As most of you are aware, we favor real estate markets in the Southeastern U.S. over markets in California. We invest in Florida, Texas, the Carolinas & Georgia. When compared to California, those markets are better suited to our value-add business plan. We value capital preservation over speculation, cash flow over appreciation & long-term growth prospects over short-term price swings. All of these signs point to markets in other areas of the country. So what are the top 5 reasons to NOT invest in California?
1. Cash Flow vs Appreciation
Let’s talk briefly about California’s commercial real estate market. There are two drivers of asset prices in real estate - Cash Flow and Appreciation. One thing California has going for it is a history of appreciation, especially in coastal cities. This upward price pressure on west coast real estate can generally be attributed to a long-term steady influx of people contributing to population growth. Historically this has been true. However we are in the midst of a population exodus from California, these articles will illustrate that:
Redfin: 2019 Housing Migration Report
On a typical commercial multifamily purchase in California, with average leverage, the rents will simply not be enough to cover the property loan. Investors in California are banking on appreciation, not cash flow. That’s why you see extremely low cap rates in California alongside much lower leverage. Owners realize they must put substantial amounts of equity into the property to cover the loan and protect against insolvency. Where California property makes up the difference is in appreciation. That appreciation is based on positive population demographic trends, which as we’re seeing...have reversed.
No longer do investments in California real estate make sense to us.
2. Tenant vs Landlord Protection Laws
California is an extremely renter friendly state. Virtually all new legislation passed is in favor of renters. Along with our property management teams, we make every effort to ensure our tenants have a way to stay in the unit should they fall on hard times. Turnover is a real expense to us, so we have a vested interest in keeping tenants in the units even if it means we have to take a hit in the short term. The problem arises when a tenant has no intention of digging themselves out of a hole. They know the renter laws, and they take advantage of them. In California, it can take up to 6 months to process an eviction. Compare that with 3-6 weeks in Dallas, TX for example.
Commercial multifamily is a business as much as it is real estate.
Until the banks start forgiving our loan payments, we must take every effort to ensure the solvency of our properties on behalf of investors. That means investing in states where we can protect cash flow.
3. Demographic Trends
All the numbers point towards the southeast. Everything from corporate relocations favoring Florida and Texas, to corresponding population increases. Average apartment rent increases in the Winter Park suburb of Orlando for example have average above 5% year over year for the last 5 years. Compare that to a rent controlled maximum of 3% in Los Angeles. 2% might not sound like much, but on a $50,000,000 property, that translates to big returns.
4. Room to Grow
One problem we’re seeing in California markets is rent comprising a much higher percentage of income. People are paying a premium to live in California to the exclusion of quality of life. At some point, tenants are asking themselves…’Is it worth it to live here’? As a percentage of income, it is not uncommon for 35-50% of income going towards rent. Compare that with 25-35% in southeastern markets. When you don’t have enough money to spend on quality of life, you begin to question why you’re living in ‘these 4 walls’ versus ‘those 4 walls’.
Southeastern markets have some room to grow when it comes to rent as a percentage of income.
5. Political climate
Taxes can make or break a state, and when 10% of income is coming right off the top simply because a property is located in one state vs another...its time to reevaluate where we invest. Eventually the California market will correct itself, but that could take decades. A personal hero of mine, Elon Musk, has talked about this at length.
When a California assemblywoman tweets ‘F*ck Elon Musk’...a man who holds the title as the last Californian automaker...its time to reevaluate where we invest.
Capital flows where it’s treated best...and right now, that's not California.
Invest with fyre CAPITAL
fyre CAPITAL is a commercial multifamily investment firm. We purchase and/or partner in 150-600 unit, value-add apartment communities in fast-growing Tier 1 & 2 U.S. markets. Together with our strategic partners, fyre CAPITAL represents over 500 Million Dollars of successful real estate acquisitions. Our developers, sponsors and capital partners have amassed a network of over 1,500 unique investors. We provide new opportunities to invest in projects targeting a 14%-21% Internal Rate of Return . If you would like to join us on our next project, your first step is to Submit an Interest Card. We look forward to partnering with you.