Ian asks: Move to CA & Invest? - Posted by Ronald * Starr(in No CA)
Posted by Ronald * Starr(in No CA) on February 28, 2002 at 21:30:19:
I received the following question via e-mail. I don’t see a problem with personal privacy, so post here for anybody to read or to comment. I removed Ian’s last name initial to increase privacy.
From: "Ian " | Block Address | Add to Address Book
Subject: California Real Estate Investment
Date: Thu, 28 Feb 2002 03:13:33 -0500
Hi Mr. Ronald Starr. I had coordinated with you a few times a little while back. Recently I’ve begin seriously considering investing in California.
My initial thoughts were to focus on the Sacramento area, but I don’t have a lot of knowledge on California’s vast areas. Any input on possible areas of appreciation, current market conditions, etc. would be much appreciated
(no pun intended).
Sorry I had a long e-mail written out being more specific on my requests but my computer crashed and it demoralized me for the night. Any information you could give me would be great. Thanks.
Ian, there are three major categories of financial benefit from real estate investing: Cash Flow, Appreciation, and Tax Benefits. There are a lot of different areas of California, since the population here is bigger than any other state of the union and the land-mass is pretty big also, something like 4th largest, if I recall correctly.
I’m sure that there are many ways to conceptually divide up CA for investment purposes. I tend to think of four major categories myself. Coastal California, from about Mendocino County (an hour’s drive north of San Fran) to San Diego, going inland perhaps 35 miles or so. Then there is the “Inland Empire” which is east of Los Angeles and Orange county. The “Central Valley” is east of the coastal area and runs roughly from Redding–Shasta County–in the North to Bakersfield–Kern County–in the South. Then there is the “other” or remaining area: North coast, north inland, foothills, the Sierra mountains, and perhaps the Imperial Valley east of San Diego.
If you want cash flow, you will want to avoid coastal CA. Prices are very high, rents are low relative to the prices. You will do best for cash flow in the central valley and the “other” areas.
Appreciation has been greatest in the Coastal area for at least 30 years, perhaps more. Whether this will continue in the future is hard to know. There have always been people saying that the prices can’t go up much more in the coastal areas. But then they do. I bought a modest 1952-built Eichler house in Palo Alto in 1964 for about $21,500, if I recall correctly. Sold it in 1990 for $315K, as a fixer-upper, as I had had it rented out for about 15 years. I think now it would be worth about $750K!
Houses here in Oakland that sold for $35K in 1980, when I started investing here, now sell for about $125K-150K. And this is in the below-average neighborhoods, sometimes called the “ghetto.”
I predict that the Central Valley will show fine appreciation over the next 10 years. I suspect that the Inland Empire will also show very good appreciation. I make no projection for the “other” areas, as they are diverse and local economies will probably be very divergent in what happens. A lot of those areas have traditionally been dependent upon fishing, logging, and mining, as well as ranching. The outlook for those industries is murky at best.
The tax benefits of owning rental real estate are probably very independent of the cash flow levels and the appreciation rates. So, if you are mainly interested in tax benefits, you could probably do pretty well anywhere. There are some places to get more tax benefits: buying and renting condos. This suggests larger towns and cities. They will be more concentrated in Coastal CA and maybe in the central valley areas. There are some special tax benefits for raising Christmas trees, probably other forestry activities, and maybe agriculture. This suggests the central valley and the “other” areas of CA. There are tax credits for investing in historical districts and historical properties. This suggests older cities.
The Coastal Area is the most popular place to live because of the great year-round climate. The “other” areas are the least popular because of heat in the desert areas to the east, snow in the Sierra Mountains, and miserable cold and fog in the North Coast. In between are the central valley and the inland empire. The are hot in the summer, enjoyable in the winter.
I project a very good population growth in what I call the “rim”–west side of the Sierras–in the foothills at about 3000 to 4500 feet altitude. Not very hot in the summer, not too much snow in the winter: Paradise, Nevada City, Placerville, Jacksonville, Sonora, Mariposa, the foothills in Fresno County. There seems to be pent-up demand in those areas for rental housing. But the economics of building new properties and renting them out is not very attractive. Little profit for all the work one has to do. Probably that is why the demand is strong and the supply is low. If you could find a way to build acceptable rental properties in those areas at lower cost than currently, you could make out well.
Sacramento has potential for appreciation. It is in the central valley. The largest city in the central valley. It has a diverse economy, although rather heavily weighted with state government jobs. When the overall economy in CA is weak, the state cuts back on job positions. When the economy booms, so does Sacramento. The prices are much lower than on the coast, so many people move from the coast to the Sacramento area, especially young people who cannot afford to buy houses in the coastal areas. There are areas there from below below average to very nice. There are old areas with rundown properties and lots of new construction. So there are a lot of opportunities for different investment strategies there.
If you have more specific questions, I will try to answer them.
Good InvestingRon Starr****