Met the 1% rule in hot HOT LA

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Met the 1% rule in hot HOT LA

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

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!!

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Medi Sarwary
Pleasanton, CA · Member since 2016 · 73 posts · 48 votes
8y

Podcast 274 with Paul Morris. He's the co-author of the bestselling Wealth Can’t Wait and has extensive experience investing in RC properties within LA. 

6Reply
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  • Jonathan Taylor
    Lender · Los Angeles, CA · Member since 2017 · 916 posts · 647 votes
    8y
    @Alex Shin I know that area as I work there often. Dive deep into tenant laws and look up prop 10. It’s on the ballot in November that would make it ever harder for landlords to raise rents by restricting the percentage a landlord can raise rents AFTER a tenant moves out. I agree with all who have commented. CA is not friendly to landlords and pad your numbers because the property tax and rehab are much more than you expect. Good luck!
    1Reply
  • Josh Howard
    Rental Property Investor · Austin, TX · Member since 2018 · 21 posts · 11 votes
    8y

    Why on earth are people investing in California then? I just don't understand the appeal with the lack of deals and tenant laws. Appreciation is more speculative than an investment. May as well just put money in the stock market... 

    0Reply
  • Account Closed
    Rental Property Investor · Austin, TX · Member since 2015 · 280 posts · 176 votes
    8y

    @Alex Shin but what is the market value? If you are buying it at market value, then good for you! But if you are buying it below Market Value, the 1% rule likely is not met. 

    0Reply
  • David Zheng
    Investor · Saint Louis, MO · Member since 2016 · 970 posts · 1k+ votes
    8y

    I don't get your loan. 14% down with a low 4% rate seems like some sort of conventional loan. but your numbers suggest that you renting out all 3 units off the bat. seems fishy

    1Reply
  • Matt R.
    Sherman Oaks, CA · Member since 2013 · 3k+ posts · 2k+ votes
    8y
    Originally posted by @Josh Howard:

    Why on earth are people investing in California then? I just don't understand the appeal with the lack of deals and tenant laws. Appreciation is more speculative than an investment. May as well just put money in the stock market... 

     I hear ya however when you look at the bigger pockets picture, parts of CA could be one of the places that actually can keep up with the stock market. IDk about this particular deal and South LA might be one of the locations that one might be able to start closer to the 1%. Despite the fear mongering, average evictions in LA county are 3 to 6 weeks but part of the idea with LA is you might have less evictions to begin with...jobs, growing economy, tight inventories, competitive tenants, low vacancies etc...In a nut shell, the appeal could be substantially more profits with less hassle if compared to other locations on a longer term hold.

    As is, Corelogic reports the #1-3 locations in the nation with the highest average profits ( cash flow+equity gains) since 2000 are LA, SF and SD so there is that picture painted in the background. Investors worldwide know this and it sort of snowballs a bit perhaps off that too. Then add San Jose, Riverside and Sacramento also in the top 10 nationally,  we can understand the general appeal for some longer term type investors favoring CA that way. 

    3Reply
  • Lee RipmaPro Member
    Rental Property Investor · Prairie Village, KS · Member since 2015 · 2k+ posts · 2k+ votes
    8y
    @Josh Howard I don’t do it for all the reasons in this thread. However, I have watched lots of folks be successful with rent controlled units. If you buy out tenants and take rents to market you can massively increase the value of the buildings. It’s just a different kind of forced appreciation. The appreciation rate is around 7% per year in LA. I do think you can be successful here it’s just a different type of market. I invest in MO and I love the landlord friendly laws.
    Podcast Guest on Show #373
    3Reply
  • Medi Sarwary
    Pleasanton, CA · Member since 2016 · 73 posts · 48 votes
    8y

    Podcast 274 with Paul Morris. He's the co-author of the bestselling Wealth Can’t Wait and has extensive experience investing in RC properties within LA. 

    6Reply
  • Andrew Y.
    Los Angeles, CA · Member since 2018 · 3 posts · 7 votes
    7y

    I have been investing in South Los Angeles area for the last 5 years (just bought 2 duplexes in the last 3 month). The rents are great and after 25% down with 5.75% interest (30-year fixed), they still cash flow nicely. 

    We all know the rents in Los Angeles are going to the roof and the last and only place for people to live close to Downtown LA is the area I just mentioned. I have seen appreciation of 100% from 5 years ago and rental increase of 36%+. 

    One misconception people have about this area is gang activities and violence. I lived in Los Angeles for the last 30+ years and I know which "blocks" have problems so I avoid them (Watts for example). In general though, all these areas are changing and they are not what they used to be. 

    Currently I manage 30+ duplexes/quadplex for friends and families and I can tell you that vacancy is almost 0%. We only purchase newer properties (2010 or newer) and they are not subject to rent control. Currently 4-bedroom units are going for $2500 to $2800 and 5-bedroom units are going for $2800 to $3100. The rents will continue to climb as long as "nicer" neighborhood in Los Angeles rents go up.

    3Reply
  • KJ L.
    Rental Property Investor · Los Angeles, CA · Member since 2017 · 210 posts · 155 votes
    7y
    Originally posted by @Andrew Y.:

    I have been investing in South Los Angeles area for the last 5 years (just bought 2 duplexes in the last 3 month). The rents are great and after 25% down with 5.75% interest (30-year fixed), they still cash flow nicely. 

    We all know the rents in Los Angeles are going to the roof and the last and only place for people to live close to Downtown LA is the area I just mentioned. I have seen appreciation of 100% from 5 years ago and rental increase of 36%+. 

    One misconception people have about this area is gang activities and violence. I lived in Los Angeles for the last 30+ years and I know which "blocks" have problems so I avoid them (Watts for example). In general though, all these areas are changing and they are not what they used to be. 

    Currently I manage 30+ duplexes/quadplex for friends and families and I can tell you that vacancy is almost 0%. We only purchase newer properties (2010 or newer) and they are not subject to rent control. Currently 4-bedroom units are going for $2500 to $2800 and 5-bedroom units are going for $2800 to $3100. The rents will continue to climb as long as "nicer" neighborhood in Los Angeles rents go up.

    Where in South LA do you invest? My husband and I have a duplex in Vermont Square (near USC). 

    0Reply
  • Andrew Y.
    Los Angeles, CA · Member since 2018 · 3 posts · 7 votes
    7y

    We purchased duplexes and quadplexes alongside 110 Fwy from 41St all the way to 105 Fwy. I currently entered escrow in 208th (South of 105 Fwy). It’s a single family house and I’ll demolish it in order to build a 5-bedroom duplex.

    1Reply
  • Alvin Uy
    Rental Property Investor · Los Angeles · Member since 2019 · 284 posts · 184 votes
    7y
    Originally posted by @Andrew Y.:

    We purchased duplexes and quadplexes alongside 110 Fwy from 41St all the way to 105 Fwy. I currently entered escrow in 208th (South of 105 Fwy). It’s a single family house and I’ll demolish it in order to build a 5-bedroom duplex.

    Hi Andrew... Are you able to use the BRRRR strategies in this area of LA?? If not, what strategy works to get that cash flow?

    I own 6 propeties in Eagle Rock, LA. Mostly Single Family Houses since those are Not under RC.  But i do have one 4 unit near Occidental College (where Pres. Obama went to school)... with existing tenants on 2 of them that Ive inherited under market rent....  But the other 2 units are student housing which helps gets me cash positive.  I love Eagle Rock but Its getting tough to find gems.  Im looking to getting more student housing and been considering finding one around USC...   How’s USC area for Student housing? Any tips?

    0Reply
  • Cody L.
    Rental Property Investor · San Diego, CA · Member since 2013 · 3k+ posts · 4k+ votes
    7y
    Originally posted by @Josh Howard:

    Why on earth are people investing in California then? I just don't understand the appeal with the lack of deals and tenant laws. Appreciation is more speculative than an investment. May as well just put money in the stock market... 

    What’s not to love? Tenant friendly laws. Rent control. Crap in the streets. Punitive state tax.  And now typhoid is making a comeback 

    At least you have a low return / CAP to make it all worthwhile

    0Reply
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