Am I in the wrong market to begin investing in real estate?

9 Replies

Living in Los Angeles is daunting as a newb real estate investor. In reading the forums (and consuming YouTube and podcast content), it seems there are a number of investors (new and pro) who have relocated to markets with better opportunities. I know there is always the option of finding my first deal out of the city (in-state/not in LA or out of state), however, would like it to be local (might even be a live in situation with tenants for a year while I plan for my second door).

My broad goals (being a newb, I’m sure the finer details will come with time):

Long-term (next 5-10 years): "Retire" from my low $100Ks career with a diversified portfolio compromised of real estate (primary) and investments through 401K + supplemental Roth IRA (secondary). Been making my secondary focus primary the last 2-3 years by maxing out my 401K and contributing my tax return to my Roth IRA; so would like to contribute my income/savings directly into real estate).

  • Short-term: First door (within the next 12 months): buy and hold, single or multi-family (duplex) while assuming best practices re wealth generation standards / Being a first time buyer – I'm open to approach: house hacking, etc.

    Here are my specific questions:

    • Any investors who left a challenging market for a more promising one? (why/why not – if you have, how did it all work out for you? Worth it?)
    • Anyone in the larger Los Angeles/surrounding areas market who have had luck securing an entry property? Any words of wisdom in finding a deal in this market that’s a reasonable buy for someone starting out? I've been reading up on lead gen, so understand many of the best practices there.
    • Any other thoughts on the topic greatly appreciated.

    Thanks for your advice, and all the inspiration in the forums. I will pay it forward down the road!

    @Jason V. If you can find a house hack, it would be tremendously beneficial. If you want to live in a high priced market and want to stay there, house hack can reduce or eliminate your housing expense. Later you can re-evaluate and do another house hack or purchase in another market.

    Great points, @Lina Bibikov ! I thought about staying here via house hacking, however, my concern is LA area home prices (what I'll have to put towards the mortgage monthly after rent from roommates). Something to definitely consider, and also great points for me in continuing to get clear on what I'm looking for -- in this case, either a property where where the mortgage is being paid by the tenants (ideally some cash flow), or essentially keeping my portion of the mortgage as low as possible.

    Regardless of market, nationwide you are facing obnoxiously high valuations, made worse by low interest rates. Every clown and his brother can raise cheap capital and overbid prices.

    There have definitely been better times than this to get started. 

    Originally posted by @Jason V. :

    Living in Los Angeles is daunting as a newb real estate investor. In reading the forums (and consuming YouTube and podcast content), it seems there are a number of investors (new and pro) who have relocated to markets with better opportunities. I know there is always the option of finding my first deal out of the city (in-state/not in LA or out of state), however, would like it to be local (might even be a live in situation with tenants for a year while I plan for my second door).

    My broad goals (being a newb, I’m sure the finer details will come with time):

    Long-term (next 5-10 years): "Retire" from my low $100Ks career with a diversified portfolio compromised of real estate (primary) and investments through 401K + supplemental Roth IRA (secondary). Been making my secondary focus primary the last 2-3 years by maxing out my 401K and contributing my tax return to my Roth IRA; so would like to contribute my income/savings directly into real estate).

    • Short-term: First door (within the next 12 months): buy and hold, single or multi-family (duplex) while assuming best practices re wealth generation standards / Being a first time buyer – I’m open to approach: house hacking, etc.

      Here are my specific questions:

      • Any investors who left a challenging market for a more promising one? (why/why not – if you have, how did it all work out for you? Worth it?)
      • Anyone in the larger Los Angeles/surrounding areas market who have had luck securing an entry property? Any words of wisdom in finding a deal in this market that’s a reasonable buy for someone starting out? I've been reading up on lead gen, so understand many of the best practices there.
      • Any other thoughts on the topic greatly appreciated.

      Thanks for your advice, and all the inspiration in the forums. I will pay it forward down the road!

      Jason,

      You're asking all the right questions. As an Angelino who decided to invest in LA, lemme share some thoughts.

      Firstly, I don't mean to sound like a Socal supremacist, but you really have to take advice from out-of-staters with a huge grain of salt. Midwesterners have no idea what the LA market is actually like. They look at our prices and rent control and think, "No way!" In reality, LA's pricing and rent control create incredible long-term investments. I would much rather hold a property in LA for ten years than in almost any other city in America (and other investors agree, which is why the pricing is what it is).

      Also, before getting to the meat of it, I gotta tell you that my main goal is very much like yours: I've set a goal of "retiring" in 10 years and living off my rental portfolio (until I start pulling distributions from my retirement accounts, too). I've been maxing out my IRA accounts (I have a SEP IRA as an owner/sole employee of a C Corp) for the last four years, and now I'm focusing my savings on real estate.

      So the first thing to state about the LA market is that it's expensive. If you can't afford a down payment in Los Angeles, there's no choice but to go out of state. That said, the median home price in LA right now is $794K, and the minimum down payment on such a home, owner-occupied, would be $28K. So if you have the funds to invest out-of-state, you have the funds to househack in LA -- and I think househacking in LA is a fantastic first move.

      Why? Because LA's longterm annual appreciation rate is 6.3%. Even if you bank on half that, utilizing leverage, just househacking in LA is quite profitable.

      The best approach for a neophyte (I hate the word "newb") investor in LA is to househack a fixer-upper, either a SFR or a duplex. For contrast, if you buy a fixer-upper in a Midwest market to turn into a rental, you might spend $30K on rehab and increase the value of the home by $40K. That's a $10K gain in equity -- woohoo! But if you buy a fixer in LA and spend $30K on the rehab, you'll likely increase the home's value by $60K or $80K. Because LA property is expensive, improving it creates more gain.

      Personally, I chose to househack a duplex outside of Hollywood. I renovated the building before moving in to force some appreciation. Now my tenant pays most of the mortgage, I live for much less than I did before, and I'm building lots of equity for down the road. My plan is to build equity in LA for several more years before redeploying it in out-of-state, cashflowing assets.

      Oh! And that reminds me of an important point about househacking in LA: you can't use the same metrics as Midwesterners! Househacks don't cashflow in LA, but that doesn't mean they're bad investments. Rent is SO HIGH in Los Angeles that if you can cut down your living expense significantly, you're way ahead. What's better for your bottom line: an investment in the Midwest that provides $300/month in cashflow or a duplex househack in LA that saves you $700/month in living expenses?

      So let's answer some of your questions specifically now:

      I "left" LA during my research phase in pursuit of a "more promising" market, but the math behind the numbers led me back to LA. I considered several promising markets in the Midwest and Southeast, even took a four-day trip to check out my favorite market at the time, Fayetteville, AR. But as Brandon Turner has said, "Cashflow gives you freedom, but appreciation gives you wealth." Since you're already earning a good income, I suggest you invest for wealth.

      Luck securing an entry property... It's not luck, Jason! I do a couple of things to find properties that work: I use Census data to confirm my research into LA submarkets; when you're househacking, you want to live where you want to live, but it's good to have data backing your hunch as to what neighborhoods are appreciating faster. I keep several maps handy for that. I also run the numbers extensively, including modeling out projections for years down the road. I haven't found a good online calculator specifically for househacking, so I built my own and update it often.

      Words of wisdom for finding a deal: believe it or not, if you're househacking in LA, there's no place better than the MLS. I'm on several wholesaler's email lists, the their offerings are really only appropriate for pro flippers. (I can't explain more if you'd like.) I also did a mailing of my own before finding my duplex on the MLS. I got a very good response rate, but because I was househacking, I was picky. Too picky. So for me, it's a numbers game. The task is to underwrite every listing in the area that you're considering. Run the numbers on everything to find a better "paper deals" -- that is, the few deals that actually make a lot of sense as an investment. Then dig deeper into those listings to find additional sources of equity creation, like: a garage that can be converted to an ADU down the road, a decrepit but easily improvable facade, a large 2-bedroom that could be converted to a 3-bedroom down the road, etc.

      Where in LA do you live and work? What neighborhoods interest you here?

      Best,

      Jon

      Originally posted by @Jon Schwartz :
      Originally posted by @Jason V.:

      Living in Los Angeles is daunting as a newb real estate investor. In reading the forums (and consuming YouTube and podcast content), it seems there are a number of investors (new and pro) who have relocated to markets with better opportunities. I know there is always the option of finding my first deal out of the city (in-state/not in LA or out of state), however, would like it to be local (might even be a live in situation with tenants for a year while I plan for my second door).

      My broad goals (being a newb, I’m sure the finer details will come with time):

      Long-term (next 5-10 years): "Retire" from my low $100Ks career with a diversified portfolio compromised of real estate (primary) and investments through 401K + supplemental Roth IRA (secondary). Been making my secondary focus primary the last 2-3 years by maxing out my 401K and contributing my tax return to my Roth IRA; so would like to contribute my income/savings directly into real estate).

      • Short-term: First door (within the next 12 months): buy and hold, single or multi-family (duplex) while assuming best practices re wealth generation standards / Being a first time buyer – I’m open to approach: house hacking, etc.

        Here are my specific questions:

        • Any investors who left a challenging market for a more promising one? (why/why not – if you have, how did it all work out for you? Worth it?)
        • Anyone in the larger Los Angeles/surrounding areas market who have had luck securing an entry property? Any words of wisdom in finding a deal in this market that’s a reasonable buy for someone starting out? I've been reading up on lead gen, so understand many of the best practices there.
        • Any other thoughts on the topic greatly appreciated.

        Thanks for your advice, and all the inspiration in the forums. I will pay it forward down the road!

        Jason,

        You're asking all the right questions. As an Angelino who decided to invest in LA, lemme share some thoughts.

        Firstly, I don't mean to sound like a Socal supremacist, but you really have to take advice from out-of-staters with a huge grain of salt. Midwesterners have no idea what the LA market is actually like. They look at our prices and rent control and think, "No way!" In reality, LA's pricing and rent control create incredible long-term investments. I would much rather hold a property in LA for ten years than in almost any other city in America (and other investors agree, which is why the pricing is what it is).

        Also, before getting to the meat of it, I gotta tell you that my main goal is very much like yours: I've set a goal of "retiring" in 10 years and living off my rental portfolio (until I start pulling distributions from my retirement accounts, too). I've been maxing out my IRA accounts (I have a SEP IRA as an owner/sole employee of a C Corp) for the last four years, and now I'm focusing my savings on real estate.

        So the first thing to state about the LA market is that it's expensive. If you can't afford a down payment in Los Angeles, there's no choice but to go out of state. That said, the median home price in LA right now is $794K, and the minimum down payment on such a home, owner-occupied, would be $28K. So if you have the funds to invest out-of-state, you have the funds to househack in LA -- and I think househacking in LA is a fantastic first move.

        Why? Because LA's longterm annual appreciation rate is 6.3%. Even if you bank on half that, utilizing leverage, just househacking in LA is quite profitable.

        The best approach for a neophyte (I hate the word "newb") investor in LA is to househack a fixer-upper, either a SFR or a duplex. For contrast, if you buy a fixer-upper in a Midwest market to turn into a rental, you might spend $30K on rehab and increase the value of the home by $40K. That's a $10K gain in equity -- woohoo! But if you buy a fixer in LA and spend $30K on the rehab, you'll likely increase the home's value by $60K or $80K. Because LA property is expensive, improving it creates more gain.

        Personally, I chose to househack a duplex outside of Hollywood. I renovated the building before moving in to force some appreciation. Now my tenant pays most of the mortgage, I live for much less than I did before, and I'm building lots of equity for down the road. My plan is to build equity in LA for several more years before redeploying it in out-of-state, cashflowing assets.

        Oh! And that reminds me of an important point about househacking in LA: you can't use the same metrics as Midwesterners! Househacks don't cashflow in LA, but that doesn't mean they're bad investments. Rent is SO HIGH in Los Angeles that if you can cut down your living expense significantly, you're way ahead. What's better for your bottom line: an investment in the Midwest that provides $300/month in cashflow or a duplex househack in LA that saves you $700/month in living expenses?

        So let's answer some of your questions specifically now:

        I "left" LA during my research phase in pursuit of a "more promising" market, but the math behind the numbers led me back to LA. I considered several promising markets in the Midwest and Southeast, even took a four-day trip to check out my favorite market at the time, Fayetteville, AR. But as Brandon Turner has said, "Cashflow gives you freedom, but appreciation gives you wealth." Since you're already earning a good income, I suggest you invest for wealth.

        Luck securing an entry property... It's not luck, Jason! I do a couple of things to find properties that work: I use Census data to confirm my research into LA submarkets; when you're househacking, you want to live where you want to live, but it's good to have data backing your hunch as to what neighborhoods are appreciating faster. I keep several maps handy for that. I also run the numbers extensively, including modeling out projections for years down the road. I haven't found a good online calculator specifically for househacking, so I built my own and update it often.

        Words of wisdom for finding a deal: believe it or not, if you're househacking in LA, there's no place better than the MLS. I'm on several wholesaler's email lists, the their offerings are really only appropriate for pro flippers. (I can't explain more if you'd like.) I also did a mailing of my own before finding my duplex on the MLS. I got a very good response rate, but because I was househacking, I was picky. Too picky. So for me, it's a numbers game. The task is to underwrite every listing in the area that you're considering. Run the numbers on everything to find a better "paper deals" -- that is, the few deals that actually make a lot of sense as an investment. Then dig deeper into those listings to find additional sources of equity creation, like: a garage that can be converted to an ADU down the road, a decrepit but easily improvable facade, a large 2-bedroom that could be converted to a 3-bedroom down the road, etc.

        Where in LA do you live and work? What neighborhoods interest you here?

        Best,

        Jon

        I strongly agree with Jon here, it's really hard to go wrong starting with a house hack and it works especially well in an expensive market. I'm from rural OH where you can buy houses for nothing and (relatively speaking) Colorado is very expensive. 

        I see this as a good thing. As a long term investor the appreciation/amortization is far more substantial than if I were buying $50k houses in the Midwest. Plus, when talking about house hacking, it's very easy to rent rooms to excellent tenants in expensive markets.

        Perhaps down the road you'll invest elsewhere so you can scale cashflow quickly but the amount of wealth a million dollar house hack will bring you in the next ten years is worth many cheap Midwestern houses. 

        Dan

        @Jon Schwartz - Such great wisdom (best practices, LA market specific considerations, etc.)… thank you! You changed my limited perspective on having to prioritize cashflow (specifically building a foundation before starting to scale) than starting with a house hack where I would contribute towards the mortgage, but possibly still save a bit on living expenses – while most importantly, gaining appreciation from LA’s rising market.

        Yes, it seems our strategy, and goals, are similar (paired retirement investments with real estate). When I was promoted/started making around my current salary four plus years ago, I decided to stay where I'm living currently given I have a roommate w/ rent control ($1K/month with utilities in a residential neighborhood in West Hollywood – which I know you know is now unheard of in this neighborhood for a two bed two bathroom; the condition of the building, etc. is all topnotch, too). In addition to allowing me to maximize my investment contributions, I've been saving for a down payment. The minimum down payment you referenced would not be a challenge while keeping some cash on hand just in case. Everyone on the forums/podcasts/YouTube videos swear by MLS, so have been cruising through there to start to get accustom and start getting a lay of the land.

        You mentioned your house hack duplex is outside of Hollywood. Where did you buy? Are you willing to share the details about what you paid/appreciation? If you rented out the part you're living in, would you about cover the mortgage from rent? Just curious/would help me better understand your story. Agree with a house hack via fixer-upper SFR or duplex approach.

        Also, great videos on your YouTube channel (had a quick look at your profile)! Following you now. If the above is too sensitive, let me know if you’d like to connect with a PM. 

        Thanks again!

        @Courtney Francis  – Yeah, I understand your POV with mixed responses on this topic (in-state vs. out). Especially when it comes to a city like NYC. Really appreciate your response - thank you.

        @David A.  – Thanks for your honest opinion. Jumping in late in the game is just like anything else, it’s better to start late than not at all. Maybe it's just the optimist in me? I'll let you know when I find out. Haha

        @Daniel Haberkost - I sincerely appreciate the amendment to Jon's post/your POV! I understand your point about starting with a home as a house hack – specifically in a market where the appreciation/amortization is far more substantial. I've been thinking about the Denver market as well (I know it's booming – may be a good alternative if I find it challenging to find the deal I'm looking for in LA). Thanks!