Income Property Los Angeles

Category: Essentials

  • Rent vs. Own

    east-vs-west-buy-vs-rentA 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.

  • Redfin

    should-i-use-redfinThere 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.
    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.

  • 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.

    Pros:

    – 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.

    Cons:

    – 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.

  • 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.

  • Why buy?

    In most good income property deals these days, you can expect to make between 5-8% on your money, if you can afford a conventional loan. If you put down $100,000 cash (20% of purchase price), you’ll get between $5,000 and $8,000 cash back every year. That’s pretty nice on its own.

    The exceptional thing about buying leveraged property is that your rents are also covering your mortgage, so in addition to the cash in your hand, you’re earning equity in your building. That means in 30 years, you’ll have earned an additional $400,000 bonus in your building.  And that’s not counting appreciation.

    {Next post: What’s the least cash I can use to buy an apartment building?}

  • Kagan’s Blog

    Kagan’s Blog

    If you really want to know about the income property business, take a look at Kagan’s Blog. Moses Kagan taught me almost everything I know about real estate, and the Essential Reading section of his blog is worth its weight in gold, if digital words could be weighed.

    While Moses focuses his time on buying and renovating apartment buildings for his fund, I work with him at Adaptive Realty to help people like you buy your own income property. What’s the difference between the properties he buys and the ones you will likely own? He buys rundown pieces of junk, spends tons of money renovating them and sells the updated property (like the beauty in the picture here) for a large margin. That takes a lot of risk, time, gumption, and cash. What most people like to do (and what I encourage) is to buy a property with decent leverage, one that needs little rehab, and then collect rents and watch it appreciate into your retirement.

    We know how to do all kinds of deals depending on the kind of buyer you are, but 2-4 unit residential income properties are our sweet spot. Follow my blog to read about the kinds of deals that we do at Adaptive Realty, and what you can do with us.