Where to Invest $750K to $1M in Southern California

By Danae Aballi-Mecham

Danae Aballi-Mecham is a long-time real estate industry veteran. She has worked in various positions in the industry having grown from an independent real estate agent to running a team of 5 top producing agents.

Suppose you’ve been considering investing in Southern California. In that case, you might be aware of its reputation for high property prices, but before you dismiss the idea, it’s essential to look at the real numbers. Let’s break down what you can expect if you’re eyeing areas like Orange County and Temecula, and determine if investing here really makes sense.

Orange County: What does the investment look like? In Orange County, you can expect to pay around $850,000 for a 3-bedroom, 2-bath single-family home in areas like Garden Grove or the City of Orange. With 20% down, your loan amount would be approximately $680,000, and your monthly payment, including taxes and insurance, would be around $4,500.

At first glance, this might seem like a manageable investment; however, the reality is that the property would only rent for approximately $4,000 per month. This creates a negative cash flow of roughly $500 each month, meaning that unless you put down more than 20%, you’re losing money from the start.

Temecula: A similar story at a lower price point. Now, let’s compare that to Temecula. A similar 3-bedroom, 2-bath home here would be priced at about $650,000. With 20% down, that would give you a loan of $520,000 and a monthly payment of roughly $3,500. Rent in Temecula would come in around $3,000 per month, meaning you’re still looking at a $500 negative cash flow each month, even though the property price is lower.

Why would anyone invest if they’re losing money upfront? At first, it might seem counterintuitive to invest in a market where the cash flow is negative. However, there are a couple of compelling reasons why investing in Southern California still makes sense, even with the negative cash flow:

• Appreciation: Southern California has historically experienced stronger appreciation than most other markets in the country. Over time, your property value could increase significantly, making up for any early negative cash flow. While the market may be more expensive, the potential for long-term growth is one of the key drivers of investment in this area.
• Refinance potential: If interest rates drop in the future, you could refinance your property, which would lower your monthly payments and help improve your cash flow. This gives you a way to turn a temporary negative into a more manageable situation down the road.

Investment tips to maximize returns. If you’re planning to move forward with an investment, here are two crucial tips that can help you maximize your returns:

• Avoid HOA fees: Homeowners Association fees can have a significant impact on your returns, especially when you’re already looking at negative cash flow. It’s a good idea to avoid properties with these fees if you can, as they reduce your profits and make it harder to see any positive cash flow.
• Leverage tax benefits: With bonus depreciation back in play, there are tax advantages that can offset some of your upfront costs. Consulting with your CPA is essential to ensure you’re taking advantage of all available tax breaks, which can increase the profitability of your investment.

While the cash flow in Southern California may not look promising with just 20% down, there are significant long-term rewards that can make the investment worthwhile. With the potential for property appreciation, the ability to refinance if interest rates fall, and the tax benefits that are currently available, investing here can still be a smart decision for the right investor.

If you’re thinking about investing and want to take a closer look at the numbers for a specific property, feel free to call or text me at 949-216-8565 or email me at danae@danaeaballi.com. I’d be happy to help you analyze your options.