Need help from my SoCal investors
New to Real Estate · Pomona, CA · Member since 2018 · 14 posts · 6 votes
Hello BP squad!
I'm looking to do a house hack here in Southern California's LA area this year, but I was hoping I could pick your brains first. Just to give you an idea of what I'm trying to do, I'd ideally like to purchase a duplex (at the least), live in one unit while I rent out the other. I plan to purchase this property on a FHA loan and my budget is about $350k on the low end, and $450 on the high end. I've listed a few questions below that have by rattling around in my head. Any advice you could provide would be greatly appreciated!
1. Do you recommend any specific cities near LA to buy a small multi-family property where the numbers make sense?
2. What is a realistic cash-on-cash return and CAP rate number for SoCal's market? Should I even be concerned about the CAP rate for such a small property?
3. Is it realistic to get a $100 - $200 in cash flow in this area without any major rehabs?
Hi Vincent. You're head is in the right place but you might be looking in the wrong area. Finding any duplex in LA for between $350 and $450K will likely be very difficult. Moreover, being that you are going to house hack, you're going to want to live in an area that both works for you and appeals to you. There are very few area which are generally thought as desirable in LA that you'll be able to find anything in that price range.
You'll see most duplexes trading at a cap between 3.5 and 5% but you can find a 6 Cap if you get lucky. Your best bet for getting a great Cap and cash-flowing is finding a value-add property in a area that is in the process of gentrification and put in some sweat equity to grow the value and justify those higher rents so you can achieve the cash flow you're looking for.
Lastly, remember that with an FHA loan (lower down payment) it will be harder to cash flow since you're going to have a higher monthly mortgage payment + mortgage insurance. You're cash-on-cash is likely to be higher is you do a FHA (low down payment) but you'll need to make sure the financials work on a monthly and annual basis. Don't forget to give yourself a buffer in case unexpected expenses come up.
Hi Vincent. You're head is in the right place but you might be looking in the wrong area. Finding any duplex in LA for between $350 and $450K will likely be very difficult. Moreover, being that you are going to house hack, you're going to want to live in an area that both works for you and appeals to you. There are very few area which are generally thought as desirable in LA that you'll be able to find anything in that price range.
You'll see most duplexes trading at a cap between 3.5 and 5% but you can find a 6 Cap if you get lucky. Your best bet for getting a great Cap and cash-flowing is finding a value-add property in a area that is in the process of gentrification and put in some sweat equity to grow the value and justify those higher rents so you can achieve the cash flow you're looking for.
Lastly, remember that with an FHA loan (lower down payment) it will be harder to cash flow since you're going to have a higher monthly mortgage payment + mortgage insurance. You're cash-on-cash is likely to be higher is you do a FHA (low down payment) but you'll need to make sure the financials work on a monthly and annual basis. Don't forget to give yourself a buffer in case unexpected expenses come up.
Hi Vincent,
I am here in the LA area too and am also doing a house hack. Finding a duplex is going to be very hard in that price range in most of the LA area. I have a suggestion for you though. Try to find a single family home that has the opportunity to add or convert part the existing structure into an ADU. You could live in the smaller ADU and rent out the rest of the house.
Hope that helps!
@Daniel Gutierrez
Hi Daniel,
Thank you for the great information! Considering that my budget is a bit low I know I have to be flexible on choosing where I want to go. I know the Inland Empire and even the desert areas like Victorville would be easier to buy in, but they just aren’t the most idle locations when considering my job.
I like your idea of getting into an area that is in the beginning stages of gentrification (Long Beach, Inglewood, etc.) and putting in some sweat equity.
@Irina Costea
Hi Irina, this might be a newbie question but what is an ADU? This is the first time I've ever heard of this.
Is it an expensive process to do?
@Vincent Ludegna Both Long Beach and Inglewood are great options! You want to make sure that where you live works for your life style and work. You don't want to buy a place in the dessert to find that you're commuting 4hrs/ day and spending hundred more on gas.
Buying a place in a gentrifying area will give you the benefit of a low purchase price a lot of upside potential and solid cash flow. But make sure to get a great home inspection because some of those older homes can come with a world of problems. I personally invest a lot in Long Beach and have been finding great opportunities. Hope this helps.
@Daniel Gutierrez
Daniel, it gives me a bit of confidence that you have had success investing in Long Beach. Do you tend to stick to a particular area of Long Beach? I heard North Long Beach is the place to be right now.
As go the inspections, would you happen to have any recommendations for a company or individual that does inspections? Lastly, can I make an offer contingent on an inspection?
Sorry for bombarding you with questions, I just want to try and learn as much as possible. I appreciate your help!
@Vincent Ludegna
An ADU is an acronym for an "accessory dwelling unit". It's also often called a back house, granny flat, etc. it's basically a little unit that in California, as of a couple years ago, is legal on an R1 property. So, where before you could only have a single family home, you can legally have an additional unit.
It isn't a duplex because the rules around it are a little different and the ADU has to truly be accessory to the house, usually limiting its square footage to 1/2 that if the house and no more than 1,200 square feet regardless of the house square footage. You are also exempt from some additional parking requirements as well if you are within a certain distance of a bus stop, and it doesn't need to be a new building, you can carve the space out from the house or sometimes convert a garage. It depends a couple of factors.
If you do a quick google search, there are a lot of resources online as well.
As far as cost, I would say $150 to $250 per square foot for new construction depending on finishes you choose, etc. The cost can be lower too if you are converting a garage or using existing construction.
Hope that helps!
Vincent, I try to stay closer to the beach as that is where you will be able to get the best rents. The down town area is going through a huge revitalization right now. You'll be able to find great deals around there. Check out 4th st and up for areas of gentrification.
You should always make that a contingency. Never buy a home without seeing the inside first. It's okay to put an offer in and lock down the house but ALWAYS get an inspection before your first contingency period passes. I've used Home Front Inspect: https://homefrontinspect.com/ in the past but there are lots of good ones out there. I always look for a company who does thermal imaging of the home used cameras to look where we aren't able to see (behind walls, main-line sewer, etc.)
@Daniel Gutierrez
This great all great information Daniel! Thank you very much for taking the time to answer my questions.
@Irina Costea
Thank you for the different perspective. I will definitely have to do my homework on that subject.
@Vincent Ludegna there are definitely places throughout the Los Angeles are that are in the "path of progress" or gentrifying area and while it is very difficult to cash flow here in Southern California it is possible.
If you are wanting to stay in the Pomona area there are a few options there and then closer to Los Angeles there are additional options.
Ultimately, with a lot of your questions your real estate agent can definitely help you through the process.
Vincent I am so glad you asked this question because I myself am considering the same option - though it just seems if you do not have a lot of capital, your capital will go much farther out of CA.
Michael, and Daniel, my question is, even if it is possible to house hack, invest in California in the way Vincent is mentioning, would the property taxes deplete any cash flow made?
@Sara Martin
Sara, for that reason alone I’ve debated on moving out of CA. Just about everywhere else seems to be significantly cheaper, with a few exceptions of course. However, I think with the house hack technique it makes it a bit more realistic to live, and begin to invest, here in SoCal. Truthfully I would like to go straight into a triplex or higher, but a duplex seems realistic for me at the moment.
As for the property taxes, I could be wrong, but ideally I think those should be incorporated into your analysis of the property when you are looking to buy. Just to avoid whipping out your potential cash flow at the end of the year, as you previously mentioned. BP has some great calculators that can help with that (rental calculator).
You can still find MFR properties in the $450k or up price range in East LA as well. Have you considered those areas? They are also gentrifying. Granted as mentioned above they will be value add properties and most likely be tenant occupied but it's definitely an area with opportunity. I've completed a couple flips in those areas recently. The ADU is definitely a great option. @Nabil Suleiman who’s an agent/investor has been doing business in East LA and also has a lot of local knowledge to offer in those areas.
I agree on the house hack, Just seems like your $ will go much farther out of state, with that said, you don't need to move out of state in order to begin investing out of state. I am debating this myself, living in the SFV, Los Angeles, there is still plenty available and you have to get creative, but being with out a partner, and thinking if I had to do this on my own, an FHA in a much lower cost market makes sense, especially considering taxes, HOA, rents, upcoming markets, tenant vs landlord states, etc etc.
Check out this FSBO - really nearby where you are https://fsbo.com/listings/listings/show/id/194026/
https://www.redfin.com/CA/Pomona/695-Mountain-Ave-...
There are still decent prices where you are in Pamona! and on the outskirts like Rancho Cucamonga or even just a bit more eat by Fontana, you can drive around and probably just talk to those people selling their homes.
Ah you are right about incorporating those into the cash analysis, though still they kill! I am a developer and the taxes on properties in West LA are insane, like 37k for 1 quarter....
Anyway, I am in that boat of ...do I stay in Cali and try to do out of state investing? Do I move out of Cali into a 4 plex with an FHA? Try and house hack here? Or D. All of the above?
@Sara Martin @Vincent Ludegna You absolutely have to incorporate property taxes into your financial models. The question of property taxes is not limited to California. In reality, most states have property taxes and the CA property tax rate is actually relatively low compared to some other areas of the country. The reason CA property tax rates seem so high in CA is because of the relatively higher property values. Nevertheless, the higher property values also come with higher rental values.
You'll need to spend time doing a thorough financial analysis of the property (regardless of the state) in order to project the potential and likely returns of the investment. Also, it takes work but you can find some diamonds in the rough. Doing a house hack on a value-add duplex or triplex is totally doable. For example, in late 2017 I came across a duplex in downtown long beach that was for sale as what I though was way under priced. It turned out that the duplex had a lot of deferred maintenance (it was in bad shape) and the owner hadn't raised rents in 7yrs. One unit was renting for $650/mo and the other was renting for $800/ mo. I bought the duplex, spent $80K doing a complete renovation of both units and raised the rent to $1500/ mo each. My cap rate on the property is almost 8! When doing value add you also get the benefit of having a lower tax basis based on the lower purchase price of the property you bought. There are a lot of ways to do it. You just have to hustle and be creative. Evaluate each property on the basis of what you can make out of it; not just what the current owner is doing with it.
@Daniel Gutierrez Thank you for the encouragement and suggestions, you are right about getting creative, solid advice.
@Sara Martin Of course! Also, remember the end game! An 8 Cap might not seem high compared to other areas of the county but what you're really going for over the long term is IRR. So Cal real estate has the potential to appreciate much more over the long term which will give you a big kicker to your IRR upon exit. Always have an exit strategy for your investments.
@Sara Martin while the taxes here in California are high there are still opportunities to invest and let appreciation do it's job. By no means do you want to invest in something that doesn't make sense financially but just because you're not cash flowing on a property here in Los Angeles doesn't mean it's a bad investment.
If you want cash flow then OOS is the way to go.
If you have to live here in Southern California then there is no reason to not purchase a multi-unit property, let your tenant pay down your debt and you get the gain in appreciation.
I invest OOS for cash flow and here in the Los Angeles are for appreciation.
@Adriel Liwag
Adriel, thank you for the advice and recommendation! As for East LA I have definitely considered that area but being that this first property would be my primary residence, LA would not be an ideal location for me at this time. However, I still keep my mind open to all locations.
@Michael Tripp @Daniel Gutierrez @Sara Martin
Thank you all for pitching in your opinions and experience. Definitely a lot of solid information and advice floating around on this form.
Another question, going off your example Daniel, if I'm considering adding value to a small multi family; is worth doing something like an FHA 203k loan? Or should I find another means of capital to fund the rehabbing portion?
@Vincent Ludegna look at every option possible to get financing so you have option to choose from. Depending on where the home is you may be able to get Ca Gov backed loans/ grants for repairs/ improvements that make the home more energy efficient. Shop around and find the best and cheapest capital.
@Vincent Ludegna You seem to be in the same boat I was in two years ago. Look into the NACA program, It can help you get your minimum purchase price up and it does not have mortgage insurance. I now have a fourplex that will break even when the reno is complete. Check it out, naca.com
@Vincent Ludegna see my post from a few days back https://www.biggerpockets.com/forums/12/topics/672... it references a bunch of different financing options with links to the specific government sites.
@Daniel Gutierrez i also live in Newport, are you a part of any local meet ups? Please see my profile for my bio. Trying to to buy my MFR this year and surround myself with as many like minded folks as possible in the process!
@Sara Martin while the taxes here in California are high there are still opportunities to invest and let appreciation do it's job. By no means do you want to invest in something that doesn't make sense financially but just because you're not cash flowing on a property here in Los Angeles doesn't mean it's a bad investment.
If you want cash flow then OOS is the way to go.
If you have to live here in Southern California then there is no reason to not purchase a multi-unit property, let your tenant pay down your debt and you get the gain in appreciation.
I invest OOS for cash flow and here in the Los Angeles are for appreciation.
Getting started is my issue, I see how beneficial in other ways investing in CA would be, as you mentioned, though having low capital, I am not positive on how I can leverage everything I have into something great. Its possible, just need the pathway...
I would love to do MUP and house hack in that sense, so for now I will keep looking and learning...
thank you ever so much for the valuable information.