Income Property Los Angeles

Category: Financials

  • 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?}