Income Property Los Angeles

Category: Big Picture

  • The Arts District is Gone

    sixth-street-bridgeEvery investor wishes she invested in the Arts District five years ago. It could be the fastest developed area in Los Angeles’s recent history of rapid gentrification. You know the current story, but here are a few developments planned in the next five years:

    1) THE BRIDGE – The new world-class 6th St. Bridge, set to complete in 2019, will become the only bridge worth talking about in Los Angeles with its bike-friendly, eco-friendly awesome swoopy look. It connects Boyle Heights to the ever-fancifying Arts District downtown.

    2) HOLLENBECK PARK – In Boyle Heights, Hollenbeck Park on 4th St and St. Louis, already one of my favorite parks in the city for its hills, water and bridges, is going to get a 1-million-dollar upgrade thanks to the money coming into the Arts District.

    3) MATEO – The Arts District is going all in on becoming the next East Village  Old Town Pasadena West Hollywood and building an industrial-chic open-air shopping center that will certainly attract ritzier clientele.

    So, what does this mean for the Arts District? If it’s unaffordable now, it will fall into the “bad deal” category for investors before you know it. I have heard of a very affordable neighborhood three minutes across the bridge though…

  • Buy a Los Angeles condo?

    I have a client in a 1031 exchange whose recent fourplex purchase has left very little cash to buy a second property.  So we’ve turned to condos, where the market is great for buyers right now.  I don’t normally buy condos in Los Angeles because if a cheap 1-bedroom condo costs $250,000, that makes the fourplex version of that cheap condo $1,000,000.  Would I buy a vacant fourplex full of 1-bedroom apartments in Westlake for $1,000,000?  Not as of today (10/30/2014), I wouldn’t.

    That said, you can’t normally buy a $1,000,000 fourplex with $100,000 down, but you can buy a condo in almost any part of Los Angeles, from West Hollywood to the Valley.  Condominium units usually come in much better condition than a multifamily property, they often don’t have rent control, and maintenance is cheaper because the HOA pays most of it.

    So when is a good time to buy a condo in L.A.?

    Are you paying more than $2500 in rent? Do you have $100,000 that is making you less than 4% on your money?  If the answer is yes to either of those questions, contact me and let’s look at your options.  While a good 2-4 unit property is largely preferable as a pure investment, buying a condo and living in it can save you money in the meantime.

  • Real Estate Psychology

    This topic deserves a book. A PhD candidate could write a dissertation about it.

    All businesses have their psychological quirks, and I’ve been through a few industries to understand the spectrum.  In any business the bottom line is profit, but in some industries ego steps in the way more than in others.  I’m no longer surprised by how much pride is involved in real estate.

    With single family homes, comparable properties are the main indicator of value. That said, unless you’re buying in a cookie-cutter development, no two comps are exactly alike. That’s when personal taste steps in, and that’s where I run to multifamily apartment buildings. With “units” as we call them, there are more numbers involved, which is why I add value in this area of real estate more than I do in SFRs. I’m a math guy. We have costs, CAP rates, GRMs, mortgages, FICO scores, rents, rental increases, gross profit, PITI, cash returns and overall returns.  I love it.  You figure out how much you can spend, decide what return you want on that cash, and we choose the smallest headache that can deliver that return.  Makes sense, right?

    I recently removed contingencies on a property in Glendale. My buyer discovered through his physical inspections that the sewage stops up frequently and the electrical panels are out-dated. While every building has its own set of problems, this discovery represented a systems issue that might need major work. We asked for $10,000 off the price to help correct these long-deferred maintenance problems.

    I only advise my buyers to ask for credits when there is substantial work needed to sustain a functioning apartment building.  There are always improvements one can make like bolting the foundation for earthquake preparedness or replacing the water heaters with new tankless ones, but those don’t constitute reasons for a price reduction in my book. I only ask for a price reduction if this problem needs to be fixed ASAP.

    In response to our formal request, I got this email:

    “The seller is upset to receive the buyer’s request.  The seller feels that $10,000 is excessive since the buyer was aware that the property isn’t brand new.”

    I can take a certain amount of hemming and hawing, but there was no formal counter offer attached to this email.  What is the point of this email between agents?  I am not your client’s therapist. You are responsible for your client’s feelings, as I am for mine.

    Do you think I explained to the listing agent my thoughts on her psychological responsibility? No way. I played her psychological tennis match until we came to the inevitable conclusion: a $5,000 price reduction.

    I sometimes perform a trick for certain clients where I predict exactly how a negotiation will go, and 90% of the time I’m right. Clients often ask why I suggest offering a certain amount on a property or discourage a particular price reduction. Half of my job is determining what kind of person is on the other end of the deal and where that person’s rationality and interest lies. If I’m working with a good agent who understands her client well, we work together to bypass the back and forth. It’s every agent’s responsibility to interpret his client’s emotional and financial needs into a legally sound real estate deal. That’s what I do for you, and that’s almost always what I do for the other party, as well.

  • Need for Buying Speed

    There’s one thing in common with all of the buyers who have gotten into contract with me: they were fully prepared to make an offer the day that the property came on the market.

    What does “fully prepared” mean?  Simply, it means I have your pre-qualification letter (which you have gotten by qualifying through a lender) and your proof of funds (a screenshot of your bank statement), and you have your Docusign account set up so you can sign the offer I write for you.  Cash buyers clearly only need the latter two items prepared.

    Many new buyers of Los Angeles income property naturally expect the process to be like buying a house: you go to the open house, maybe you have a private inspection, and if you still like it, you make an offer.  Investors think differently from that, and therefore you have to keep up with that mindset.

    One major reason for the difference is that there are tenants living in the property.  If every interested person got to tour the property, tenants would have 40 people walking through their apartment.  We’re slightly more civil than that in real estate. Instead, once a buyer gets into contract, she can have her team of inspectors come through.  At least the seller knows that she is serious and not wasting the tenants’ and the listing agent’s time. It makes sense.

    One reason why this works is because of your physical contingency period.  Typically, we do two inspections during this period, during which we can cancel the deal and get your full deposit back. And if there’s a serious problem with the property or with the numbers the listing agent gave us, we can ask for a price reduction or cancel.

    Because of Adaptive Realty’s experience managing properties in the Los Angeles rental market, we do a very good job of estimating monthly expenses for each property I recommend to you, and based off of those numbers and the rents, we can make a fairly accurate estimate of your monthly profit. In investment property, that is one of your two bottom lines.

    Your second bottom line comes from appreciation. While I can give my own predictions as to how properties in certain areas will appreciate, that will come from your own gut as much as mine.  That’s why driving by the property if you’re unfamiliar with the area can be a good idea.

    I’ve written before that not all buyers are the same. So when I send listings to by clients, first I determine which clients are the right investors for the property. And if there’s more than one, you can be sure that the one who is ready to offer first will have the best shot at the property.

  • Buy East Side or Drown

    Buy East Side or Drown

    Sound dramatic enough? At the projected rate of glaciers melting in Greenland, Antarctica and elsewhere, the world’s sea level is supposed to rise two feet by 2050, just 36 years away (according to the EPA). You may have paid off your mortgage by then and taken on all the risk of drowning yourself, or you’ll refinance and buy real estate in new, emerging markets even farther east like a good investor.

    GreenlandMeltwaterI hope you know I’m mostly kidding, but I’ve seen one too many documentaries and reports recently about sea levels rising, and this new, chilling rendering of famous American landmarks that may go underwater in the next century inspired this post.

    So, if gross rent multiples and cheap prices per square foot aren’t enough to convince you to buy on the east side, consider what Venice Beach will look like when you bequeath your property to your grandkids, or theirs.

  • 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).

  • 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.

     

     

  • 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.

  • 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.

  • 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.