Income Property Los Angeles

Category: Real Estate Blog

All things real estate.

  • 1031 Exchange Strategy

    I’ve had some very active buyers and sellers lately and it feels like everyone is in a 1031 exchange. This is a very important tax strategy in real estate, and it’s important that you know how to operate with precision when trying to execute a 1031. First I’ll explain what it is, and if you don’t need a refresher, go ahead and skip to the Strategy.

    What is a 1031 Exchange?

    Simply put, a 1031 Exchange is when you sell an income property, buy a new income property to replace it, and skip paying taxes on your sale.

    What are the rules?

    1. They have to be income properties – essentially that means that neither property can be your primary residence. I’ve heard of some people doing some tricks like putting title in an LLC and paying themselves rent, but I’m not a lawyer and that is certainly not advice.
    2. You have to name 3 options for your replacement properties (or “uplegs”) within 45 days of your sale property (or “downleg”) closing escrow.
    3. You have to complete the purchase of your upleg(s) within 180 days of the sale of your downleg.
    4. Both the equity (cash down) in your upleg(s) and the total value (purchase price) has to be equal or greater than that of your downleg(s).
    5. All has to be accomplished within the same taxable year and to the same person(s) on title.
    6. You have to own the property for one year before selling.

    These are the most common and basic rules. There are more if you strive to be more creative.

    The Strategy

    By skipping capital gains tax, you could save hundreds of thousands of dollars. But why sell in the first place if you’re just going to buy something else?

    I’ve written about this before, but the fastest way to substantially grow your wealth through real estate is by buying and selling again and again. I’ve been a party to this and I think my clients in question would admit that I masterminded this growth for them. (And yes, when writing a blog your humility sometimes falls by the wayside.) Staying ahead of gentrifying neighborhoods, good deals and unnoticed potential is key to unlocking a property’s value that you can cash in one year later (1031 Rule #6).

    Why sell that unlocked value rather than hoard it? Once you have unlocked a property’s value, you have maxed it out. And unless you have unlimited capital, you can’t simply buy more and more properties; you have to use that unlocked value to unlock even more value, and so on.

    That’s the abstract. Here’s an example:

    Property A, a fourplex, is selling for $780,000 in an up-and-coming neighborhood.

    After closing the deal with 25% down, you fix up a vacant unit and rent it for $700/month more than the seller predicted. Another tenant moves out, and you do the same. Not only did you raise two rents in the property, but those rents are so high that you proved what the other units can get. You may or may not have the cash to renovate the other units, but who cares. You’ve implied the value in the property that no one saw before; you’ve unlocked it. Now your property is worth $1,050,000 (if  your agent knows how to present that unlocked value as current value).

    You spent $50,000 to fix it up, and $220,000 on the down payment. After a year, the mortgage pay down is near negligible. But you doubled your equity to $540,000 on a $1.05M value. The bank not only won’t value your property like a buyer will, but it also won’t let you cash out enough to do it again. So you sell to a smart, more fluid, and less hands-on buyer and do it twice more with the newest gentrifying neighborhood / great deal / unnoticed potential.

    If that sounded tricky, buying Properties B and C is where things can get sticky.

    Because you only have 45 days to name your next properties, being sharp and aggressive during this process is absolutely essential. You make strong bids, drive by dozens of properties, and always see the forest rather than the trees.

    When I have a client in a 1031 exchange, that client usually gets my ideas in their inbox first because (a) the 1031 time sensitivity and (b) they reward me with selling their property, as well as their responsiveness and aggressiveness in getting the next amazing deal.

    Do you want to make one of these deals happen? I’ll tell you how you can unlock the value in your property to get top price, and guide you towards doing it again.

     

    IMPORTANT DISCLAIMER: I am a licensed real estate agent, not a CPA nor a tax attorney, and nowhere on this website am I offering you tax advice.

     

  • 1414 Dixon is Pending!

    1414 Dixon is Pending!

    After 6 days on the market, several above-market offers, and just 2 hours after our Sunday open house, 1414 Dixon is in escrow. Because I marketed Glendale’s lack of rent control and the seller proved that the property could achieve high rents, it sold very fast. If you want to make a back-up offer let me know, or if you want to buy or sell a Glendale property, I know how to get the right price.

  • Dream Fourplex: 1414 Dixon St.

    Dream Fourplex: 1414 Dixon St.

    I’m not one to exaggerate. There are some properties that have one business strategy that will make it worth owning: you have to buy out the tenants and renovate, for example.  This leaves you in a lurch if any of the tenants won’t leave for a reasonable dollar amount, or renovating costs rise higher than you budgeted.

    The new fourplex that I’m listing is rare because it has multiple positive options:

    1. Don’t do a thing. It already cashflows with a 4.85 CAP at the listing price of $1,195,000
    2. Raise the rents on three under-market units: did I mention there’s NO RENT CONTROL in Glendale? At market rents you reach a 6.5 CAP.
    3. Raise the rents until tenant turnover happens slowly so you can renovate the units and get top dollar in the skyrocketing Glendale pocket neighborhood.
    4. Spend cash to develop, maybe add bedrooms, and you tell me what else you can do with a 10,000 SF flat, buildable lot.

    Here is the public MLS listing. Here is the slideshow.

    I’ve told some of my clients what I think of Glendale as a new opportunity. My sister is a writer for animation, and because of that I’m friends with dozens of young(ish) animators who work at Disney TV Animation’s new huge facility in Glendale, and others. The industry itself is growing, and animators and their friends are moving to Glendale. That, along with the growing popularity of Los Feliz and Atwater Village at the doorstop of Glendale, the cool neighborhoods are climbing northeasterly into Glendale’s green streets, raising market rents.

    Key features:

    • NO Rent Control
    • 4,272 SF
    • 10,169 SF lot
    • Four Units: Two 2+1, Two 1+1
    • Four Garages (Three Empty)
    • Updated: Plumbing, Electric, Sewer, Floor, Landscaping
    • Current $80,340 annual gross rent
    • Approximate 20% under-market rents
    • Actual 4.85 CAP

    Please let me know if you’d like more information: 310-801-0000

    dixon-2 dixon-6 dixon-15 dixon-13dixon-19   dixon-11dixon-9 dixon-8

  • Growing Real Estate Equity

    There are two goals for investing in real estate: 1) Growing your equity and therefore your wealth, and 2) creating a relatively steady and passive income stream to help with your bills.

    Quick: what is equity? Equity is cash in the form of real estate. If you put 25% cash down on a $1M property then you have $250,000 in equity on the million-dollar property. Then, that amount changes with the value of your property and as you pay off your loan.

    When you purchase income property, you may be fortunate enough to have the option to obtain financing or pay all cash. If your rental income covers your expenses, including mortgage, you love that the %$ you borrowed is turning into equity as your tenants pay off your loan over time. If you pay all cash, you enjoy a higher cash yield because you don’t have the extra expense of a mortgage.

    Now, the big question: how do I grow my equity the fastest?

    I can speak with some authority on this because not only have I doubled my own equity in one year by being an active real estate investor, but I have also helped my clients do the same – in one case growing my client’s equity more than 10X in under three years (this is rare).

    Contrary to what some say, if you have a limited budget you have to sell to grow your equity quickly. Unless you are attracting investors or you have unlimited funds, you cannot hold onto all of your properties forever. In order to fully maximize the opportunity in a property, you have to be well capitalized. Not everyone is. And that’s why you sell.

    If you bought aggressively, you probably took advantage of an uninformed seller and listing agent, or you bet on a neighborhood that is still up and coming, or both. This automatically puts you in a position to increase your equity by 1) selling with a good listing agent and/or 2) selling when the neighborhood popularizes. (Unfortunately, lenders don’t love to give you loads of cash when you refinance, so that’s not a viable option in the short term.)

    Once you sell, a 1031 exchange allows you to trade up without paying taxes, as long as you follow certain protocol. Now it’s time for you to do the same thing you just did, only on a larger scale. Either your new equity will help you a) buy a more valuable building or b) buy two. Now you repeat your previous strategy, but this time in a new up-and-coming neighborhood or from a different uninformed seller.

    Wash and repeat. Does it sound simple? Unfortunately it’s not. Because you really have to understand (1) rent control (2) neighborhood specifics (3) deal making and (4) 1031 exchanges, it means you have to be extremely aggressive during the sell/buy period and operate with finesse.

    If you have $350,000 or more to invest and you want to actively build your equity/wealth, please get in touch.

  • The Fed and What .25% Means

    I couldn’t explain this more clearly and succinctly than one of my go-to loan brokers, Justin Brown of NuHome Financial:

    First, what is the Fed?

    The Federal Reserve Board (the Fed) controls the Fed Funds Rate and the Discount Rate. These are overnight loans from bank to bank or from the Fed to member banks. The Fed adjusts the rate to influence the economy. For example, if things are going well, a rate increase may slow inflation. If the economy is struggling, a rate drop could be the boost it needs.

     

    Two important things to note:

    – The Fed can influence, but does not directly set, consumer rates.

    – The Fed’s rates are short term and often do not impact longer term rates, such as mortgage loans.

     

    Why the fuss?

    Increases in the Fed Funds rate can cause banks to raise their “prime” rates, which are often used to calculate costs of revolving credit or home equity lines of credit (HELOCs).

     

    What about mortgages?

    Mortgage loans are a different animal, so to speak. The “agencies” (Fannie Mae and Freddie Mac) pool mortgages together and sell them as mortgage bonds. The amount investors pay for these bonds directly influences mortgage rates.

     

    Bottom Line:

    When the Fed moves, it generally provides lots of warning, and markets have already had a chance to react. Markets are constantly responding to other factors as well, from the stock market to global events to consumer spending. In the end, no one can say for certain what the reaction to Fed moves will be.

  • Long View Investing

    sixth-street-bridge-farewell-fireworksA firework display is an apt symbol for successful long view investing. The 6th Street Bridge, connecting Boyle Heights to the Arts District Downtown, celebrated its long life this weekend, and its imminent demise. In its place, a $420,000,000 world-class bridge will be constructed to attract tourists and locals alike, bringing a new symbolic and physical connection between one of the city’s fastest developing locations and its poorest.

    What does this mean for investment properties in Boyle Heights, especially near the bridge? First of all, it means one of the most immediate means of transportation to Downtown will be out of commission for the next four years. However, once the new bridge is completed, those investors who bought in early will see a brand new light shining on a once ignored neighborhood.

  • Earthquake Retrofitting for “Soft-Story” Apartment Buildings

    dingbatOn Friday, the Los Angeles City Council unanimously passed mandatory new earthquake retrofitting requirements for over 15,000 buildings whose second floors are built over carports. This includes the “dingbat” in which I currently reside. The good news is: this will save dozens of lives in the next major earthquake. I’m sure you can also guess the bad news: landlords have to pay for it.

    The city is discussing some ways to help landlords, like a small increase in rent, which may cover the capital outlay in twenty years. But the retrofitting needs to be completed within 7 years of being noticed, according to the law. The LA Times reports that the retrofitting for wood structures can cost between $60,000 to over $130,000. You can read the LA Times article here.

    What does this mean for you? If you don’t have $100,000 cash to retrofit, you may be forced to sell your property if the city doesn’t come up with a better solution. If you do have the cash, that’s a big blow to your savings.dingbat

    If you think you may need to sell your property, the best move would be not to wait. Sell your building to a buyer with the capital to make the necessary safety improvements now, or else a much worse disaster could be on our hands. Not to mention incredibly low interest rates mean the highest prices paid for income property in a long time.

     

  • Selling Your Property

    Selling Your Property

    The common wisdom in real estate is never to sell.  However, there are several good reasons to sell your property in a bull market like today’s.  You just need to have a plan for your hundreds of thousands of dollars after the sale. Every situation is different, and you may have personal reasons why you need the money, but here are some good economic reasons to sell:

    1) Neighborhood Hills and Valleys

    Just like the economy, different neighborhoods in Los Angeles can peak in price. Neighborhoods become hot at different times, and if your property’s neighborhood is peaking in interest, it may be a good time to sell.  After all, you were smart enough to invest in this neighborhood before it was hot.  Why don’t you take advantage of the next up-and-coming neighborhood before it pops.  Selling your West Hollywood, Los Feliz or Silver Lake property at top dollar and buying low in Cypress Park or Boyle Heights will increase your equity faster, and more dramatically.

    In other words, if the prices in West LA, Santa Monica, or Echo Park are ridiculous (they are), then you should sell to these ridiculous buyers, and then use that equity in a smarter investment.

    2) Smart Equity

    Neighborhood isn’t the only way in which you can improve the quality of your equity. Maybe you’ve built enough equity in your property that you’re cash-flowing okay, but there’s no cost-effective way to really improve your property.  You feel like it’s hit a dead end, maybe due to rent control, tenant issues, floorplan, neighbors, or you’re not even sure why.  There are buyers out there who will buy your property at a high price (developers, homeowners, foreigners), and you can move that equity into a property that fits your business model better.

    3) Low Rents = No Cash Flow

    Rent control is a problem for lots of property owners.  And while there are ways to improve your property under rent control, that takes lots of initial cash that you don’t have.  Selling your property with low rents to a buyer with more funds is a great option for getting yourself in a better position to cash flow.  Almost all of my clients buy properties where there is upside potential, and we select the right property for each client based on their ability to improve it.

    4) Trading Up

    The most aggressive real estate business people will continue to build equity rapidly by buying and flipping, buying and flipping.  To do this using a 1031 exchange, you have to wait 1 year between flips.  But I have had clients successfully sell one property and buy two, increasing the total value of their portfolio.

    While selling your property is a big decision, it doesn’t hurt to test the market once in a while and list your property on the MLS to see where it stands.

  • Improving and Repositioning Your Income Property

    As a rental property owner, you have many options for how to treat your investment. The most aggressive investors will continue to buy and sell, but if you would rather stick to what you have, and you’re willing to spend some cash, improving the property you own is incredibly smart.

    Why improve my property?

    In Los Angeles, rent control is a fundamental part of the real estate business. In brief, rent control means that a tenant can stay in his apartment forever, as long as he pays rent on time and doesn’t break the law on the premises. In turn, you’re allowed to raise the rent 3% per year.

    However, raising the rent 3% per year doesn’t come close to the rate at which market rents increase. For example, an average 1-bedroom in Echo Park has raised in value from $1100 to $1600/month in the last three years. If a lucky tenant moved in three years ago, his landlord would only be making $1,202 on that unit today by increasing rent 3% per year.

    How do you beat this scenario? You need cash.

    (How do I get cash if I don’t have it? Refinance, sell and buy a new property, or sell other assets.)

    Before I explain how to beat rent control, I need to show you how much value you gain by doing it.

    Take scenario Echo Park.  In your fourplex, you earn the following rents on two 2-bed / 1-bath units & two 1-bed / 1-bath units:

    2/1 = $1775
    2/1 = $1182
    1/1 = $1098
    1/1 = $1595

    The current value of your Echo Park fourplex with these rents is approximately $1,015,000 at about 15 GRM (gross rent multiple, or 15 X yearly gross rent). If you absolutely maximized the value of this property, you could raise the value to $1,475,000. (A maximized income property in Echo Park can sell for up to 14 GRM.)

    While this scenario leaves lots of room for improvement, let’s focus on the biggest problems: the 2/1 at $1182 and the 1/1 at $1098.

    You need to increase the rent, and to do that, you need new tenants. The current tenants don’t want to leave, so the only way to change their mind legally is by offering them cash. There is no standard rule for this, but I know lots of owners who have negotiated with their tenants to move out for a lump sum. When you calculate your property’s value based on GRM,  you can quickly determine what value you’re adding to the property by raising the rent, and therefore figure out a reasonable offer to your tenants. You need a Voluntary Vacancy Agreement from a lawyer to do this the right way.

    Once your tenants move out, you need to know how to improve the unit. This means hiring a contractor. Sometimes you just need to clean, but more likely you’ll want to modernize the bathrooms, floors, fixtures and appliances in order to fully maximize rents (you don’t want another tenant moving in below market). That’s what I did on my property in Boyle Heights and I exceeded my expectations in new monthly rent, breaking records for the neighborhood.

    So let’s work the numbers here:

    You paid the tenants of the two most problematic units $10k each to vacate (this number varies). You paid $60k each to renovate the units, and $20k to improve the exterior and some deferred sewage issues.  You’re all in for $160,000 and you increased rents to $2,595 and $1,795. So how much did you increase your property value? Approximately $350,000 (at 14GRM).

    You paid $160,000 for $350,000 in value.

    If this seems overwhelming, please feel free to tap into my experience at david@adaptiverealty.com or 310-801-000.

  • Owning Income Property in Los Angeles

    Speaking from experience, owning rental property in Los Angeles can be a lot of work. It can also be relatively hassle-free if you have a building with good plumbing, electric, sewer, and tenant relations. If you’re not working in real estate full-time, it’s likely that you go through periods where you want to devote time to improving your property, times you don’t even want to think about it, and times you ponder just how much you could get for it on the open market.

    Here are four different strategies for what to do with your property once you own it:

    1) Reposition Your Property. Depending on how much cash you have available, repositioning your income property is usually your best option, especially if you bought your property more than four years ago. To do this, you need an aggressive business mindset, and cash. If your property is suffering under rent control, there are strategies to doubling your rental income in some cases, and increasing the value of your property by hundreds of thousands of dollars.  I’ve done it and my clients have done it with my consultation.

    2) Sell Your Property. This concept is not new to you, but in a true Seller’s market like this, selling your property in an established or hot area means you can reinvest that equity into a developing area, where you can get a much better deal. Selling and buying (usually in a 1031 exchange) is a great way to increase your overall equity faster than if you were simply to wait for your property to appreciate.

    3) Sit on Your Property. In Los Angeles, income properties appreciate. Because of zoning laws, rental supply will never keep up with increasing demand no matter how many ugly mixed users are built on major intersections. You’ve done a good thing buying property and it’s unlikely its value will decrease, barring an economic collapse. So if you’re too busy to think about it, sit on your property, increase rents 3% per year, and let the value appreciate as your neighborhood continues to gentrify.

    4) Refinance and Improve/Buy. If you’re unfamiliar with leverage, you may be enjoying watching your equity build in your property, and counting the days until you don’t have a mortgage. However, this could be a huge financial blunder. If you have significant equity in your property (50% or more), you could borrow on your property at close to 4%, and make much more than that reinvesting it into more property, or improving the one you have. The numbers don’t lie.

    Over the next week, I’ll be going over these strategies one-by-one. Please feel free to contact me at david@adaptiverealty.com or 310-801-0000 if you have any questions, or if you want specific advice on your property.