Frequent Single Family Home Advice

As good income properties are growing harder to find these days (though not impossible!), the single family home market is picking up. Here’s some advice I give most often to home buyers:

1) If you need a loan, you also need to plan for 15-30 years of mortgage and expenses. Bidding wars are scary for buyers. A good agent will have your financial interests at heart. I make sure my clients can handle all their new expenses, and my first job is helping you plan for them.

2) Being aggressive in this market is just as important as getting on the good side of sellers. Coming out strong doesn’t always mean the highest price, it could also mean the best terms. And you can only discover the best terms (rent-backs, escrow periods, inspection times, etc) if your agent knows how to read and approach each listing agent in their preferred way.

3) Manage your emotions. Buying a house is an emotional business, and falling in love with a house that’s not yours (yet) makes you do funny things. A good agent helps you keep perspective.

Please reach out if you are looking!

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Best and Final Offer – the Lazy Move

What does it mean when a listing agent asks you to submit your “best and final offer”?

…Because what is your true best and final offer when you really want a property? …When this is your dream house? How do you calculate whether you are willing to pay an extra $100/month in mortgage payments above what you initially budgeted?

Generally, when a listing agent asks for “best and final,” they want buyers to show their cards because (a) they are lazy and don’t want to counter offers individually or (b) they expect to counter only the top two or three offers from that stack.

If you are selling a property, and your potential listing agent says they will ask for “best and final” in a multiple buyer situation, find another agent. You will never get the best price when an agent simply asks for best and final. No one submits their best and final offer until they are stretched with a true counter offer.

If you are a buyer and the listing agent asks for best and final, it’s hard to know whether they really mean it or not. In that case, the silver rule is to imagine what number you would be happy walking away from, and subtract $1 from that – that’s your top price.

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I just sold the highest priced L.A. fourplex east of Sunset Blvd.*

At the time of writing, 3335 Cazador St. is the highest priced fourplex ever to sell in Los Angeles east of Sunset Boulevard, other than one famous Rudolph Schindler architectural sold in 2015. The east side of Los Angeles is changing fast, and it’s important to know just how much you can push the market if you can reposition the right property.

The seller of 3335 Cazador and I bought it just one year ago for $1,180,000 and sold it last month for $1,855,000.  What changed in a year? We knew that the rents could be much higher than the current rents, and, one-by-one, the seller paid the tenants to move out so he could renovate and capture high market rents. And believe it or not, the new owners did NOT overpay. They bought the property, fully rented, at a low 12.78 GRM!  You better believe the new owners are making good cash flow on that.

So why did the seller sell? With the equity from the property, he upgraded to a 6-unit building in another under-appreciated area, where he snagged a new deal. We’re currently selling one of his other properties, so he’ll have the equity to renovate his new 6-unit property, and add even more equity to his quickly growing fortune.

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Your Parents’ Money

A lot of baby boomers are retiring now, and they’re wondering what to do with their savings. I have one thought: your pension is great for you, but you can’t pass it down to your kids.

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GRM vs. CAP?

I’ve gotten this question from beginner investors lately, and it’s worth a quick explanation. What is GRM and CAP and which is better to use?

GRM stands for Gross Rent Multiple and you get it by dividing the gross rent (the annual total rent from all units in your building) into the purchase price (PP/GR). So a $1M purchase price and $100,000/year in gross rent equates to a 10 GRM. The higher the GRM, the less you cash flow, all else being equal.

CAP is your capitalization rate, which is your net income (gross rent minus all expenses) divided by your purchase price (NI/PP). In this scenario, the higher the number, the more you cash flow.

The benefit of CAP is that it provides more information–that is, if the information is accurate. On larger properties of 8 or more units, you’re more likely to get more accurate information because a management company or a more sophisticated investor has better accounting. However, on smaller buildings of 3-4 units I prefer to use GRM because landlords are generally terrible at keeping and reporting expenses (and they’re fairly easy to estimate), so the only real number is the GRM.

In conclusion, GRM is a great shorthand but doesn’t tell the whole story, and CAP will give you an exact idea of income if you are able to calculate it correctly.

In today’s market in LA, a 4 CAP and 18 GRM are pretty common, but I tend only to show my clients better than 5 CAP or 15 GRM, depending on various factors of course. Email me if you have any questions.

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