Starting Out In Los Angeles

[Eric Grunfeld]

Hello:

I am a new real estate investor that currently lives in Los Angeles, CA.

I have been seeking to invest in 2 - 4 unit establishments.

However, I have been experiencing this market to be priced quite high (low cap rates). Very competitive market. 

And wanted to know what is currently working in the Los Angeles real estate market? What are people investing in? How are investors making money in this over-priced market?

I look forward to your thoughts/comments on this.

All the best,

Eric

[Rick Albert]

Hey Eric!

It is doable but tough. Some are banking on appreciation. I'm on my second house hack in LA.

Are you looking at owner occupied or straight investment?

For example, I have a client doing an FHA 203(k) loan and planning on permitting the second structure into an ADU.

Happy to chat more if you would like.

-Rick

[Charles Renn]

Hi @Eric Grunfeld,

The market for small multi-family is extremely competitive at the moment and I think it will be for the foreseeable future. Because of this most of the investor my team works with come at it from the house hack angle, as Rick mentioned. Live in one unit and rent the others, using a low down payment loan. Using this strategy provides a low cash investment up front, but trying to cash flow or break even can be a challenge. If you have some capital saved up a house hack could incentivize you due to it's low interest, lower than an investment loan. 

Without dragging on to far here, the main point I'll make is that your expectation when getting into 2-4 unit investing in SoCal, is expect it to take a few years to break even and/or cash flow and play the appreciation strategy. 

What do you think?

Hope this helps!

[Account Closed]

As a private lender I have only seen short term fix & flips in CA. Buy & holds are very underwater right now. Rehabbing seems to be the only way, from what I am personally seeing. 

[Zachary Inman]

Step 1: pick an out of state market

[Rick Albert]

I do think rents are going to go up even more in Los Angeles than they already have. I wouldn't be surprised if we end up in double digit growth, so if you choose to wait it out, it could pay off long term in Los Angeles. The rents over the last two years for one of my rentals is up 20%-25%.

You could go out of state, but factor in that you have one appreciating asset that is paying you cash just go towards someone else's asset. By owning your own, you have an appreciating asset pay another appreciating asset. It could be a better flow of money and investment. Of course there are multiple ways to invest. I'm also looking out of state and would consider in Los Angeles but would be going towards my third house hack.

[Daniel Park]

Also had this same question. Thanks for asking and for all the helpful insights here.

[Eric Grunfeld]

Quote from @Zachary Inman:

Step 1: pick an out of state market

 Thank you Zachary.

What markets (states) do you think are appropriate where there is some kind of decent cap rate as well as pro-landlord?

Any thoughts on that?

[Eric Grunfeld]

Quote from @Rick Albert:

I do think rents are going to go up even more in Los Angeles than they already have. I wouldn't be surprised if we end up in double digit growth, so if you choose to wait it out, it could pay off long term in Los Angeles. The rents over the last two years for one of my rentals is up 20%-25%.

You could go out of state, but factor in that you have one appreciating asset that is paying you cash just go towards someone else's asset. By owning your own, you have an appreciating asset pay another appreciating asset. It could be a better flow of money and investment. Of course there are multiple ways to invest. I'm also looking out of state and would consider in Los Angeles but would be going towards my third house hack.

 Thank you Rick. This is very helpful. 

[Robert Reynolds]

Hi @Eric Grunfeld,

Buy and hold in Los Angeles will always be more about appreciation than cash flow in my opinion. My homes in LA have appreciated faster than my ability to save. I'd recommend continuing to buy and hold if possible and then sell when it makes sense to buy more. House Hacking as mentioned above and live in flip are great options. With the live in flip you can live in the house for 2 years, fix it up and sell it within the next 3 years and get $250k tax free if single or $500k tax free profit if married. House Hacking single family residences by either adding an ADU or renting out spare bedrooms, and even your garage space for storage can help alleviate the high costs of living in LA. Please reach out and we can discuss further.

[Ali Boone]

The only way to really do it here is by assuming you're going to be negative cash flow for quite some time before the rents catch up to what you pay. Fixing up has been the only thing I've really seen here, or flipping. Even that can be tough with bidding wars though. And all of it will require a high level of capital. Ultimately, to answer your question on how people make money here, is through appreciation and over the long-term. Because of the entry prices and negative cash flow, a lot of CA investors invest out-of-state. Don't forget too in CA that it's incredibly tenant-friendly here, which makes it even more risky.