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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Dodger Stadium opening Scott Ave gate

Dodger Stadium opening Scott Ave gate

The Dodgers are opening another parking lot gate that exits into one of my favorite neighborhoods for real estate, Echo Park.  Echo Park residents are rightly up in arms. Opening any more traffic through their residential streets will surely disturb the peace. Imagine living in a quiet neighborhood where 81 days per year, lines of cars drive by, sometimes spewing trash or worse.  As a Dodger season ticket holder who knows his way around Echo Park, I am additionally upset because opening Scott Ave will drive more fans to my secret parking spots.

There’s an interesting article about real estate prices near baseball stadiums here. Basically, in California it costs more to live in a convenient location, as one would guess. That said, should one expect that living near a major event arena will drive torrents of people past their property?  As someone invested heavily in both Echo Park real estate and the Dodgers, I’m torn.

Here’s a petition if that’s your thing.

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Investor vs. Homeowner

One of the first questions you need to ask yourself when you’re buying an income property is: Am I an investor or am I a homeowner?  While those two terms are not mutually exclusive for everyone, they are for most people.

Most folks like you with enough cash to buy an apartment building don’t want to live in an area that is “up-and-coming” or not yet gentrified. But you are willing to invest in them because that’s where the deals are.  Why are there solid investment deals in up-and-coming neighborhoods and not “good” neighborhoods? Because in good neighborhoods you’re competing with homeowners.

It’s pretty simple, I’ll admit.  Today I had a meeting with a homeowner who wants to sell his West Hollywood duplex, and I described why the same principles of GRM don’t apply to his duplex the way they do to my upcoming fourplex listing in Rampart Village.  In West Hollywood, investors are competing with homeowners, who are paying for the privilege of living in the neighborhood.  In Rampart Village, investors are competing with other investors, who are all in it for the same reason: money.  If the numbers don’t make sense, they won’t buy it. In West Hollywood, numbers matter less because it’s harder to put a number on a lifestyle choice.

So while it feels good to have a property in a neighborhood where you would live, instead imagine whether you could live in that property 10-15 years from now. Because the homeowner I met with today will sell his duplex for $1.2M. Back when he was an investor and Melrose was as sketchy as Rampart Village is now, he bought it for under $500k.

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Rent during REO sale

When a bank owns a property due to foreclosure, different rules apply.  Here’s one worth knowing:

Sometimes, banks won’t collect rent from tenants while they own an income property.  Sometimes they do; it depends what their priorities are.  When you enter escrow for an REO property, find out whether the bank has been collecting rents.  If they haven’t, you, the new buyer, can collect all past rent not paid by the current tenants.

Other than cash, what does that buy you?  Leverage.  If these tenants are low paying tenants, and your priority is to relocate them in a rent controlled building, the money they owe you in past rent is leverage in your negotiation to relocate them.  Imagine thinking you don’t have to pay rent for six months and then you find out you owe $4,000 in back rent.  If you don’t pay you can be evicted.  Would you rather scrounge up $4K or get paid $4K to move somewhere else?

Man, I know this sounds harsh and most tenants aren’t in the real estate business like you are.  But when you’re making the biggest financial decision of your life, it’s important to know all of the rules involved, and which of them may be on your side.

 

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In Escrow Again

Sorry for not posting in a little while, but I just got into escrow with a client on an awesome fourplex in Virgil Village near Silver Lake.  This is a FHA client, which makes me even prouder of our accomplishment!  My client was aggressive in his offer and we were patient in our hunt.  That’s how you make FHA deals happen.

While I’ve become the go-to agent for FHA deals at our brokerage, I don’t know if this is quite my future. I do love a good challenge, and while helping those with less cash is something I feel passionate about, the amount of work to get into escrow is about three times that of a conventional loan, and probably ten times that of cash buyers.  And because FHA buyers in L.A. all look at the same deals, it’s hard to take on more than one buyer at a time.

Meanwhile, my broker Moses Kagan is writing up a storm over at kagansblog.com – check out some of his latest posts, too.  And tell him I sent you.  ;)

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Good Deals Scarce

While interest rates have dropped back down to a respectable 4.5% for investors, there just aren’t that many good deals out there.  I’ve seen a few 8-unit buildings with around 11.7 GRM, which can be a decent investment, but nothing that screams goooooaaaalll or home run or whatever sports metaphor you like.  If you’re interested in making around 6% on your money and you have about 250K-300K to invest, let me know because there are some decent deals.

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