I Need advice on my first purchase

6 Replies

I am attempting to purchase my first property in the San Fernando valley in Los Angeles and I after reading Rich Dad Poor Dad and listening to countless episodes on here I am interested in purchasing a cash flowing property. I feel most comfortable purchasing a duplex or even an ADU, but I'm having a hard time finding property for a price in the valley where I can make a positive cash flow. Should I wait keep waiting until something potential comes up in the area, should I just jump in and buy a property so I can start building equity, or should I look in other cities?


okay so I am currently living in an apartment right now, and I am really interested in purchasing my first property. I work in the San Fernando Valley, CA. I am on the market to purchase a duplex (preferably) or a house and convert the garage to an ADU if possible and live in the ADU while rent out the main house to produce cash flow. The problem with this is the duplex's that I've found off multiple websites start off at $700,000. I have a realtor that has started the process of getting a preapproved loan but also I was looking at how much people in multiple neighborhoods are renting out their houses and back additional units, and they are getting anywhere between $1200-$2500 depending on the neighborhood and the size of the unit. I'm not sure if I am not looking in the right places (realitor.com, Zillow, Google, and craigslist) or if the market doesn't currently have any deals. I don't believe I can have positive cash flow if I'm purchasing a home for this price. any advice on what should do would be lovely. I work in the middle of the valley as a mailman and would prefer not to have to deal with LA traffic so I would love to stay in the valley but don't know if I can find a good deal here in the valley

Hey Anthony,

First off you need to make sure the area you plan to add the ADU in has no zoning restrictions or CC&Rs (covenant codes and restrictions) as this can put an immediate halt to your progress. In order to stay where you want you might have to look into creative financing options to make the deal work for you. You may also want to look into comps for renting by the room to see if that could procure more cash flow? If you're really trying to hustle for a good deal you could pursue off-market or seller financing deals if they're available for your area (I assume your market is red hot).

If you have any questions I am always available to talk real estate. Good luck!

Originally posted by @Anthony Marshall :

okay so I am currently living in an apartment right now, and I am really interested in purchasing my first property. I work in the San Fernando Valley, CA. I am on the market to purchase a duplex (preferably) or a house and convert the garage to an ADU if possible and live in the ADU while rent out the main house to produce cash flow. The problem with this is the duplex's that I've found off multiple websites start off at $700,000. I have a realtor that has started the process of getting a preapproved loan but also I was looking at how much people in multiple neighborhoods are renting out their houses and back additional units, and they are getting anywhere between $1200-$2500 depending on the neighborhood and the size of the unit. I'm not sure if I am not looking in the right places (realitor.com, Zillow, Google, and craigslist) or if the market doesn't currently have any deals. I don't believe I can have positive cash flow if I'm purchasing a home for this price. any advice on what should do would be lovely. I work in the middle of the valley as a mailman and would prefer not to have to deal with LA traffic so I would love to stay in the valley but don't know if I can find a good deal here in the valley

Anthony,

I'm a realtor who works exclusively with people looking to house hack, so lemme give you some pointers!

You will not find a property that cashflows while you live in it. Such a property does not exist on the MLS in the Valley. Property is so expensive in Greater LA that it's just not going to happen.

However, you don't need positive cashflow on a house hack for it to be a great deal. Rent is incredibly expensive in the Valley, too! By LA standards, if a duplex or house + ADU allows you to spend less than you're paying on rent now and start building equity, it's a win.

For example, I spent some time last time finding properties for a client near El Segundo, where this client lives. He's currently paying $1800/month in rent. I found several duplexes and house/ADU properties that end up with a net monthly cost under $1800/month. Beyond that, the principal paydown on a house hack tends to be huge. For most of the properties I found, the net monthly cost is $1800, but around $1200 of that comes back to you as principal paydown. So you're "rent equivalent" -- the actual dollars that leave your pocket and never return -- is more like $600!

So these properties don't cashflow, but where in LA can you live in a decent apartment for $600/month???

So pointer #1 is to stop using positive cashflow as the litmus test. LA is a very different market than the rest of the county; our deals looks different, too.

Pointer #2 is to start analyzing these properties correctly. I house hacked a duplex outside of Hollywood last year, and I made a spreadsheet to properly analyze how the property would perform. I've refined the spreadsheet since. I'm happy to share it.

Pointer #3 is that building an ADU is quite expensive. If you're looking for homes with ADU potential, here are a few things to look for: Garages underneath living spaces are ideal because the foundation is there and systems won't be difficult. If you're assessing an attached garage, you want to see footers under the walls and plumbing as close as possible, ideally a washer/dryer in the garage or a kitchen adjacent to the garage.

Pointer #4: Search the MLS for homes with guest houses, mother-in-law flats, casitas, or whatever other name you can think of. A lot of houses have non-permitted second units, so the listing agent won't make a big deal about it in the listing. These listing are great opportunities!

That's about all I can think of... Lemme know if you have anymore questions. Happy to help!

All the best,

Jon

@Anthony Marshall

Hi Anthony. I'm in the valley myself (Granada Hills) so I know what you're talking about. The advice you're getting now is good. My two cents is this as I'm in the middle of building an ADU out of a garage with my family myself right now.

- work with a good planner/architect because you can't even go into the planning office and there are a bunch of details you'll have to learn on the fly. The money you pay for someone else to deal with the headaches and getting the permits is worth the money

- I'd recommend getting a good general contractor to handle the job for you. You work a full time job like me so having someone you can trust to build the job will help

- this part I'm dealing with right now. I rented a house out and told the tenants that my family was building out the ADU with the garage so it would be gone. I told them it would be large and take up most of the yard. They said okay and I wrote the garage was going to be out of the lease. I didn't put down the loss of the yard (my mistake!) so now I'm going through problems with that and the whole thing is delayed. Put everything in writing! And fence off the area you're going to take away so anyone in the house knows what they're going to lose

Good luck!

Great advice from @Jon Schwartz above. 

I'd add that most of the chatter here on Bigger Pockets revolves around high cashflowing deals. These types of deals can't be forced in markets that don't have great cashflow. My market, like LA, is an appreciating market and those returns have excellent perks as well, but you have to analyze the deals differently and there really aren't many resources here for those types of returns. I can tell you that appreciation can be a game changer if you are patience and understand how to use leverage as a tool.

I've never bought a 1% deal in my life, but was able to quit my day job after a few years of investing in an appreciating market. 

I'd suggest you connect with Jon and see if he can help you find a deal that will get your on your path- sounds like he knows the market and understands the long term benefits. 

Best of luck!