The California real estate market is one of the most active and lucrative markets in the country. Velocities are high, large numbers of both bank and hard money lenders provide capital, and some markets offer significant opportunities for appreciation. However, the unique nature of real estate in the Golden State also poses some challenges. Here are some tips to help you close the right deals:
Given the fierce competition for the best investments in California, zero down properties are almost impossible to find. Further complicating matters, some California markets are still underserved by the traditional lending community, although hard money loans are usually available. This means that you will need to be prepared to make meaningful down payments on desirable investment properties.
There's More to California Than the Beach
One county in California -- San Bernardino -- is larger than Massachusetts, New Jersey and Connecticut combined. It's also completely landlocked with no access to the Pacific Ocean. Much of California is located inland. Those markets typically carry lower costs and higher returns than the big coastal markets, although they can also carry bigger risks.
Plan for Prop 13
When you do your proformas to look at how you expect a property to perform, it's important to be aware of how property taxes work in California. Property tax increases are capped at roughly 2 percent per year while an owner controls a property. However, the tax assessment can be increased to a property's sales price when a property changes hands. This means that if you buy a property that was held by the same person for 30 years, your property taxes could easily be three times what the previous owner paid.
Leverage Makes More Sense Than Usual
Many investors in California find that their returns are driven by equity growth and appreciation, rather than cash flow. Given the impact of leverage on multiplying growth potential, using it in California can be especially advantageous. If you're able to buy a property using a hard money loan at 50 percent down, which is usually doable in most California markets, and it goes up in value by 10 percent, your equity growth is twice that since you get all of the growth in the property's value while the lender just gets their money back.