Income Property Los Angeles

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  • Mid-City awesome Fourplex

    There’s a huge fourplex that went on the market today in mid-city.  If you know the area, you know Paper or Plastik café.  While it has low-ish rents now, one of the big units is vacant and you could move in and still make cash flow.  If you want to live in a 2.5-bedroom apartment and put down approximately $160,000 to own a gigantic fourplex in an improving neighborhood, let me know! It’s going to get snatched up fast so strategy is key.

  • Scheduling Inspections

    Man, it’s much easier to schedule inspections when you have the inspectors on the phone, and you’re with the buyer and seller. It’s not always that easy, but that’s what I got to do today on a new property my client’s in contract for. On the flip side, scheduling another fourplex today proved more difficult – had to change the inspection time twice, checked my client’s calendar, then called the seller’s agent, who in turn had to contact the seller, and around we went.

    While often being an agent feels like being a secretary, today was a good day with two new properties in contract. One listing agent even bragged for me in front of my client about how I “swooped in at the last minute,” and had the “right balance of persistence without being too pushy.” Apparently there were multiple counter offers out, but I got Carlos to divulge at what price we could close before they got the counters back. So my buyer and I didn’t mess around. Now we’re about to close on a property that will make my client a 9% cash return.

    That said, let’s not count our chickens before they’re inspected…

  • Opening Day win!

    Clayton KershawNot totally irrelevant to real estate is Opening Day at Dodger Stadium today. (9-inning shutout win by Clayton Kershaw who homered the go-ahead run.) Everyone in the beautiful Elysian Park area is going to feel the swell of traffic, and the night will be slightly brighter illuminated by the stadium tungsten.

    When listing agents brag about proximity to Dodger Stadium, they’re taking a gamble.  To some, that’s an amazing perk to be able to walk to see the new blue, featuring recent acquisitions Carl Crawford, Zach Grienke, Adrian Gonzalez and our now-customary Dodger stars Matt Kemp, Andre Ethier and Kershaw. But to others they see only the line of cars and littering of trash along Elysian Park Avenue.

    Either way, I’m excited with my first-ever season tickets in the 5th row field level. I’m adjacent to the opposing bullpen, so if we lead the league in come-from-behind victories this year, you’ll know who got in those pitchers’ heads.

  • Subject to Inspection

    In the apartment building world, many properties are listed as “subject to inspection.” This means that your offer is considered subject to inspection of the property. Simply put, the seller understands that you haven’t seen the property, and you can cancel if you don’t like it.

    Why do they do this? Usually it’s because they don’t want to disturb the tenants. Or they’re lazy.

    Actually, all offers that you make are subject to inspection. During escrow, your inspection team (a general inspector / foundation specialist, a sewage specialist, or, depending on the work you expect to do, your contractor) will do due diligence to make sure there aren’t any current or future problems that might arise with the property. These team members, if they’re licensed, are liable for the information they give you.

    Depending on what your team finds, you can ask for a credit from the seller to fix the problem, or back out of the deal and get your deposit returned with good reason. If the listing is “subject to inspection” you don’t even need a good reason.

    So don’t be scared to make an offer on a solid deal without inspecting the property. That’s what escrow is for. And that’s where Adaptive Realty will continue to guide you.

  • New Philosophy for Poor Investors

    I write this with zero condescension. And it’s really not complicated, either. If you’re an FHA buyer, especially, I used to promote that you buy the most expensive property you can qualify for, with as much leverage as possible, because if the rents securely cover the mortgage, your small down payment will balloon into the full value of the property in 30 years. I still like that philosophy and it has worked for clients; it’s just not entirely applicable in this market.

    In today’s market, you need to buy with more foresight. The current strategy for poor investors is to find the future hotspots in L.A. and buy the gem of that neighborhood. Pretend that it’s the current hotspot and you’re getting an amazing deal on the best property around, if that makes you feel more comfortable. This means you might be investing a few thousand into your property for the first five years with no cash flow, but you’re banking on the appreciation, and, your own intuition. We’re searching for buildings with solid bones, a good lot, a great location for the neighborhood, and lots of potential.

    If you’re not one of those investors with loads of cash, you have to do a little imagining. It’s not the most profound insight, but it’s opened a lot of doors that competitors aren’t yet entering.

  • Flipping Flips

    There are bad flippers out there.  And you can take advantage of them.  I closed a deal on a poorly flipped duplex last week that stands to make my client $50K once the quick job is done.  Here’s why this deal works:

    – $370K contract price

    – needs $25K in improvements

    – delivered vacant

    – Rental area would command $3200/mo for the two units when renovated.

    The previous flippers restored the building, added new appliances, fixtures, and  new cabinetry. They mistakenly installed carpet, painted over the brick chimney, and painted it an ugly beige. They also left a yard with tons of potential an ugly mess. It figures that they were planning to sell to an owner-occupier who would take it from there.

    The better plan for this particular property would be to maximize the rents and sell it to an investor.  It’s in a better rental neighborhood than an owner’s neighborhood, and there are tons of investors looking for 4-5% deals out there.

    Investors are buying income properties with 12.5X GRM every day, so if you rent it for $3200/month, you have a $480,000 property.

    $3,200 x 12 months x 12.5 GRM = $480,000

    Subtract closing costs, you have $450,000 left over and you spent $400,000.  The renovations will take one month and the total hold period will be 3-4 months.  That’s a quick $50K if I’ve ever heard of one.

  • Zoning

    One thing to consider when deciding on your best and final offer for a property is the zoning. If you’re buying a duplex on a 8,000 sq ft lot, the zoning makes a huge difference in terms of the property value. If it’s R2, the duplex is all you’ll get, so there’s not much hidden value beyond the obvious: rents, appreciation, future market rents.  If the zoning is R3, a developer can build one unit for every 800 sq ft of lot space.  So in this case, that’s 10 units.

    There are other restrictions involved. Here are some basics:

    – Max height = 45ft.

    – Setbacks = 15ft. front and back. 10% of width on the sides.

    – 1 parking space per 1-bedroom apartment; 1.5 parking spaces per 2-bedroom apartment

    For more details, see the L.A. City Zoning Appendix.

    Our sample lot here is 160 feet by 50 feet.

    One parking space is 10 feet by 20 feet.

    Unless our developer is building 3 stories or an underground parking garage, we can only truly fit 8 1-bedroom apartments here because of the parking requirement and driveway.

    So a reasonable estimate for the value of this new property will be:

    8 units X $1,600 monthly rent ($19,200 yearly) = $153,600

    11 X GRM = $1.69 million

    If a developer buys the duplex for $400,000, builds for $840,000, that’s a $460,000 profit.

    So if you’re bidding $360,000 (12x GRM) on a duplex with a rent roll of $30,000 / year, remember what the developer paying all cash stands to make.  The good news is, that developer might be there again when you sell.

  • 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.

  • Listing Agents & FHA

    I’ve stopped asking agents if they’ll accept FHA loans. I had done that previously so my clients don’t waste time driving to a property they have no chance of buying. (FHA loans are sometimes less desirable because there are a few more steps to closing the deal.) While normally I give agents credit for knowing the difference, last week I actually startled a young agent with the question.

    “Yeah, why not. We’ll take whatever the highest offer is.”

    This is my kind of agent, I thought. I told my client that we had a good chance to get this place. She went to see it.

    Two days later, we came in at the highest offer. The listing agent told me so (are we sensing something amiss?), and that the seller would accept our offer that afternoon.

    Several hours of no phone calls later, I get a text saying they’ve countered a lower offer that has a higher down payment.

    What could have happened between the morning and late afternoon?  Did this agent Google “FHA loans” and get scared?  I texted back that this property would surely assess (it had in city records already and had the rent roll to boot), but the agent didn’t want to go back to the seller and look silly.

    The truth is, agents should favor FHA loans when they are higher offers, especially if the property will most likely assess.  Some agents want cash only if it’s a short sale or the building’s decrepit and they don’t want assessors near the place.  But this listing agent’s first instinct was actually the right one.

    Now I refer to my client as “my FHA buyer” once to see if there’s a reaction, and if not, we don’t mention it again until the purchase agreement.

  • Why not to buy Apartment Buildings

    I defer to my broker/partner, with a great post on the topic. These may be common turn-offs, according to Moses:

    1. Confrontation

    2. Risk

    3. Negotiations

    4. Organization

    5. Numbers

    6. Learning

    He writes more about it on his blog here.