Selling Your Property
The common wisdom in real estate is never to sell. However, there are several good reasons to sell your property in a bull market like today’s. You just need to have a plan for your hundreds of thousands of dollars after the sale. Every situation is different, and you may have personal reasons why you need the money, but here are some good economic reasons to sell:
1) Neighborhood Hills and Valleys
Just like the economy, different neighborhoods in Los Angeles can peak in price. Neighborhoods become hot at different times, and if your property’s neighborhood is peaking in interest, it may be a good time to sell. After all, you were smart enough to invest in this neighborhood before it was hot. Why don’t you take advantage of the next up-and-coming neighborhood before it pops. Selling your West Hollywood, Los Feliz or Silver Lake property at top dollar and buying low in Cypress Park or Boyle Heights will increase your equity faster, and more dramatically.
In other words, if the prices in West LA, Santa Monica, or Echo Park are ridiculous (they are), then you should sell to these ridiculous buyers, and then use that equity in a smarter investment.
2) Smart Equity
Neighborhood isn’t the only way in which you can improve the quality of your equity. Maybe you’ve built enough equity in your property that you’re cash-flowing okay, but there’s no cost-effective way to really improve your property. You feel like it’s hit a dead end, maybe due to rent control, tenant issues, floorplan, neighbors, or you’re not even sure why. There are buyers out there who will buy your property at a high price (developers, homeowners, foreigners), and you can move that equity into a property that fits your business model better.
3) Low Rents = No Cash Flow
Rent control is a problem for lots of property owners. And while there are ways to improve your property under rent control, that takes lots of initial cash that you don’t have. Selling your property with low rents to a buyer with more funds is a great option for getting yourself in a better position to cash flow. Almost all of my clients buy properties where there is upside potential, and we select the right property for each client based on their ability to improve it.
4) Trading Up
The most aggressive real estate business people will continue to build equity rapidly by buying and flipping, buying and flipping. To do this using a 1031 exchange, you have to wait 1 year between flips. But I have had clients successfully sell one property and buy two, increasing the total value of their portfolio.
While selling your property is a big decision, it doesn’t hurt to test the market once in a while and list your property on the MLS to see where it stands.
Read MoreImproving and Repositioning Your Income Property
As a rental property owner, you have many options for how to treat your investment. The most aggressive investors will continue to buy and sell, but if you would rather stick to what you have, and you’re willing to spend some cash, improving the property you own is incredibly smart.
Why improve my property?
In Los Angeles, rent control is a fundamental part of the real estate business. In brief, rent control means that a tenant can stay in his apartment forever, as long as he pays rent on time and doesn’t break the law on the premises. In turn, you’re allowed to raise the rent 3% per year.
However, raising the rent 3% per year doesn’t come close to the rate at which market rents increase. For example, an average 1-bedroom in Echo Park has raised in value from $1100 to $1600/month in the last three years. If a lucky tenant moved in three years ago, his landlord would only be making $1,202 on that unit today by increasing rent 3% per year.
How do you beat this scenario? You need cash.
(How do I get cash if I don’t have it? Refinance, sell and buy a new property, or sell other assets.)
Before I explain how to beat rent control, I need to show you how much value you gain by doing it.
Take scenario Echo Park. In your fourplex, you earn the following rents on two 2-bed / 1-bath units & two 1-bed / 1-bath units:
2/1 = $1775
2/1 = $1182
1/1 = $1098
1/1 = $1595
The current value of your Echo Park fourplex with these rents is approximately $1,015,000 at about 15 GRM (gross rent multiple, or 15 X yearly gross rent). If you absolutely maximized the value of this property, you could raise the value to $1,475,000. (A maximized income property in Echo Park can sell for up to 14 GRM.)
While this scenario leaves lots of room for improvement, let’s focus on the biggest problems: the 2/1 at $1182 and the 1/1 at $1098.
You need to increase the rent, and to do that, you need new tenants. The current tenants don’t want to leave, so the only way to change their mind legally is by offering them cash. There is no standard rule for this, but I know lots of owners who have negotiated with their tenants to move out for a lump sum. When you calculate your property’s value based on GRM, you can quickly determine what value you’re adding to the property by raising the rent, and therefore figure out a reasonable offer to your tenants. You need a Voluntary Vacancy Agreement from a lawyer to do this the right way.
Once your tenants move out, you need to know how to improve the unit. This means hiring a contractor. Sometimes you just need to clean, but more likely you’ll want to modernize the bathrooms, floors, fixtures and appliances in order to fully maximize rents (you don’t want another tenant moving in below market). That’s what I did on my property in Boyle Heights and I exceeded my expectations in new monthly rent, breaking records for the neighborhood.
So let’s work the numbers here:
You paid the tenants of the two most problematic units $10k each to vacate (this number varies). You paid $60k each to renovate the units, and $20k to improve the exterior and some deferred sewage issues. You’re all in for $160,000 and you increased rents to $2,595 and $1,795. So how much did you increase your property value? Approximately $350,000 (at 14GRM).
You paid $160,000 for $350,000 in value.
If this seems overwhelming, please feel free to tap into my experience at david@adaptiverealty.com or 310-801-000.
Read MoreOwning Income Property in Los Angeles
Speaking from experience, owning rental property in Los Angeles can be a lot of work. It can also be relatively hassle-free if you have a building with good plumbing, electric, sewer, and tenant relations. If you’re not working in real estate full-time, it’s likely that you go through periods where you want to devote time to improving your property, times you don’t even want to think about it, and times you ponder just how much you could get for it on the open market.
Here are four different strategies for what to do with your property once you own it:
1) Reposition Your Property. Depending on how much cash you have available, repositioning your income property is usually your best option, especially if you bought your property more than four years ago. To do this, you need an aggressive business mindset, and cash. If your property is suffering under rent control, there are strategies to doubling your rental income in some cases, and increasing the value of your property by hundreds of thousands of dollars. I’ve done it and my clients have done it with my consultation.
2) Sell Your Property. This concept is not new to you, but in a true Seller’s market like this, selling your property in an established or hot area means you can reinvest that equity into a developing area, where you can get a much better deal. Selling and buying (usually in a 1031 exchange) is a great way to increase your overall equity faster than if you were simply to wait for your property to appreciate.
3) Sit on Your Property. In Los Angeles, income properties appreciate. Because of zoning laws, rental supply will never keep up with increasing demand no matter how many ugly mixed users are built on major intersections. You’ve done a good thing buying property and it’s unlikely its value will decrease, barring an economic collapse. So if you’re too busy to think about it, sit on your property, increase rents 3% per year, and let the value appreciate as your neighborhood continues to gentrify.
4) Refinance and Improve/Buy. If you’re unfamiliar with leverage, you may be enjoying watching your equity build in your property, and counting the days until you don’t have a mortgage. However, this could be a huge financial blunder. If you have significant equity in your property (50% or more), you could borrow on your property at close to 4%, and make much more than that reinvesting it into more property, or improving the one you have. The numbers don’t lie.
Over the next week, I’ll be going over these strategies one-by-one. Please feel free to contact me at david@adaptiverealty.com or 310-801-0000 if you have any questions, or if you want specific advice on your property.
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