Los Angeles Investors, how do you do it?

33 Replies

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?

@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.

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@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!

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. 

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.

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.

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.

@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 @Mark Hentemann for some tricks on what he looks for in LA. 

As @Matt Mason 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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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! 

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. 

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.

@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).

Originally posted by Account Closed I hear you about how things will look over time, but using tody as a jumping off point, the Los Angeles case schiller is at an all time high, around 285, reflecting the stretched valuations- in a city with a median household income of around 60k (I know there is a huge range) where tenants are already paying over 30% of their income in rent. 

How are rents going to double from there? Either people in the future will need to make twice the income or they will have to pay 60% of their income, or some mix of the two.

Only thing left is looking for creative deals in select areas, which is an obvious win if the investor has the access to do them... but if they did, would they really be on these boards asking how it's done?

 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.