisco Bay Area and relatively soon. According to the Federal Housing Finance Agency “…Fannie Mae and Freddie Mac will extend the moratoriums on single-family foreclosures and real estate owned evictions until February 28, 2021.” That means we are postponing the pain of those who are still not making their mortgage payments and when that expires, those who lost their jobs will be unable to make their mortgage payments. As horrible as that is, I’m just being realistic and I realize that this market right now is being propped up by supply and demand as well as historically low-interest rates. What happens when the Forbearance moratorium and eviction moratoriums expire and the interest rates start to climb? I don’t think it takes a genius to figure out that this Bay Area Real Estate bubble will burst.
Being over-leveraged or over-invested in one or two properties, if you think about it, when you spend $1 to $2 million on a 3 bedroom 2 bath here in California and you have a tenant vacancy, you have now lost 50 to 100% of all your income until you fix the place back up and release it. Check out my video on the 13 RISKS OF OWNING RENTALS linked in the comments section below. On the other hand, if you spread that money out on many doors, each unit is called a door or a source of rental income, then you have less pain when you have a vacancy. If you own only one or two doors and you lose a tenant, that’s a huge hit to your cash flow. On the other hand, it’s easy to find a 20 door apartment complex for under $750,000 in other markets, even if you had 2 vacancies in a particular month, you only have lost 10% of your total monthly passive income. It’s another main motivation for me to sell all my holdings here in California and look for a more investor-friendly market.
So that covered reasons 1, 2, and 3 above as to why I will never invest in California again. Now I get into the very controversial reason I will never invest in California again. I consider myself a very liberal person, that’s why I choose to sell all my holdings in California, and instead, I will rent and continue to live in California. Now at some point, if I’m honest I will get tired of renting and may buy a more affordable home out in the valley or up near Sacramento, and especially considering what may happen when the real estate bubble bursts, but for now, I will take advantage of the laws here protecting the tenant and those that hurt the landlord.
So why did I say you are risking your investments in California? In the land of milk and honey, also known as California, it’s not easy to be a landlord and as we learned, doesn’t make financial sense. As an investor you must look at the potential risks for your investment and where you invest is extremely important. Knowing if the local government has the best interest of your investment at heart is a considerable and smart factor in any rental property investment decision.
For example, AB 1482 is the Tenant Protection Act of 2019. This is called the Rent Cap or Rent Control Bill, which covers rent increases and termination of residency which basically means you have a cap on what you can raise the rent to which is 5% and you must have just cause for terminating residency for tenants otherwise the landlord will have to provide a relocation assistance payment to the tenant of one month’s rent to do that. Now, this doesn’t apply to all properties but will want to know about this before making investments. If California landlords miss this deadline for AB 1482 they can lose their AB 1482 exemptions if they have them already and the deadlines began on July 1, 2020.
The state of California has just passed AB 3088 also known as The Tenant Relief Act of 2020.
• The courts will now begin processing evictions for some tenants, but not others
• Landlords can now ask for proof of economic hardship from tenants, but that comes with a pre-qualifier that they are deemed a “high-income tenant”
• And what really sucks for landlords in California is that tenants can pay as little as 25% of their rent due for the coming months
Also, all California landlords and tenants need to know about upcoming legislation, Assembly Bill 1436 (AB 1436) related to nonpayment of rent during the COVID-19 pandemic. Do you have tenants who can’t pay rent due to coronavirus? This bill will prevent evictions of tenants who can’t pay rent due to coronavirus and will also limit being able to go after the residents for nonpayment of rent. It has always been difficult in California to evict tenants or even squatters who never even signed a lease with you in this state.
Another California law for landlords to consider is the Rental Affordability Act, also known as Rent Control 2.0 or Prop 10 2.0, which was voted No on in 2018 and again for the second time in 2020 but they will most likely try to pass Prop 10 again in the future. Probably call it Prop 10 3.0 and there are many more laws that are against landlords in California, this is just the latest pain point.
Now I have to end this with the natural disclaimer that none of what you heard here is legal or tax advice and you must seek the counsel of a professional to see what would apply to you and your investments specifically.
Feel free to comment below or send me a message from the healthwealthandrealestate.com website on the “Get in Touch” link at the top of that web page and please like and subscribe to the channel so that you don’t miss any future educational videos. I hope you found this video helpful and eye-opening and wish you the best in your investments and of course I am also a resource if you would like to utilize me.
Have a wonderful day!