Met the 1% rule in hot HOT LA

Rental Property Investor · Austin, TX · Member since 2018 · 21 posts · 11 votes

That deal sounds a bit too good to be true. The other thing you have to consider is renovation costs. I assume a complex selling for that price will require some TLC. Although your find does give me hope that there are still some cash flowing deals out there in this crazy market!

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Lee RipmaPro Member

Rental Property Investor · Prairie Village, KS · Member since 2015 · 2k+ posts · 2k+ votes

8y

@Alex Shin Will all units be delivered vacant? Is this building subject to rent control?

Podcast Guest on Show #373

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Seth Borman

Rental Property Investor · Phoenix, AZ · Member since 2016 · 553 posts · 314 votes

8y

Lee asked a very important question.

What condition are the interiors in and what zip code?

0 Reply

Alex Shin

OP

San Antonio, TX · Member since 2018 · 103 posts · 31 votes

8y

@Josh Howard Hey Josh thanks for tuning in. Definitely will consider rehab costs when evaluating my max offer, thanks! Hows your experience been in this side of the cycle? Closing on some deals in lalaland?

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Alex Shin

OP

San Antonio, TX · Member since 2018 · 103 posts · 31 votes

8y

@Lee Ripma Hey Lee, great question. Units will not be delivered vacant and the units are subject to rent control. I can see these concerns becoming issues if the tenants have been there for a while and 1. Their rents are reasonably below market value 2. Potentially the units need some updating, despite current tenants being OK with the condition. Do you have any stories to share where these concerns turned a cash flowing property to a Hell House, as Brandon mentioned? Thanks!

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Alex Shin

OP

San Antonio, TX · Member since 2018 · 103 posts · 31 votes

8y

@Seth Borman This is the primary estimating stage to determine if it's worth it to walk the property. If these numbers are good enough, I'll go ahead and take a look and do a more detailed analysis. Do you have a flow on how you analyze deals? Thanks for being here

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Seth Borman

Rental Property Investor · Phoenix, AZ · Member since 2016 · 553 posts · 314 votes

8y

Are the rents that you posted actual rents or pro forma rents?

If they are actual then you can figure that you don't need to do anything.

If they are pro forma you need to figure out if the tenants can be convinced to relocate. If not, you are stuck with them at that rent. Plus you need to figure out a rehab budget.

1 Reply

Dan H.Pro Member

Investor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votes

8y

Originally posted by @Alex Shin:

@Lee Ripma Hey Lee, great question. Units will not be delivered vacant and the units are subject to rent control. I can see these concerns becoming issues if the tenants have been there for a while and 1. Their rents are reasonably below market value 2. Potentially the units need some updating, despite current tenants being OK with the condition. Do you have any stories to share where these concerns turned a cash flowing property to a Hell House, as Brandon mentioned?

Thanks!

Rent controlled units sell for less because one of the primary profit sources of Coastal So Cal buy n hold RE is rent appreciation. When rent increases are regulated, the profit source from rent appreciation is capped. Without rent appreciation or tenant buy out the cash flow will not increase significantly.

Typically to get rid of a tenant with below market rents requires a buy out. Then the unit typically needs a rehab because rent controlled units typically have bare minimum in terms of tenant enhancements. For example if a carpet is done then it is typically replaced by the cheapest and often ugliest carpet available. The tenants are not moving so why spend even $1 more for carpet that looks nice. Maybe if the tenants do not like the carpet color they will be more inclined to accept a tenant buy out.

I will provide two examples but my non-rent controlled example will be San Diego market (not LA) because I know the San Diego market better and therefore already know the aver rent increase of a San Diego SFR. Both examples, are from 3 years ago (2015) and start with the same rent (for this example it is a unit with $2K rent in 2015):

Rent Controlled 3% annual increase: $2000 * 1.03**3 = $2,185/month after 3 year (after the 3rd annual rent increase)
San Diego non rent controlled actual average increase (which has averaged just under $500/month increase in the last 3 years for SFR): $2,485/month.

That is $300/month ($3,600/year) difference in only 3 years time.

You could do a tenant buyout of the rent controlled unit but the cost typically is a function of the amount the rent is below market. So the units that have the most for the owner to gain by a tenant buy out will likely cost the owner the most to buy out.

I would be leery of purchasing rent controller RE.

Good luck

4 Reply

Alex Shin

OP

San Antonio, TX · Member since 2018 · 103 posts · 31 votes

8y

@Seth Borman @Dan H. I appreciate the feedback from you both

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Medi Sarwary

Pleasanton, CA · Member since 2016 · 73 posts · 48 votes

8y

Some people make money on rent control property, Paul Morris* comes to mind. I wouldn't touch it without a really experienced PM, someone who has extensive experience in RC properties within LA.

1 Reply

Dustin Beam

Kansas City, MO · Member since 2015 · 609 posts · 321 votes

8y

Originally posted by @Alex Shin:

BP Family! Bring it in :-)

I've been consistently analyzing deals in LA on a daily basis and had to keep writing "Damn" on the bottom of my pages of paper after analyzing that the property will not cash flow. Well, I finally found a property that I wrote "Yooooo" next to the monthly cash flow of over $600. I'd like to share with ya'll and receive some feedback, por favor! Without taking too much of your time, let's jump right in.

Rent comparables, using the lower-mid end of the market:

1/1 - $1475

3/2 - $2500

Mortgage 30YF @ 4.359%, 14% down

Triplex- 3/2 & 1/1 & 1/1

Asking Price 519,000

EGI

65,400 - vacancy (5%) = 62,130

Yearly Operating Expenses

Taxes (1.15%) - 7,785

insurance - 1500

repairs (5%)- 3270

CapEx (10%) - 6540

PM (10%) - 6540

Utilities - 1500

Total Expenses- 27,135

NOI= 34,995

34,995 - 27,384 (mortgage- refer above) = 7,611

$$$634$$$ CASH FLOW per month, or over $200 per door for this multi in LOS ANGELES, CALIFORNIA CA!!

I've now analyzed dozens of deals and all of them have been big fat negatives. This is the first one to provide me with some hopium in a cash flowing rental in the LA market. Please chime in and provide some feedback! But more importantly, tell me if I need to add or change my formula in analyzing a deal. Much appreciated!!

P.S. I would like my CapEx number and repairs estimates to be a bit more concise in the future.. atleast not a percentage of gross income but rather a hard estimated number I'd allocate on a consistent basis. Anyone have any suggestions on coming up with this number or does this come with time and experience? Brandon makes a great point here and is a good place to start.

Thank you all a ton!!

I have a spreadsheet available, I think on page 5 of the spreadsheets in File place here, that IMO does a much better job of estimating Cap-X. Feel free to download it.

Or download someone else's. I'm really not pimping my spreadsheet, there may be others that are much better, but it's what I know. But in either case, I agree that using percentages of rent or purchase price are silly since that varies greatly on a location but the water heater/roof/etc costs are nearly the same.

2 Reply

Hai Loc

Specialist · Toronto, Ontario · Member since 2012 · 2k+ posts · 891 votes

8y

@Alex Shin Good job buddy.. My uncle lives there and cannot find anything

1 Reply

Account Closed

Rental Property Investor · Oakland, CA · Member since 2014 · 730 posts · 1k+ votes

8y

@Alex Shin imagine if you self-managed. Your cash flow would almost double. Also, you'll learn this business inside and out by managing it yourself. Think about it.

3 Reply

Lee RipmaPro Member

Rental Property Investor · Prairie Village, KS · Member since 2015 · 2k+ posts · 2k+ votes

8y

@Alex Shin

Underwrite your property with the current market rents and see how it looks. If you offer all of them 15k buyout then maybe one will leave. Some may be determined to die there, in which case you can do nothing about it. You can just raise their rents by 3% yearly. So how does it look with a 15k buyout, one unit at market, and the other two at current market rents?

I don't buy in LA because I'm terrified of the tenants' rights. But honestly, it's such a great market for appreciation that you should think about getting in if you can. LA RE is not like most RE discussed on BP. If you can get the markets to rent then you'll really increase the value of your building.

Podcast Guest on Show #373

5 Reply

Ray Lai

Investor / Vendor · San Diego, CA · Member since 2016 · 1k+ posts · 949 votes

8y

The deal is not too good to be true due to 3 large risk areas that need additional investigation/information

1) Actual rent controlled rent versus market value since it's a rent controlled unit. One of the most common issues with projections is wrong rental projections that are too high.

2) No mention of neighborhood type. Assuming this is a C or D area based on cost of this multi.

3) Quality of tenant and the issues that come with those types of tenants. Quality tenants don't live in war zones.

Bonus: check out the deferred maintenance that comes with rent controlled units...

1 Reply

Dennis M.

Rental Property Investor · Erie, PA · Member since 2018 · 6k+ posts · 9k+ votes

8y

If this is c or d class you can quadruple that vacancy rate of 5% . I guess the big thing I haven’t really gathered in this deal is have you even actually seen the property ?? Or is this just a dream on a spreadsheet ? A property is much more than just random numbers in a piece of paper . Yeah the numbers need to work but Are you sure the place isn’t a total dump inside ? Anytime I thought I found a killer deal online I was almost always dissatisfied with the condition when I actually inspected the place . it’s only a good deal if you don’t have to dump a train load of money in it to get it where it’s decent

3 Reply

Johnny Bravo

Specialist · Murrieta, CA · Member since 2016 · 24 posts · 18 votes

8y

@Alex Shin I’m hoping the best for you but like a few have mentioned there are a few unknowns that would help. What is the zip you’re looking at? Santa Monica, Compton, Pasadena, etc? Also are you planing to live in one unit? I think I only saw you list two rents. Even if it’s rent controlled, assuming you are cash flowing and will continue to do so as long as you own the property, you’ll be ok.

1 Reply

Joseph M.

Flipper/Rehabber · Los Angeles, CA · Member since 2009 · 1k+ posts · 732 votes

8y

Regarding rent control In l.a I’ve heard of tenants being offered high amounts over $50,000 and turning down the offer . Not sure if it’s possible to have a contract with the tenants before closing that would actually be binding. But if the owner could get the rent control tenants to move prior to closing I’m guessing they’d do that themselves . The laws are very pro tenant in L.A and now the city is even considering hiring attorneys for tenants facing eviction .

3 Reply

Ali Boone

Real Estate Coach · Venice Beach, CA · Member since 2012 · 6k+ posts · 3k+ votes

8y

Yeah, my question is like others:

What kind of neighborhood is this in?
Do you know the exact condition of the property? Is there any room for it to be in bad enough shape that it could tank those estimates due to excessive rehab/repair costs?
Why is it priced so low, exactly?

If you don't know the answer to the last question, or more generally- why is it the only property cash-flowing in LA- you could be getting yourself in some trouble.

3 Reply

Jeffrey Almonte

Rental Property Investor · Los Angeles, CA · Member since 2011 · 122 posts · 67 votes

8y

Hi @Alex Shin , I have the same questions as @Ali Boone and others above.

To answer your question regarding narrowing down your CapEx number, make a list of items that have a limited lifespan such as roofs, water heaters, HVAC, appliances, etc. Decide how much that would cost to replace each of those items and divide it by its lifespan in months and add a 5-10% contingency.

2 Reply

Alex Shin

OP

San Antonio, TX · Member since 2018 · 103 posts · 31 votes

8y

@Lee Ripma What about LA's tenants rights turns you off? Definitely something I'd have to look more into. thank you for bringing it up

0 Reply

Lee RipmaPro Member

Rental Property Investor · Prairie Village, KS · Member since 2015 · 2k+ posts · 2k+ votes

8y

@Alex Shin Rent control and the fact that you can't get rid of your tenants. So if market is 1500 and they are paying 500 and won't take a buyout, you are stuck with them. @Joseph M. My landlord in LA has a tenant that he has offered 75k to, won't take it.

Podcast Guest on Show #373

1 Reply

Jonathan Taylor

Lender · Los Angeles, CA · Member since 2017 · 916 posts · 647 votes

8y

@Alex Shin I agree that there are a few things you’re missing. First. Rent control if tenants are in the properties it’s very difficult to remove them to get rents up to market. Talk to an eviction lawyer as it’s conditional on how to do it Second, revisit your insurance costs because of the wiring is not up to date (most la properties are 1910-1940) insurance will not cover you. Third, it’s already been discussed here but rehab costs are much higher here. If this is the unicorn then congrats man but I’m in the same boat. My deals just have NOPE written all over them. Keep us posted on your progress.

2 Reply

Alex Shin

OP

San Antonio, TX · Member since 2018 · 103 posts · 31 votes

8y

Hi All, I appreciate all of you providing feedback and digging deeper. To clear the fog.. the properties I am focused on is right along the 110 and south of the 10, above slauson. Further south is what a lot of you are calling the war zone. Interestingly enough, an insurance broker told me her son saw a gang shootout at 1 in the afternoon as he was driving through the neighborhood, further south, close to the 105. Youch. So yes, this property would be a C class, bordering a (D)o not enter zone, close to the University of Spoiled Children (Sorry, go Bruins). *A common concern many of the folk posed is in relation to rent controlled properties... Call me a dreamer but there must be some opportunity in that..! I'd enjoy to hear of experiences people have had with such units, in LA or not. Any podcasts on this topic? I've listened to all of the California ones at least and dont recall anyone discussing rent control/tenants rights... Back to the drawing board 🐛

1 Reply

Ali Boone

Real Estate Coach · Venice Beach, CA · Member since 2012 · 6k+ posts · 3k+ votes

8y

Originally posted by @Alex Shin:

Hi All,

I appreciate all of you providing feedback and digging deeper.

To clear the fog.. the properties I am focused on is right along the 110 and south of the 10, above slauson. Further south is what a lot of you are calling the war zone.

Interestingly enough, an insurance broker told me her son saw a gang shootout at 1 in the afternoon as he was driving through the neighborhood, further south, close to the 105. Youch.

So yes, this property would be a C class, bordering a (D)o not enter zone, close to the University of Spoiled Children (Sorry, go Bruins). *A common concern many of the folk posed is in relation to rent controlled properties... Call me a dreamer but there must be some opportunity in that..! I'd enjoy to hear of experiences people have had with such units, in LA or not. Any podcasts on this topic? I've listened to all of the California ones at least and dont recall anyone discussing rent control/tenants rights... Back to the drawing board 🐛

Lol! University of Spoiled Children. I have some USC fans that are going to love me after I start waiving that one around. Haha. (how have I not heard that before?)

I can't think of what the opportunity would be with the rent-controlled tenants. It's a very unfortunate thing for landlords. My direct neighbor has been in his unit since the 1970s and is easily paying $3-4k under what the market rent for that unit would be right now. The owner of my building has offered him tens of thousands of dollars to get out and he refuses. Why would he leave? He'd have to pay $3-4k more than what he currently pays a month for potentially a less-nice unit in a less desirable location. And because California is so tenant-friendly, it can be extremely difficult to evict a tenant who does something blatantly worth eviction, so good luck evicting just because you want them out.

The only two options I know of for getting rid of a rent-controlled tenant are:

The new owner of the property can pay one of the tenants to leave (amount is set by the city, usually somewhere ~$10k depending on different factors) if THEY (the owner) move into the unit themselves. Not sure how long legally you'd have to stay in the unit, but I imagine it's too long to make it worth it because I've never heard of anyone doing that just to get rid of a rent-controlled tenant.
You can Ellis the entire property, meaning you take all units of the property off the rental market for a certain period of time. Not sure the rules about putting it back on the rental market, but I imagine it's not that easy or advantageous for the same reason as the above--I've never heard of anyone doing it just to refresh the rent-control numbers.

California is generally pretty bad for landlords. It's workable, for sure, but it's an extremely tenant-friendly state so the laws aren't in your favor. Tenants have the upper-hand. So you combine that with minimal to negative cash flow, and suddenly California really becomes an appreciation play (in my opinion).

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Met the 1% rule in hot HOT LA

Met the 1% rule in hot HOT LA

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