As a buyer’s agent, it’s a beautiful thing when the bank’s appraisal comes in higher than the purchase price you negotiated. Appraisers are notoriously blind to rental income comps and gentrifying markets, so I make it my business to give appraisers as much information as they need to understand our purchase price.  I’ve never had an appraisal come in short and today I had one come in $25,000 above the purchase price.   In this business it’s important not to take anything for granted, and in the case of appraisals, you can’t trust that a bank will understand the value of real estate like you do.

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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).

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Interest Rates UP

Red percentage symbol with an arrow up.Well, the end of an historically low interest rate era has come. My recent client in escrow just locked in a 3.75% interest rate, but he’ll be the last for a while. Rates for FHA have climbed to about 4% and for  investors at about 5%. While this might change our game plan, it also means a lot of middling, half-interested, opportunistic investors have dropped out of the market. That will make prices drop and opportunities for committed, patient buyers rise.  I’m excited to see how the market reacts and I’ll keep you posted.

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Favoring 2-4 Units (financing)

I’ve touched on this before, but another compelling reason why 2-4 units can be more desirable is because of the types of loans you can get.

We’ve discussed the down payment before:

– 25% for 2-4 units (20% if you’re an owner-occupier) vs. 30% for 5 or more units.

But in this market, with interest rates so low, you want a 30-year fixed loan whenever possible. If you have 5 units or more, you can’t get more than 5-10 years guaranteed, and your interest rate might even be half a point higher.

This is why we call 5 units the no-man’s land for income property financing.  Unless you’re buying with cash (and hope to sell for cash), you’re better off going bigger or smaller.

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FHA Loans + & –

The FHA gives hope to many future homeowners who are short on cash.

What is it?

The FHA is a government organization that insures loans. It doesn’t give loans; it insures them. This makes FHA-backed loans very safe for banks because the FHA assumes the risk. But since it acts like an insurance company, you pay a premium and the FHA might not want to insure your loan if they don’t think the property is worth what you’re paying.


– You can put down as little as 3.5% of the purchase price.

– You can go through a normal (FHA-approved) lender.

– You have certain move-in rights as an owner-occupier, and can sometimes relocate low-paying tenants and therefore raise the value of your property.

– You get good interest rates.


– You technically have to live there for two years.

– If no unit is vacant, you have to pay the tenants to move out (between $8,000-$20,000).

– Because the FHA appraiser is strict, there’s a chance your deal might not go through. This means many sellers will overlook  your offer in favor of an all-cash or conventional loan offer. And that means your pickings are slim in Los Angeles.

– You pay an insurance premium:

– You pay a 1.25% upfront premium (UFMIP). Luckily, this can be added to your loan amount.

– Additionally, you pay 1.25% of the total loan per year as a recurring premium.

– You pay 0.25% extra if the loan amount is above $625,500.

– Thankfully, you stop paying the premium when your loan-to-value ratio lowers to 78% (and you’ve already been paying for 60 months).

So yes, there is hope. But you have to know what you’re up against. Let me know if you’re in this market because this is what I specialize in.

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How low can I go?

$40,000.  The lowest reasonable amount of cash you need in L.A. to buy an apartment building is $40,000.

Now, you’re not going to get a “nice” apartment building in a “great” neighborhood, but you can buy a cash-flowing building in a soon-to-be up-and-coming neighborhood.  We’re talking Boyle Heights and Lincoln Heights – the areas just outside of downtown that haven’t quite felt gentrification yet, but are destined to.

Here’s the math:

$400,000 contract price (average 4-plex in those areas)

3.5% down = $14,000

Closing costs = $4,000

Tenant Relocation = $10,000

Renovations = $10,000

Reserves = $2,000

TOTAL = $40,000

Now, there are 2 catches:

1) The reason you can put just 3.5% down is because this is a FHA loan. The FHA insures risky mortgages (down payments below 20%) so you have the opportunity to own your first home – not income property. Home. That means they expect this to be your primary residence for at least two years. The good news is you can buy up to 4 units. And you have the right to move into one of the units with certain restrictions (I’ll post about this later).

2) You have to prove that you made an average income of about $5,500 per month for the past two years. This varies, depending on the property, but that’s about the bottom line for Los Angeles.

I’m in this boat and I have hope. So can you.

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