Real Estate Newbie in LA Looking for Direction

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Real Estate Newbie in LA Looking for Direction

Geo Tan
Real Estate Broker · Los Angeles, CA · Member since 2016 · 112 posts · 34 votes

Hello!

I have just recently started to look into real estate investing and am learning as much as I can. Let me explain the situation I am currently in and hopefully anyone here can help me with any advice they can offer which is greatly appreciated!

**The next 3 paragraphs will explain how I got to where I am today in terms of getting started on real estate investing. If this does not interest you, please feel free to skip the next 3 paragraphs!**

I was fortunate enough to have my father purchase a two bedroom condo in Las Vegas with both our names. I wasn't really hands on with that unit since we had a property manager do the heavy lifting. I just recently was able to sell that property for roughly $200k. I am currently in the contract signing process but I would like to do a 1031 to use this profit to dive into the world of real estate investing. I currently live in LA (Ktown) and have been learning as much as I can through Bigger Pockets and any other resource I can get my hands on.

I would like to start with a buy and hold approach and make some income from renting the units out. I have a full time job currently so I'm not in dire need of income. Through the little information I have learned so far I set my goal as "Earn a steady $2,000 per month of steady income through multi unit properties (duplex, triplex, quadruplex) in LA by June 30th". I know how ridiculous that sounds but I was lacking a lot of researching and learning at that point so that was what got me started.

After some more research I learned that it was extremely difficult to make profits through rent in LA. The more I researched, the more I realized that the 2% or 1% rule cannot work with most of the properties. If anything I was lucky to find a few that would meet the 0.5% rule (if that exists). So now I have expanded my search area to the greater Los Angeles area.

Thank you for taking the time to read this long story. I hope that will answer any questions any of you might have in terms of the history behind where I am currently at.

So bottom line is, I have now amended my goal to "Earn $2,000 per month of profit through multi unit properties (duplex, triplex, quadruplex) in California by June 30th".

First of all, please do let me know if this is a horrible goal to start off with. I am still very green to the real estate world and have yet to fully grasp all of it yet.

Second, I will most likely start with a $200k cash for my previous property I will be selling which I will do a 1031 with to start my real estate venture. So with a loan, I'm leaning towards a spending budget of $500k - $1.2m for a property (or properties).

Well that's about as much information as I can share I think...

So any tips or guidance in terms of the direction I'm going would be greatly appreciated! Please feel free to ask me any questions you may have and I'll respond back as soon as I can. 

Thank you again and hope everyone has a great day!

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Logan AllecBusiness Member
Accountant · Los Angeles, CA · Member since 2014 · 1k+ posts · 980 votes
10y

@Geo Tan, if you're in your 20s and currently renting, house hacking is a no-brainer.  If you do nothing else in real estate, you will have succeeded by getting into a Los Angeles fourplex as a young man with only 3.5% down. Assuming the rents cover your expenses, in 30 years when you're in your early 50s and the mortgage is paid off, you will be sitting on a multi-million-dollar asset that cash flows thousands of dollars per month at the cost of a measly $20k or so out-of-pocket when you were 23. I can't think of any better way for young people with limited resources to prepare for their future so early on in life with so little cash out-of-pocket. Run the numbers and see for yourself.

Also, remember this: you're young. Your priority at this point in life should be setting yourself up to build your balance sheet, not necessarily your current profit and loss statement via cash flow.  It'd be a different tune if you were in your mid-40s with a family.

PM me, and let's talk.  I'd love to get on the phone with you and convince you why you should make house hacking your first investment and then think about duplexes in Indy or Cleveland later down the line if you're so inclined.

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  • Geo Tan
    OP
    Real Estate Broker · Los Angeles, CA · Member since 2016 · 112 posts · 34 votes
    10y

    @Jerry Padilla

    Hey Jerry!

    Thank you for the encouraging words. Means a lot and helps every bit.

    You kind of lost me with all those numbers and terms on the financing and loans. I'm still learning the terms and formulas but I'll dive more in detail with you on that after I learn about it (hopefully soon)! But in terms of the 1031 which I did get a chance to learn a tiny bit about, there are definitely pros and cons to it in my opinion. From what little I read into, it sounds like it's harder to house hack and like you mentioned you do have to give that cash for another entity to hold while you're selling and investing. I do know a great pro for that is that you don't have to pay taxes on the profits you get for selling the initial property. That's the main reason most people go with the 1031. So if I were to pocket the profits from the sale I'd get taxed on it quite a bit. But if I'm re-investing that cash into another property, I can avoid these taxes. I THINK that's how it works. The more I interact with people here at Bigger Pockets the more I realize I need to definitely step up my research game. But from what I know so far, that seems to be the case.

    I'd definitely love to talk more about the mortgage and loan side to it so as soon as I read into it I'll reach out to you again!

    Thanks again!

    1Reply
  • Geo Tan
    OP
    Real Estate Broker · Los Angeles, CA · Member since 2016 · 112 posts · 34 votes
    10y

    @Dave Foster

    Thanks for the amazingly fast response Dave!

    That first part you responded with totally makes sense to me now. If I did house hack it would technically be me using a investment to investment purchase method to buy personal property which is basically cheating the system in terms of taxes?

    So if I understand properly, it would pretty much mean that the only way to go around 1031 and personal properties is to use the profits from 1031 to pay for the portion of a multi-unit that I will not be personally living in. So ultimately I'm still paying someone else (the loaner in this case) to rent in my own property?

    And I love the comparison to a bed n breakfast. That makes it much easier to understand. So from what I'm understanding, it seems like house hacking with a 1031 is possible, but it doesn't seem that smart of a move to me since that's the same result with more headache. Definitely feel free to correct me if I'm wrong.

    Thanks again for all the awesome information and feedback Dave!

    0Reply
  • Fay Chen
    Investor · Bothell, WA · Member since 2015 · 214 posts · 104 votes
    10y
    0Reply
  • Matt R.
    Sherman Oaks, CA · Member since 2013 · 3k+ posts · 2k+ votes
    10y

    @Geo Tan That is both combined and that is how most investors record profits in the end. Now if you bought in 2000 your cash flow would also be likely insane in many LA, SF and SD areas and higher than nearly every city in the nation. Rents sky rocketed and values/rents tend to go hand in hand long run. Even for LA county there are 100 different climates still. If just initial cash flow is your goal Detroit has been number one for that past two years. 

    1Reply
  • Account Closed
    Investor · Honolulu, HI · Member since 2013 · 3k+ posts · 1k+ votes
    10y
    Originally posted by @Geo Tan:

    After some more research I learned that it was extremely difficult to make profits through rent in LA. The more I researched, the more I realized that the 2% or 1% rule cannot work with most of the properties. If anything I was lucky to find a few that would meet the 0.5% rule (if that exists). So now I have expanded my search area to the greater Los Angeles area.

    Geoffrey, welcome!  Please educate yourself about the real estate "rules" thrown around here.  Most are used backwards so that people that have inferior products to sell can make a sale.  Let's look at this 2% rule.  Backwards it makes flyover property seem impressive. 

    2%  rent of $1,000 in say Indy means the market will ONLY pay $50,000 for the CHANCE to collect that $1,000.

    Now my experience in the more profitable areas like CA and HI is that the price to rent ratio is more like ,8%  So that same $1,000 rent is worth $125,000! 

    Geez Geoffrey, which market do you think the more profitable property is in?  How can you be more profitable in a more expensive place?  Lower vacancy, less weather related expenses, a better RENT to SQUARE FOOT ratio (you'll collect $1000 for say every 500 sq ft of expenses in an expensive area vs. say $1,000 for 1500 sf), better tax expenses.

    Also be very careful of calling "cashflow" profit.  They are NOT the same.

    Good luck!

    2Reply
  • Melissa Gittens
    Real Estate Broker · Windsor, CT · Member since 2015 · 1k+ posts · 268 votes
    10y

    I think you are on the right track and have a sound plan in mind. I would suggest developing your plan and to have a a sound exit strategy just in case problems were to arise. 

    0Reply
  • Manolo D.
    Contractor · Los Angeles, CA · Member since 2015 · 4k+ posts · 1k+ votes
    10y
    Geoffrey Tan I don't think your goal is extreme, but it is hard to find a 1M house that rents for 3.5k to net 2k here. There are areas that you could buy, then it per room (say 700-900/room), but you need to have 4-5 bedrooms there. I have seen somewhere near the USC or student housing area that it could be around 600 or 1800 for a 3/2.l, if you buy a duplex, that could to 3600 if that's the case. Now since they are students, they might trash the place and you'll have extra expense during turn-overs. Or you could buy a 1M house in my pasadena and turn it into a 4-5 bed where rents are 900-1000/month according to someone i know. Commercial loans rely on income and 200k will not go a long way in LA market. Ethan Vegas might want to give you some bird's eye view. He property manages in some SF areas if I remember correctly.
    0Reply
  • Adam Bird
    Investor · Grosse Pointe, MI · Member since 2016 · 35 posts · 3 votes
    10y

    Detroit will certainly benefit for net rental monies and huge potential capital growth! I, and my clients, will testify to that!

    1Reply
  • Ethan Vegas
    Real Estate Investor · Los Angeles, CA · Member since 2008 · 80 posts · 42 votes
    10y

    Thanks for the mention @Manolo D.!

    @Geo Tan, If you're looking for $4k-$5k net rent out of a million or less purchase, it is very possible.  I have three clients that have bought rental properties in Pasadena (good client base) that would fit these numbers.

    Feel free to reach out....

    -Ethan

    0Reply
  • David Faulkner
    Investor · Orange County, CA · Member since 2015 · 2k+ posts · 3k+ votes
    10y

    Welcome! By and large in SoCal, you will make your money on the "value add", not the cash flow (not day 1, or year 1, or year 5 even, anyway). For example, buy a property for $1M, put in $100k in renovation, live there 2 years, sell tax free for $1.35M. Note that the $1.35M sell price should be largely due to your forced equity from buying and remodeling right, not from market appreciation over 2 years of living there. That would be $250k/2 years/12 mo/yr =  ~$10k/mo >> your $2k/mo goal ... rinse, repeat, rinse, repeat, retire. 

    Or, if you decide you want to hold, cash out refinance your next down payment after 2 years, so long as the property still produces positive cash flow after ALL expenses are factored. Positive cash flow is still important if you hold, but not as a means to make your profits but rather as an "insurance policy" to let you hold through a downturn if need be and realize those long term rent and price appreciation if they materialize like they historically have in LA.

    Lastly, if you come across a smokin' deal in the right time frame and a 1031 works out for you, great, but be careful not to let the tax tail wag the investment dog ... if you wouldn't buy the property without the 1031 then do buy it with a 1031. Good luck!

    1Reply
  • Jo-Ann LapinPro Member
    Loan Officer · Tustin, CA · Member since 2015 · 3k+ posts · 713 votes
    10y

    Look like you have your road map. You should with budget be able to receive the $2,000 a month you are seeking. Investing 1.2 for return seems like a lot to tie up for that. Maybe it's time to look into some passive investments with that cash. Food for thought.

    [email protected]
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  • Geo Tan
    OP
    Real Estate Broker · Los Angeles, CA · Member since 2016 · 112 posts · 34 votes
    10y

    @Fay Chen

    Hi again Fay!

    Sorry for the late response, I've had a crazy week at work and am now able to catch up on the weeks worth of helpful posts! I am definitely interested in meetups in LA and am totally bummed I wasn't able to make it. I'll be sure to try to clear my schedule next time!

    I did hear a little bit about commercial loans through the Bigger Pockets podcasts but still don't know the majority of information to completely comprehend it. It overall sounds like a higher risk higher reward system for commercial. But at the same time, the loans look more into cash flow rather than the other criteria you mentioned. I'll definitely look into that.

    Thanks again and I'd love for you to keep me posted on events near the area!

    0Reply
  • Fay Chen
    Investor · Bothell, WA · Member since 2015 · 214 posts · 104 votes
    10y

    Get on Jeff's list. There was a commercial broker there this time. It was really informative.

    0Reply
  • Geo Tan
    OP
    Real Estate Broker · Los Angeles, CA · Member since 2016 · 112 posts · 34 votes
    10y

    @Matt R.

    Hey Matt!

    Thanks for the explanation. I definitely get a better understanding of what you meant in terms of profits. I did hear about Detroit being number one but I definitely want my first property in my portfolio relatively close to where I reside so I can understand a bit easier in terms of the city's growth, population, employment, etc. I feel like I can connect a bit better with the statistics when it's within a few hour driving radius. I also have to admit it is a bit nerve wracking to start out of state even though I know how much better the deals are!

    0Reply
  • Geo Tan
    OP
    Real Estate Broker · Los Angeles, CA · Member since 2016 · 112 posts · 34 votes
    10y

    @Account Closed

    Hi Bob,

    I do apologize if I used the estate "rules" or REI terms incorrectly. If you can tell me how to improve my use or how I used it incorrectly, I'll definitely make sure I use the terms more correctly from now on. I hope you do understand that I'm definitely still very new to the industry so any help or explanation in terms of what I am doing or saying incorrectly would be greatly appreciated but definitely not required. I'm a bit lost in terms of what you mentioned on real estate rules being used backwards. I'll research it a bit and see if I can get a better understanding of what you were trying to relay to me.

    Until then,

    0Reply
  • Account Closed
    Investor · Honolulu, HI · Member since 2013 · 3k+ posts · 1k+ votes
    10y
    Originally posted by @Geo Tan:

    @Matt R.. I also have to admit it is a bit nerve wracking to start out of state even though I know how much better the deals are!

    Geoffrey, just every metric supports CA as one of the top profitable areas for real estate.  What support do you have for your statement?  "Deals", do you just mean properties that investors will ONLY pay under $100,000 for? Must not be that good of a "deal". 

    IMHO you are allowing yourself to be led down the garden path.

    1Reply
  • Geo Tan
    OP
    Real Estate Broker · Los Angeles, CA · Member since 2016 · 112 posts · 34 votes
    10y

    @Melissa Gittens

    Hi Melissa!

    Thanks for the motivation!

    I would love to hear more about having a sound exit strategy? I haven't really put much thought into an idea such as that and would love to hear more.

    Thanks in advance!

    0Reply
  • Geo Tan
    OP
    Real Estate Broker · Los Angeles, CA · Member since 2016 · 112 posts · 34 votes
    10y

    @Account Closed

    I'll keep that in mind. Thanks again.

    0Reply
  • Geo Tan
    OP
    Real Estate Broker · Los Angeles, CA · Member since 2016 · 112 posts · 34 votes
    10y

    @Manolo D.

    Thanks for the great tips! I definitely am seeing the hardships of looking around neighboring areas to LA. I know some people thrive on college niches and I do hope to get into that someday but as of right now, I don't think I can spare the headaches for dealing with student tenants. I'm trying to make this work with my full time job which is picking up so trying to learn as much as I can whenever I can. I'll definitely check out USC though. I have been hearing that the student housing areas are getting better but I do know that the areas right outside of USC aren't the best of locations in terms of crime rate. I'll have to look into that so thanks again for the heads up!

    0Reply
  • Geo Tan
    OP
    Real Estate Broker · Los Angeles, CA · Member since 2016 · 112 posts · 34 votes
    10y

    @Adam Bird

    Hey Adam!

    I have definitely heard that Detroit has been on many people's radars for obvious reasons! I'd love to learn more about that area. But as of right now, I'm focusing on getting my first property within a few hours drive from my location to make sure I can learn as much as I can. What sort of success did you have there?

    0Reply
  • Geo Tan
    OP
    Real Estate Broker · Los Angeles, CA · Member since 2016 · 112 posts · 34 votes
    10y

    @Ethan Vegas

    Hey Ethan!

    I should definitely start looking into Pasadena too then. I haven't put too much research in that city and now I feel like I was missing out! Appreciate the tip as always and hope to keep in touch. If you want to get a little more in detail with the 3 properties you mentioned, I'd love to hear about it. Thanks again.

    0Reply
  • Account Closed
    Investor · Honolulu, HI · Member since 2013 · 3k+ posts · 1k+ votes
    10y
    Originally posted by @Geo Tan:

    @Ali Boone

    Hi Ali!

    Thank you for the compliments! It's always great hearing motivational comments from veteran real estate professionals.

    I'm totally bummed to hear about all of California being on the same boat as LA in terms of hard to turn a profit.

    Aloha @Geoffrey Tan  Your buddy and worst nightmare here, Bob.  First @Ali Boone never said it was hard to turn a profit in CA.  That would be 100% wrong.  Now she talked about cash flow although she did not identify it as immediate cash flow vs cash flow over a normal holding period.  Generally CA will produce more cash flow that most Midwest properties over time.  In fact sometimes the Midwest cash faux is just your own money being handed back to you.  I don't call that profit.  You should realize that Ali Boone makes money for facilitating Midwest turkey properties.  I also believe she has never owned CA property and is a renter. Hasn't been a great market.  Values boomed and busted and boomed a little more. Rents move at a glacial pace.  Are you trying to time the market to get out while you can?  Do you really have that much gain that it is worth the hassle of a 1031?

    Now as your buddy let me suggest that once you determine that a 1031 is appropriate then you pick a nice property in CA that could be your own residence after a year of renting.  If you own a home rent that out in a year and keep if a good rental or sell it within the time to claim the $250,000-500,000 tax free money.  Then move into the 1031 property and sell after you have the $250-500,000 tax free money. 

    Questions?  Good luck!

    0Reply
  • Geo Tan
    OP
    Real Estate Broker · Los Angeles, CA · Member since 2016 · 112 posts · 34 votes
    10y

    @David Faulkner

    Hey David!

    I would definitely love to be able to invest for value add but I feel like there are some restrictions or requirements I cannot meet. If I would go that route, wouldn't I need the capital to grind it out for those years and make the loan payments? I definitely do not have the income from my current job to be able to make loan payments on a 1M property. Second, if it is a single property for 1M that I'll live in for the two years to get out of taxes, I cannot do a 1031? I'm not 100% sure either so let me know if that is not the case!

    I definitely will take to heart the last comment you made on dealing with 1031's though! You are definitely right in comparing how I would treat the deal if it was not a 1031 with a deadline!

    Thanks again!

    0Reply
  • Geo Tan
    OP
    Real Estate Broker · Los Angeles, CA · Member since 2016 · 112 posts · 34 votes
    10y

    @Jo-Ann Lapin

    Thanks Jo-Ann!

    What passive investments did you have in mind? Like I mentioned, I am very new to investing in general so still very ill-knowledged on any passive investments you would have in mind. I would love to get more into that with you if you can!

    Thanks in advance!

    0Reply
  • Geo Tan
    OP
    Real Estate Broker · Los Angeles, CA · Member since 2016 · 112 posts · 34 votes
    10y

    @Account Closed

    You're killing me Bob!

    I kid... But in all honesty I wanted to thank you for taking the time to critique all the mistakes I made or plan on making. As negative and overly-critical as you seem to me, you do give great advice and information on real estate investing, and for that I thank you. I know that reading my responses and ideas must be very frustrating for you as well! If I recall correctly Aloha means peace and compassion no? :)

    I'd love to have some clarification on the hassle of a 1031? From what I understand it seems fairly clear cut to me so if you do have any information on avoiding 1031 I'd love to learn more.

    In terms of your advice in the last paragraph on which path I should take: Is there a particular reason to rent the property for a year then make it my own residence? Is the 1031 investment to investment voided after 1 year? I'd love to hear more about this.

    To give you further details, I am currently renting in Los Angeles and do not own any properties besides the Vegas property I will be selling.

    So to put your plan simply, I should purchase a property in CA and rent for a year, then live in it for 2 years to get the 250k-500k tax free, then go from there?

    Thanks in advance!

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