Los Angeles Investors, how do you do it?

Buying & Selling Real Estate
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Los Angeles Investors, how do you do it?

Eric Ippolito
Los Angeles, CA · Member since 2019 · 35 posts · 16 votes

I know LA is an appreciation market, but running through any deals’ numbers, whether single family, or multifamily, I can’t see how anyone’s not losing money unless they buy a property in cash.

In LA, the housing costs are outrageous, but the rent isn’t too crazy (not to say $2400 for a 2bdrm apartment is fun). But it barely can pay for expenses, management, and the mortgage and still cash flow. My own landlord owns several multifamily locations that sold for a few million (if Zillow can be trusted) and rents the units up to about $2400 and I wonder how he’s doing it.

So what’s the strategy?

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Lee RipmaPro Member
Rental Property Investor · Prairie Village, KS · Member since 2015 · 2k+ posts · 2k+ votes
7y

@Eric Ippolito

I went out of state in 2017 and I really learned the business in a lower-stakes market. I'm really happy with the portfolio I have in Kansas City and I will continue to buy there. Now that I understand RE and have a portfolio, LA has never looked better to me. Listen to Podcast 280 with @Account Closed pointed out your cash on cash may be very low but your overall ROI will be very high if you buy right. The great thing about LA is that there is often a massive delta between current rent and market rent. So if you can bring units to market you can double the NOI of a building and it's value. Those deltas just don't exist in the midwest markets so upside on building value is more limited. In LA you might spend 30k to get an increase of $1200/mo at a 4 cap. In the midwest you'll spend 10k to get an increase of 300/mo at an 8 cap. Do the math of which market will make you rich (360k vs 45k in value to your building in my example).

Gentrifying areas also see huge spikes in rent prices and there is a huge demand and shortage of housing in LA. We will basically never have oversupply here due to physical and political barriers. As Matt pointed out you need to get into an area that is just starting to turn and really ride that rent appreciation up. You might really have to hunt for that perfect property and really research and chose your submarket carefully. 

Some of the best areas for investing may not be where you would personally want to live, so don't confuse living in real estate you own with investing in real estate. I rent in LA and I'm happy to do so to live in an area that is central, safe, walkable, and has no commute. My landlord bought the 5plex building where I live in 1990 when Echo Park was scary and full of gangs for 200k from a distressed seller. The building is now easily worth 2M. So it was a great buy then but it isn't a great buy now. It is cheaper for me to rent than to own in the location I want to live in. However, there are still plenty of good locations to INVEST in. 

That is my two cents on LA RE. Listen to others who are successful in LA. Maybe cut your teeth in the midwest or in a lower-priced desert area like Twentynine Palms (midwest prices) that you can drive to before you invest in LA. 

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  • Chris Sparrow
    Member since 2019 · 67 posts · 11 votes
    7y

    Following!  I'm very interested in hearing the responses.  

    0Reply
  • Matt Mason
    Investor · Los Angeles, CA · Member since 2013 · 231 posts · 260 votes
    7y

    @Eric Ippolito

    When I first bought my buildings I was getting very little cash flow. It was positive after management and reserves, but just a trickle. The good thing about LA properties is that they are always rented (unless you overprice badly). You can turn a unit in a few days unless it is X-Mas.

    Fast forward 7 years and rents have increased so much that the increase covers the entire mortgage plus the increase in expenses. Since property tax increases are capped in CA, that is a big deal for keeping expenses from growing. Unfortunately, i don’t think we’ll see the same metrics in the next 7 years, so the timeline will be stretched by quite a bit.

    The real money in LA, is finding a neighborhood that is on the verge of gentrifying and fixing up the property appropriately. Strategy takes some money and a little patience but the rewards are huge.

    6Reply
  • Alonso Escalante
    Lender · Irvine, CA · Member since 2019 · 13 posts · 5 votes
    7y

    @Matt Mason

    Thank you for your feedback! Would you mind sharing what was your CoC return your first years and what would be a realistic CoC in LA right now?

    As stated in the thread, I also wonder how investors are making money in this market as nothing seems to cashflow.

    Looking forward to your reply, thanks!

    2Reply
  • Jay Chang
    Developer · Los Angeles, CA · Member since 2017 · 157 posts · 84 votes
    7y

    Investing in LA is tough. The uncertainty in rent control and the unfriendly laws for landlords aren't helping very much.

    Have you thought about investing out of state? There are meetups in LA for people who are interested in investing multifamily properties in other states. 

    4Reply
  • Matt Mason
    Investor · Los Angeles, CA · Member since 2013 · 231 posts · 260 votes
    7y
    Originally posted by @Alonso Escalante:

    @Matt Mason

    Thank you for your feedback! Would you mind sharing what was your CoC return your first years and what would be a realistic CoC in LA right now?

    As stated in the thread, I also wonder how investors are making money in this market as nothing seems to cashflow.

    Looking forward to your reply, thanks!

     Like I said it was a trickle at first.  Prob. 2% the first year or so and that was in 2011 and 2013 when pricing was much more favorable.  However, if you just want to buy and sit and do nothing and collect a bunch of cash flow right away then LA is prob not for you.  The cash flow does come, but it can take a few years and some work.

    Some people are happy with a few out of state units and a $1k or $2k in monthly cash flow.  That doesn’t work for me as my career keeps me busy and the last thing I want to do is jump on a plane to go half way across the country worrying about a few properties.  I also hate relying on people I can’t meet with easily face to face and neighborhoods i don know and can’t monitor.

    I think most people on BP will tell you to go for turnkey or out of state props. as that is what most would have said to me back earlier in the decade. To each their own though.

    4Reply
  • Alonso Escalante
    Lender · Irvine, CA · Member since 2019 · 13 posts · 5 votes
    7y

    @Matt Mason

    I appreciate the reply, thanks!

    0Reply
  • James Wise
    Real Estate Broker · Cleveland Dayton Cincinnati Toledo Columbus & Akron, OH · Member since 2013 · 31k+ posts · 20k+ votes
    7y
    Originally posted by @Eric Ippolito:

    I know LA is an appreciation market, but running through any deals’ numbers, whether single family, or multifamily, I can’t see how anyone’s not losing money unless they buy a property in cash.

    In LA, the housing costs are outrageous, but the rent isn’t too crazy (not to say $2400 for a 2bdrm apartment is fun). But it barely can pay for expenses, management, and the mortgage and still cash flow. My own landlord owns several multifamily locations that sold for a few million (if Zillow can be trusted) and rents the units up to about $2400 and I wonder how he’s doing it.

    So what’s the strategy?

    Big strategy for LA folks is to invest out of state in the Turnkey markets. In no particular order I have listed some of the most popular markets for out of state investors

    • Cleveland, Ohio
    • Dayton, Ohio
    • Toledo, Ohio
    • Youngstown, Ohio
    • Cincinnati, Ohio
    • Memphis, Tennessee
    • Birmingham, Alabama
    • Kansas City, Missouri
    • Saint Louis, Missouri
    • Indianapolis, Indiana
    • Detroit, Michigan
    • Erie, Pennsylvania
    • Louisville, Kentucky
    • Milwaukee, Wisconsin
    • Jackson, Mississippi

    Each of these markets is popular with turnkey investors because of the low barrier to entry, high rental demand & high rent to price ratio. I recommend setting up keyword alerts for each area as they are discussed in the forums daily with advertisements posted in the BiggerPockets marketplace hourly.

    1Reply
  • Brett Goldsmith
    Investor · Los Angeles, CA · Member since 2012 · 1k+ posts · 500 votes
    7y
    If you find a deal in LA that you cash flow 10%+ that likely means you can make potentially a six figure check by reselling it. Some properties will cash flow though, the trick is you need to buy a really good deal. Typically you need a sizeable down payment or creative terms to put a property into a cash flow position without a sizeable down payment. Most deals in LA ( especially SFR ) won't be cash flow properties for buyers who don't have sizeable down payments. 

    Many investors in LA are happy with breaking even or barley cash flowing and holding for appreciation. Or you can go commercial route which may increase the chances of cash flowing.

    This is why I primarily hold short term in LA, go out of state for cash flow, and only hold a few creative deals in LA that allow me to cash flow or break even without having to tie up 100k+ per deal for holds.
    3Reply
  • Lee RipmaPro Member
    Rental Property Investor · Prairie Village, KS · Member since 2015 · 2k+ posts · 2k+ votes
    7y

    @Eric Ippolito

    I went out of state in 2017 and I really learned the business in a lower-stakes market. I'm really happy with the portfolio I have in Kansas City and I will continue to buy there. Now that I understand RE and have a portfolio, LA has never looked better to me. Listen to Podcast 280 with @Account Closed pointed out your cash on cash may be very low but your overall ROI will be very high if you buy right. The great thing about LA is that there is often a massive delta between current rent and market rent. So if you can bring units to market you can double the NOI of a building and it's value. Those deltas just don't exist in the midwest markets so upside on building value is more limited. In LA you might spend 30k to get an increase of $1200/mo at a 4 cap. In the midwest you'll spend 10k to get an increase of 300/mo at an 8 cap. Do the math of which market will make you rich (360k vs 45k in value to your building in my example).

    Gentrifying areas also see huge spikes in rent prices and there is a huge demand and shortage of housing in LA. We will basically never have oversupply here due to physical and political barriers. As Matt pointed out you need to get into an area that is just starting to turn and really ride that rent appreciation up. You might really have to hunt for that perfect property and really research and chose your submarket carefully. 

    Some of the best areas for investing may not be where you would personally want to live, so don't confuse living in real estate you own with investing in real estate. I rent in LA and I'm happy to do so to live in an area that is central, safe, walkable, and has no commute. My landlord bought the 5plex building where I live in 1990 when Echo Park was scary and full of gangs for 200k from a distressed seller. The building is now easily worth 2M. So it was a great buy then but it isn't a great buy now. It is cheaper for me to rent than to own in the location I want to live in. However, there are still plenty of good locations to INVEST in. 

    That is my two cents on LA RE. Listen to others who are successful in LA. Maybe cut your teeth in the midwest or in a lower-priced desert area like Twentynine Palms (midwest prices) that you can drive to before you invest in LA. 

    Podcast Guest on Show #373
    7Reply
  • Grant Gordon
    Member since 2019 · 5 posts · 1 vote
    7y

    @Jay Chang I'm curious about these meetups. Any leads would be appreciated. Thanks!

    0Reply
  • Eric Ippolito
    OP
    Los Angeles, CA · Member since 2019 · 35 posts · 16 votes
    7y

    @Lee Ripma thanks! That makes a hell of a lot of sense.

    1Reply
  • Eric Ippolito
    OP
    Los Angeles, CA · Member since 2019 · 35 posts · 16 votes
    7y

    @Grant Gordon would also be interested.

    0Reply
  • Brett Goldsmith
    Investor · Los Angeles, CA · Member since 2012 · 1k+ posts · 500 votes
    7y

    @Account Closed Haha well it's the key and it never stops working if one is consistent and knows where to look. They do pop up! =)

    0Reply
  • Tom Ott
    Equity Raiser and Turnkey Provider · Cleveland, OH · Member since 2016 · 4k+ posts · 1k+ votes
    7y
    Originally posted by @Eric Ippolito:

    I know LA is an appreciation market, but running through any deals’ numbers, whether single family, or multifamily, I can’t see how anyone’s not losing money unless they buy a property in cash.

    In LA, the housing costs are outrageous, but the rent isn’t too crazy (not to say $2400 for a 2bdrm apartment is fun). But it barely can pay for expenses, management, and the mortgage and still cash flow. My own landlord owns several multifamily locations that sold for a few million (if Zillow can be trusted) and rents the units up to about $2400 and I wonder how he’s doing it.

    So what’s the strategy?

     Many investors stick to investing in the Midwest where they can get Buy and holds for a low price and collect the cashflow! 

    1Reply
  • Russell BrazilBusiness Member
    Moderator
    Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes
    7y

    You are thinking 2 dimensionally, here and now, as opposed to 4 dimensionally,...what do things look like over time.  Often areas with high demand that are driving prices higher are also driving rents higher.  Im 10 years into 1 particular rental here in the DC area that when I bought it rented for $1900, today it rents for $2900. 

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    2Reply
  • Matt Mason
    Investor · Los Angeles, CA · Member since 2013 · 231 posts · 260 votes
    7y
    Originally posted by @Russell Brazil:

    You are thinking 2 dimensionally, here and now, as opposed to 4 dimensionally,...what do things look like over time.  Often areas with high demand that are driving prices higher are also driving rents higher.  Im 10 years into 1 particular rental here in the DC area that when I bought it rented for $1900, today it rents for $2900. 

    Exactly.

    Even the difference between 3% yearly rental increases vs. 4% becomes very significant over a 10 year period.  Now model out that difference between 2% and 5% and it is beyond huge.  However, people on BP seemed to be obsessed with initial cash flow only because it is easy to measure and don't really consider how they are going to asset manage their properties, grow rents, keep expenses down, and avoid troubled tenants.

    4Reply
  • Mario Am
    Specialist · Nashville, TN · Member since 2019 · 187 posts · 83 votes
    7y

    @Eric Ippolito hi Eric.

    Best way to invest in California and kill it is through STR.

    I.e. a 300k house in Palm Springs with 3bd/2bath will Airbnb cash flow for 6k a month approx.

    However it is always better to invest out of state I’m my opinion because your can buy 4-5 houses for same price that will cash flow 4-6k (and thats long term rentals).

    2Reply
  • Russell BrazilBusiness Member
    Moderator
    Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes
    7y

     At nearly all points in history, nearly all asset types are at all time highs at that moment. 

    How are rents going to double? How are rents not going to double? The only way over the long term that rents do not go up is if we enter a deflationary cycle. My money is on inflation being more likely than deflation. 

    [email protected]301-893-4635Podcast Guest on Show #192
    District Invest Group545 Reviews
    WebsiteView Page
    1Reply
  • Russell BrazilBusiness Member
    Moderator
    Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes
    7y

    Also just to clarify....my statement is in regards to markets in general and totality, and not necessarily a specific market.

    [email protected]301-893-4635Podcast Guest on Show #192
    District Invest Group545 Reviews
    WebsiteView Page
    0Reply
  • Angel Jose
    Contractor · Los Angeles, CA · Member since 2015 · 10 posts · 2 votes
    7y

    @Mario Am I was looking into STR in the desert area so your comment caught my attention.

    How are you setting things up to cash flow at that rate oos? From what I’ve seen most are smaller cash flows and you’d need a very large portfolio?

    Coming at this with a learning attitude, not at all contradicting you btw

    0Reply
  • Jay Chang
    Developer · Los Angeles, CA · Member since 2017 · 157 posts · 84 votes
    7y
    Originally posted by @Grant Gordon:

    @Jay Chang I'm curious about these meetups. Any leads would be appreciated. Thanks!

    Check out MultifamilyMasters We have different chapters throughout the nation. I host the one in DTLA. Our next meeting is on 9/18 at the WeWork @ Fine Arts Building. We meet every third wednesday of the month!

    1Reply
  • Grant Gordon
    Member since 2019 · 5 posts · 1 vote
    7y

    Thanks @Jay Chang! 

    1Reply
  • Tanner Marsey
    Rental Property Investor · San Diego, CA · Member since 2017 · 439 posts · 578 votes
    7y

    La is tough if you don’t have the cash to tie up. The pay off can be huge though. I won’t go to into too much detail because most of it has been covered but when I was renting in Southern California (about an hour south of la) I fully expected my rent to go up a minimum $100.00 every year and was happy if the increase wasn’t more than that. Trips me out to see people on here asking if they should raise the rent 25 bucks.

    Rent here is pricey and it creates a ton of life long renters because they can’t afford to save for a down payment....so there is no shortage of tenants.

    If you can get in the game there is huge potential. But the tenant friendly laws and high barrier to entry is definitely something to consider.

    0Reply
  • Chris Miller
    Member since 2018 · 83 posts · 26 votes
    7y

    Hi all. I have a 4plex in east la and am heavily considering doing a couple of the units short term rentals. I’m considering either getting affordable vacation rental manager or doing it myself. I’m not super keen on having to physically going to the property for fixing issues that may come up as people are staying there. Does anybody know any good and affordable property managers or any advice on how to run short term rentals from kinda far away? I’m more than willing to do bookings, responses, etc. any ideas or advice is appreciated!

    0Reply
  • Michael T.
    Los Angeles, CA · Member since 2018 · 326 posts · 279 votes
    7y

    @Eric Ippolito yes, quite often in the Los Angeles market investors will lose some money on a monthly basis, however, over the long term if they purchase the right deal they will make more in appreciation compared to an out of state cash flowing property.  

    I've definitely made more money in appreciation in Los Angeles compared to out of state cash flow, however, you do have to be patient for 3-4 years to reap the rewards of the appreciation.

    A majority of my recommendations to investors here in the Los Angeles are if you want immediate cash flow then invest out of state if you want appreciation then invest in Southern California.  Again, you have to buy the right property at the right price and if done correctly it will be well worth it in the long run.

    1Reply
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