I actually purchased my first rental property, a 4-plex in Koreatown in 2011. This was right about the time I started logging into Biggerpockets. Most people would have told me not to buy it, but I am glad I did as I don't have time to deal with properties not near me and I felt LA properties were kind of a bargain at the time even though they were comparatively expensive to places in the middle of the country. It did cash flow immediately after accounting for capital reserves, management fee, repairs and vacancy and so forth, but barely. However, rents have soared and the place was previously mismanaged some. I ended up buying another triplex in 2013 and did some rehab work that added quite a bit of rental income and value.
SoCal properties, especially those in LA have some pros and some cons. The pros are:
1. There are quite a few 4-plexes as much of LA was developed in the 20's when these were popular to build.
2. There is basically no vacancy if you are a decent manager
3. You often get good professional tenants, because in LA people with even very good jobs can't easily buy a house.
4. The mild weather takes a smaller toll on roofs and property and you don't need big HVAC systems. Most of my units do not have A/C and only basic heating units, which is common.
5. Lots of opportunities and ways to increase rents. If you do nice renovations you generally get paid for it if you are in the right neighborhoods.
6. It is easy to sell your property when you need to exit. Tons of buyers unless you overprice.
7. Prop 13 is a huge benefit that few people really appreciate.
Cons are:
1. It is hard to get in as you need a lot of money, especially considering that you need big money to renovate to.
2. It is harder to score a great deal and competition is fierce for properties.
3. Properties tend to be older, so when you do a rehab you often need to replace electrical, piping, etc...
I think newbies look too much at the current rent ratios cash flow and not enough on the vision for adding value and increasing rents. It is like buying a stock solely on the basis of its dividend yield. You gotta dig a lot more to really see if it is a good investment.
If you buy well located CA property in a downturn you will do very well. I grew up in a nice middle class area but it was near a very wealthy area. Many of the people here had made their money in real estate. I wanted to be more like them and not so much like my Dad who was the last one in the neighborhood to come back home from work every night. Many people say that was a product of the 70's and 80's and can't happen again, but they are proven wrong again and again from people who bought during the downturns of the 90's and 2009-2013.
Me and my brother purchased a 1941 4-unit in Silver Lake (Los Angeles) back in 2003 for $560K (top of the market at the time, it needed major renovations, and we had to get rid of the existing tenants -- 3% down, 6.5% interest 30 year fixed). I lived in one unit and my brother lived in another and I estimated it would take 5 years for rents to catch up with our mortgage. We lived in it for 10-11years and rehabbed it for an estimate $150k-$200K over that time using cash from income. With renters in the two free units it took about 5 years before me and my bro could live rent free. We refinanced it in 2013 at 3.5% for another 30 years and it's fully rented. Now the property pays for itself and gives both of us a nice monthly income.
With the extra income I was able to buy a home in the nice part of Eagle Rock, which I'm slowly making renovations on and I can see leaving it and renting it out in 5 years as well.
For now, this works for me. But there's no fast cash in LA. It's slow and steady, but the rental income (if you can be patient) is worth it. Good luck!
PS
The appreciation of CA properties is also worth it. My 4-unit is worth $1.5mill and my home in Eagle Rock is over $100K in value just two years after I purchased. I'm a buy and hold guy, but if I needed to exit either of these properties, they are very easy to sell with a huge profit. That's something else to think about.
I invest multifamily...do most deals in Central CA. Numbers work...property values still reasonable and I can get 9% cap rate for property in good area.
I actually purchased my first rental property, a 4-plex in Koreatown in 2011. This was right about the time I started logging into Biggerpockets. Most people would have told me not to buy it, but I am glad I did as I don't have time to deal with properties not near me and I felt LA properties were kind of a bargain at the time even though they were comparatively expensive to places in the middle of the country. It did cash flow immediately after accounting for capital reserves, management fee, repairs and vacancy and so forth, but barely. However, rents have soared and the place was previously mismanaged some. I ended up buying another triplex in 2013 and did some rehab work that added quite a bit of rental income and value.
SoCal properties, especially those in LA have some pros and some cons. The pros are:
1. There are quite a few 4-plexes as much of LA was developed in the 20's when these were popular to build.
2. There is basically no vacancy if you are a decent manager
3. You often get good professional tenants, because in LA people with even very good jobs can't easily buy a house.
4. The mild weather takes a smaller toll on roofs and property and you don't need big HVAC systems. Most of my units do not have A/C and only basic heating units, which is common.
5. Lots of opportunities and ways to increase rents. If you do nice renovations you generally get paid for it if you are in the right neighborhoods.
6. It is easy to sell your property when you need to exit. Tons of buyers unless you overprice.
7. Prop 13 is a huge benefit that few people really appreciate.
Cons are:
1. It is hard to get in as you need a lot of money, especially considering that you need big money to renovate to.
2. It is harder to score a great deal and competition is fierce for properties.
3. Properties tend to be older, so when you do a rehab you often need to replace electrical, piping, etc...
I think newbies look too much at the current rent ratios cash flow and not enough on the vision for adding value and increasing rents. It is like buying a stock solely on the basis of its dividend yield. You gotta dig a lot more to really see if it is a good investment.
If you buy well located CA property in a downturn you will do very well. I grew up in a nice middle class area but it was near a very wealthy area. Many of the people here had made their money in real estate. I wanted to be more like them and not so much like my Dad who was the last one in the neighborhood to come back home from work every night. Many people say that was a product of the 70's and 80's and can't happen again, but they are proven wrong again and again from people who bought during the downturns of the 90's and 2009-2013.
Hi @Matt R., thanks! That metric did not really come into play. The real kicker was the requirement that 85% of the monthly rents equal or exceed the monthly PITI. That requirement alone excluded a lot of properties within the rent-controlled city limits of Los Angeles, hence the reason I had to look a little further out (like Santa Clarita). I wouldn't call it a great deal, but here are the metrics nonetheless:
Purchase price: $435k reduced by seller credit of $15k for net $420k
Down Payment: $15,225
Monthly Rents: $1,025 1-bed + $995 1-bed + $675 studio (hasn't been raised in 15 years) + $650 (bedroom in my unit) = $3,345. I am eventually going to raise the rents on the studio to $750 and rent out the unit I currently live in for $1,000, making the total rents $3,770.
Monthly PITI: $2,862
For only $15k up-front, it was worth it for me since I was kicking money out the door every month in rent previously, despite the fact that the property is older, and I know it will have lots of maintenance (such as ). So let's say I need to put $10,000 in repairs over the next few weeks before El Niño (which scares the crap out of me, and I'm pretty sure will not be pretty for lots of people with older properties in SoCal...but that's a different story). Even so, I'm in this thing for only $25k, and I've certainly done sillier things with $25k, and plus now I'm not paying rent and am now getting landlording experience on a cashflowing property in Southern California (though I know a lot of that cashflow will go toward maintenance...I'm not spending or investing any of the cashflow...keeping it all in reserve...who knows what the rains will bring with them?). Would I have gotten into this property for $100k+ (25%) down? Not a chance. But for $25k, why not?
I suppose to the original poster @Arvin T. above) can give some better advice.
Logan, My Man,
Every deal is a personal one, and it sounds like you are fine because, this deal fits YOUR parameters.
Not someone else's. CoC is not the only metric to use in RE, neither is appreciation, real or anticipated.
And surely no armchair quarterback is going to make my decisions for me.
I've won some, I've lost less.
That's the game of business. To try and lose less times than you win, ie: work, deals , time, all of it.
I still say congrats on this, way to take action.
Our strategy is pretty basic, I really want the tenants to pay down our mortgages.
Appreciation will be the gravy on the taters. :)
As we only have 1 unit currently under possession in our company, (LLC formed, funding to be soon), It's really about the paydown for all of us involved.
5-10 year timeline means major equity to us, unless of course, the bottom falls out and they become worthless. Doubt that will happen.
My only piece of advice to anyone is, do NOT go cheap on repair work.
If it needs to be replaced, do NOT put a band-aid on it, replace it with like type or better, you will thank me for this.
The motto of our business is "Quality is remembered, long after price is forgotten".
Something I picked up from a guy who first got me started in the trades a long time ago.
Good Luck,
Steve
Matt,
Real Estate prices relative to the rents in Santa Barbara make it very difficult to achieve a reasonable rate of return. Duplex's often go out at a 0 cap rate. A popular way here in Santa Barbara to generate higher returns on residential income property is to rent to College students, think UCSB or Santa Barbara City College. Students are housed 2 or more to a bedroom and depending on location will pay about $750 per bed per month. Location is key.
Matt,
Real Estate prices relative to the rents in Santa Barbara make it very difficult to achieve a reasonable rate of return. Duplex's often go out at a 0 cap rate. A popular way here in Santa Barbara to generate higher returns on residential income property is to rent to College students, think UCSB or Santa Barbara City College. Students are housed 2 or more to a bedroom and depending on location will pay about $750 per bed per month. Location is key.
Yes, agreed. It is far from a zero cap fortunately. Let's say closer to above average nationally. Thanks.
I'm looking to move to these cities possibly to live in one unit and also rent out the other units.
Monterey Park, San Gabriel, Alhambra, Rosemead
or
Lakewood, Cypress
...
Any reason in particular for any of those areas? It appears the average price per multifamily and average rent in some of those areas may be more than that of Los Angeles.
I'm looking to move to these cities possibly to live in one unit and also rent out the other units.
Monterey Park, San Gabriel, Alhambra, Rosemead
or
Lakewood, Cypress
...
Any reason in particular for any of those areas? It appears the average price per multifamily and average rent in some of those areas may be more than that of Los Angeles.
Monterey Park, San Gabriel, Alhambra, Rosemead
for school district and food
Lakewood, Cypress
for school district and we have family living there.
These are the areas that I considered to be our next move when buying our next residence. I'm currently renting in Gardena, CA. I got to thinking might as well get into a multifamily if possible, instead of just buying one house / unit for us to live in.
When you buy in California, you buy location, which in financial terms means you are buying liquidity and appreciation. Despite our prices went down in 2008, they are already back up over 50% and turnkeys sell in weeks in most areas.
I have seen some California investors purchasing SFRs rentals out of state in the $120k-$160k range, just to learn the seller, who was also an investor, had just purchased the house a few weeks prior for half price and, judging from the old online photos, the rehab was just paint and carpet. In addition, they've pushed the comps over the roof so our Californian investors paid top prices. Some out of state areas appreciate so slowly that, if you need to sell after such a purchase, you either have to sell at a lost or wait for years to break even after selling costs. Even selling under value, the time on the market is months, up to 6 months. On the positive side, you're getting cash flow - you better do!
Those LA county cities you mentioned are good for owner-occupied 3-4plexes. You could consider also: South Gate, Downey, Pico Rivera, Long Beach, Montebello, Baldwin Park, and El Monte. As an owner-occupied you could get an FHA loan and other low down payment financing. As always, that is the first step: get pre-approved so that you know your price range, then you can figure out where.