Property Value & Interest Rates
When is a good time to sell?
Interest rates are starting to climb from 2014 when they were the lowest they’ve been in 30 years. Yes, 30 years. With rates starting to climb, 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).
Read MoreWhat 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
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.
Read MoreWould 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.
Read MoreRent vs. Own
A very important question in Los Angeles real estate is whether it’s better to rent or own your building. The answer is that it depends on what area you want to live in.
I almost never advise my buyers to look at buildings in Santa Monica, Venice, West L.A., Beverly Hills or West Hollywood because rents there just don’t justify purchase prices. You’ll almost never cash flow with an apartment building in those areas. What does that mean? If you want to live in an apartment building in that area, don’t buy it, rent it.
However, if you want to live in East Hollywood, Mid-City, Echo Park, Silver Lake, or even farther east, buying is your best bet. Rents in certain pockets are just as high as Venice and Santa Monica, but they can sell for half as much.
So what if I want to live on the west side but I still want to buy a building? Simple: buy on the east, live on the west. The west side is a renter’s market. The east side is a landlord’s market. While there’s a certain pride of ownership in owning property in your favorite westside neighborhood, it’s not the most financially sound decision.
Read MoreRedfin
There are pluses and minuses to my clients using Redfin as a source. The plus is that sometimes they find properties that they like personally, but that I wouldn’t think to send them. (Take, for example, my client who sent me the South Central fourplex we closed.) The problem that often arises, however, is that the data is usually inaccurate and always incomplete. The listing agent will post info on the MLS, but it will take a couple days to propagate the Redfin channels, and by that time, it may be too late. Additionally, on Redfin, you’ll never get the listing agent’s private remarks, which is the good stuff.
Search real listings here.
Enter the MLS’s Home Central Search. The name is clunky, but it’s actually a great portal that allows my clients to search specific criteria directly on the MLS – the website that agents use. For some clients, I’ve even programmed the portal to email them new listings based on their personal criteria on Sundays, twice a day, or every four hours, depending on how ambitious they are. Since I’m looking for the best deals all of the time anyway, there isn’t always a need for this. But you never know. Sometimes I might overlook something, or simply not know my client’s taste well enough. A client-agent relationship is really a learning, growing one, and the more interesting properties we show each other, the better I get to know you and your needs.
So if you’re using Redfin to shop for properties, stop. There’s a better way, direct from the source. Just ask.
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