8% Return on Fourplex!

8% Return on Fourplex!

I have a new listing that you should definitely check out. It’s a turn-key fourplex in the red hot Silver Lake adjacent neighborhood – 3 minutes from Sunset Junction. Rents in this area keep going up, and there were multiple applicants for the last unit, which was rented at $1950/mo. The address is 228 S. Vendome St. – here are more photos and a map.

If you put 25% down with a 4.5% interest rate, you can make 8% return on your investment at asking price. That’s incredibly hard to find in this market in quality neighborhoods like this.

Each unit is 2br-1ba with separate gas and electric meters, which means low costs. Here are some features:

hardwood floor in 2 units
new carpet in 2 units
new paint
two new front doors
new appliances
new sprinkler system
some new fixtures
new blinds
new staircase
8 parking spaces
4 in-unit laundry hook-ups

Here’s how the numbers look:

List price 997,000
Units 4
Structure sq. ft. 3,480
Built 1917
Lot sq. ft. 4,807
% down 25.00%
Downpayment 249,250
Total monthly rent 7,250
Total monthly costs 1,678
Monthly net income 5,563
Interest Rate 4.5%
Monthly debt service 3,775
Monthly free cashflow 1,789
Cash-on-cash % return 8.25%

Please let me know if you have any questions!


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Need for Buying Speed

There’s one thing in common with all of the buyers who have gotten into contract with me: they were fully prepared to make an offer the day that the property came on the market.

What does “fully prepared” mean?  Simply, it means I have your pre-qualification letter (which you have gotten by qualifying through a lender) and your proof of funds (a screenshot of your bank statement), and you have your Docusign account set up so you can sign the offer I write for you.  Cash buyers clearly only need the latter two items prepared.

Many new buyers of Los Angeles income property naturally expect the process to be like buying a house: you go to the open house, maybe you have a private inspection, and if you still like it, you make an offer.  Investors think differently from that, and therefore you have to keep up with that mindset.

One major reason for the difference is that there are tenants living in the property.  If every interested person got to tour the property, tenants would have 40 people walking through their apartment.  We’re slightly more civil than that in real estate. Instead, once a buyer gets into contract, she can have her team of inspectors come through.  At least the seller knows that she is serious and not wasting the tenants’ and the listing agent’s time. It makes sense.

One reason why this works is because of your physical contingency period.  Typically, we do two inspections during this period, during which we can cancel the deal and get your full deposit back. And if there’s a serious problem with the property or with the numbers the listing agent gave us, we can ask for a price reduction or cancel.

Because of Adaptive Realty’s experience managing properties in the Los Angeles rental market, we do a very good job of estimating monthly expenses for each property I recommend to you, and based off of those numbers and the rents, we can make a fairly accurate estimate of your monthly profit. In investment property, that is one of your two bottom lines.

Your second bottom line comes from appreciation. While I can give my own predictions as to how properties in certain areas will appreciate, that will come from your own gut as much as mine.  That’s why driving by the property if you’re unfamiliar with the area can be a good idea.

I’ve written before that not all buyers are the same. So when I send listings to by clients, first I determine which clients are the right investors for the property. And if there’s more than one, you can be sure that the one who is ready to offer first will have the best shot at the property.

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A New One

I’m in a fun escrow on a fourplex right now.  My client is buying a property from a slumlord because that’s often where you find upside in turning a property around.  See Moses Kagan’s post on the topic for further explanation on that point.

I’m mostly being sarcastic by calling it fun, except when this slumlord’s listing agent, his ex-wife, today served us with a Demand to Close Escrow. Sounds intimidating, right? A DCE is a signed document that can come from the Buyer or the Seller to demand that the other party close escrow within three days, but not before the agreed upon escrow closing date in the purchase agreement.

I’ll explain more about this particular situation once escrow closes, but receiving this DCE today was a first in that I’ve never gotten a DCE the day after I served the Seller with our own DCE.  Essentially, this seller is demanding to close escrow on the same day we are.  Just a little tit for tat, I guess?  If you play the trump card, so can we?  I’m due to write a post on how real estate agenting is 80% psychology, and this is a prime example.  When you’re dealing with small business owners and not banks, logic doesn’t always factor in to the decision-making process.

If there’s a lesson here, it’s this: make sure your agent knows the purchase agreement inside and out, or you may end up feeling undue pressure to close escrow the same exact day you asked to close anyway.

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Buy East Side or Drown

Buy East Side or Drown

Sound dramatic enough? At the projected rate of glaciers melting in Greenland, Antarctica and elsewhere, the world’s sea level is supposed to rise two feet by 2050, just 36 years away (according to the EPA). You may have paid off your mortgage by then and taken on all the risk of drowning yourself, or you’ll refinance and buy real estate in new, emerging markets even farther east like a good investor.

GreenlandMeltwaterI hope you know I’m mostly kidding, but I’ve seen one too many documentaries and reports recently about sea levels rising, and this new, chilling rendering of famous American landmarks that may go underwater in the next century inspired this post.

So, if gross rent multiples and cheap prices per square foot aren’t enough to convince you to buy on the east side, consider what Venice Beach will look like when you bequeath your property to your grandkids, or theirs.

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Property Value & Interest Rates

Is now a good time to sell?

If you’re reading this in May, 2014 then YES and here’s why:

This month, interest rates are still the lowest they’ve been in 30 years. Yes, 30 years. With rates set to climb next year, the value of your property may drop 7% or more. In real estate economics 101, it works like this:

1) I, an investor, buy your $1M property today with a 4% interest rate.

$1,000,000 price
$350,000 or 35% down
$3,100/month principal and interest
$15,000/year net or 4% return.

I find this acceptable.

2) What happens next year with a 5% interest rate?

$1,000,000 price
$350,000 or 35% down
$3,475/month principal and interest
$10,416/year net or 2.78% return.

I think I’ll invest elsewhere.

So, your property value drops.

3) Instead, a 5% interest rate dictates a $930,000 value.

$930,000 price
$325,500 or 35% down
$3,232/month principal and interest
$14,220/year net or 4% return.

At this price, it’s worth it.

However, there are exceptions!

While it’s hard to find a neighborhood in Los Angeles that isn’t considered “hot” by someone, there are certain areas where patience will help build value in your property. Email me for a free, thoughtful valuation of your property.

If you’re a buyer, what does this mean? If you’re buying with all cash, WAIT! When interest rates rise inevitably, you’ll have the funds to get those great deals. If you want to use a loan, however, take advantage of great interest rates NOW. This low interest rate level may not happen again in your working lifetime. Just make sure you work with a buyer’s agent who knows how to spot a good deal so you don’t overpay (hint: me).

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Section 8 Update

Some of you may have read a previous post I wrote on this topic, but I have learned some new information since then.

Please see the updated post.

If you plan to buy out tenants, Section 8 only helps you in one sense.  If you negotiate with a tenant who has a Section 8 contract, that tenant can be assured that Section 8 will move with them to their new location in another Section 8-approved unit. That means they have less incentive to stay.

However, do NOT cancel their Section 8 contract. They will only be responsible for paying you the portion of the rent that they were paying!

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What Type of Investor Am I?

Every week I see properties land on the market that could work for the right investor.  Not all investors are created equally just like not all deals are created equally.  I’m going to list the types of investors so that you can identify yourself, and please let me know at: david@adaptiverealty.com

1. Cash-heavy, ready to renovate.

This investor has between $600K-$3M ready to invest in a property that needs work. We buy an undervalued property, you buy out the tenants, and renovate it to appeal to top renters. This investor should expect at least 8% yearly return on his money.

2. Cash-heavy, hands off.

Not everyone wants to get their hands dirty and make a renovation project their part-time job. But if you have cash —  between $800k-$3M — you can still get a decent deal by making a strong cash offer. This investor can likely expect 6-7% on his cash in today’s market.

3. Cash-medium, some improvements.

This investor has $300k-$600k cash. You want to be proactive, but you’ll have to pick your deals carefully. You may not buy out all the tenants, or you may consider purchasing a property that is mostly vacant. You can’t do a complete renovation, but you’ll add hardwood floors, update the appliances, and take over for a lazier landlord. You can expect 7-8% on your money if you seize the right opportunity.

4. Cash-medium, hands off.

This investor is looking for a long-term investment. You want a property that will cash flow now, but you’re more interested in the appreciation and equity building in your property. You can expect 3-5% cash return now, but it’s more about the value in 5-10 years.

5. Cash-poor, you better be hands on.

If you have between $35K and $250K, you can go for long-term or short-term investments, but you’ll have to get involved. Whether you live on your property or you’re fixing it up to livable condition, you’ll want to be proactive in protecting your investment.

Please let me know which type of investor you are so I can send you the right deals for you. And if you don’t fit any of these descriptions, please let me know that, as well.



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Section 8 and Los Angeles Rent Control

section 8 and rent control

Many clients ask me if they can evict Section 8 tenants. Are they different from normal tenants under rent control law?  Yes and no; let me explain.

First, what’s a Section 8 tenant? “Section 8″ is the common name for the Housing Choice Voucher program, funded by the U.S. Department of Housing and Urban Development. Basically, it provides substantial rental assistance for some low-income tenants. The craziest contract I’ve personally seen was a tenant paying $4 / month for a $1,040 unit.

When it comes to eviction, you have to separate the Section 8 contract from the Section 8 tenant.  You can cancel the Section 8 contract with 90 days notice, but the Section 8 tenant has the same rent control rights that anyone else does – and even more.  DO NOT cancel the Section 8 contract.  Once you do, the tenant is now only responsible to pay you the smaller portion of the rent that he was paying.

That said, Section 8 benefits you in one way. If you pay the tenant to relocate, that tenant can be assured that the amount of rent that he pays remains the same when he moves into a new, Section 8-approved unit. His Section 8 status moves with him. The tenant pays the same amount for the new place and the government pays the price hike.

The bottom line is that out of all the tenants you’ll want to relocate, Section 8 tenants have the most incentive to do it peacefully. They won’t pay more for a new place; they’ll simply get a hefty chunk of cash to deal with the annoying hassle of moving.

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Would I live here?

One question a real estate investor inevitably asks herself is: “Would I live here?”

There’s a pitfall in this question. Unless you’re a FHA buyer or you’re after a duplex, chances are that you’re not going to live where you invest. So before you ask yourself whether you would live there, ask yourself if you are your ideal renter.

How do you know?

The basic way neighborhoods turn from low rent to high rent is the following 4-step process:

1) there’s something interesting about a poor neighborhood,
2) under-employed artists & hipsters move in,
3) employed artists & hipsters move in,
4) youngish executives and entrepreneurs move in.

Which one of these are you? I’m guessing you’re either category 3 or 4, or the fifth category – you’re established elsewhere.

So which stage of the process do I invest in? Ideally, stage 1. However, that’s the riskiest and you need a strong imagination. Stage 1 areas include Boyle Heights, Lincoln Heights, most of Highland Park, San Fernando Valley, and Westlake. You’re in these investments for the long haul and you’ll need a good management company.

It’s easier to invest in stage 2 neighborhoods because there are already tangible signs of gentrification. These include the best areas of Highland Park, Glassell Park, Mid-City, Virgil Village, and USC. You won’t get top rents now for these units, but give it five years. Here you’ll find cash-flowing properties with good upside.

Stage 3 neighborhoods include Echo Park, East Hollywood, and Atwater Village.  You’ll overpay in these neighborhoods because everyone wants them.  That is, unless you know how to buy out tenants and renovate.  You missed the boat by about two years on good turnkey deals, unless you’re spending north of $1.5M on 8+ unit properties.

Stage 4 neighborhoods are Silver Lake, West Hollywood, Hollywood and Downtown.  These areas have been established for a while and the only good investments you’ll find are $1.8M or more, with cash to develop.

So rather than asking yourself where you would live, ask yourself what kind of renter you want, and how long you can wait for her. The longer you can wait, the more upside you’ll find.

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Lack of Inventory

where inventoryA lot of newbies to real estate know one truism about the current market: there’s a “lack of inventory.”  When I talk to new clients, they often tell me they understand there’s a lack of inventory as if that’s the first real estate buzz phrase they learned.  I like it.  It sets up the correct expectations because, while I count about 350 properties in the range I most often search (good real estate areas of Los Angeles between 2-14 units under $2M), the truth isn’t so much that 350 is a small number, but rather that 99% of those properties aren’t good enough deals for me to show to my clients.

My clients are smart investors, not usually prize collectors or solely homeowners. The real lack of inventory in Los Angeles comes from too many bad investors, prize collectors, and homeowners driving prices to unreasonable heights because there aren’t many safe places to put your money right now. I wish I could say that sellers had unrealistic expectations and their prices will come down when they realize their mistakes.  But the truth is, in 2013, people were paying ridiculous prices for mediocre investments, and now sellers expect that to continue in 2014.  The jury is still out on whether it will or not. But, in the meantime, I’m keeping a close watch on those price drops.

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