300 K equity and 100 k cash in LA area what to do next ?

Question

I am In the LA area and I bought a 4 unit in 2015 in the inland empire in Southern California  and currently it has about 300 K of equity in it.  The 4 units are all currently rented out and profit is about $300 per month.   I have also about 100 k cash to invest not sure which direction to go in I work full time in a non real estate industry with solid income

Jon Schwartz · Answer

Rajan, congrats! Sounds like you're in an excellent position.

Here's my two cents for you:

Since you have solid income, don't worry about investing for cashflow, i.e. current income. You don't need it. Instead, you should invest to build wealth, which is in equity. Equity = wealth; cashflow = your buffer.

I'm in a similar position, FYI. I have income, so I'm investing for wealth creation. I have a longterm plan that involves trading expensive LA properties for cashflowing properties in out-of-state markets in 7-8 years. Until then, I'm building equity and not worrying about the cashflow. I won't make any investment that has negative cashflow, but I'm happy with $10/month cashflow on a prime building in an appreciating neighborhood.

The first thing I would consider is opening a HELOC on your fourplex so you can access that equity. Rates are extremely low right now; my HELOC is tied to LIBOR, which is at 0.17% right now. My HELOC has a floor of 2.24%, so that's what I'm paying on the money borrowed. It's the least expensive capital I have access to!

Using rough math to put some numbers into perspective: your $300/month cashflow would cover the interest payments on a $160K HELOC at 2.24%. Most HELOC offerings include an interest-only period for a decade.

If you're interested in a HELOC, google "HELOC LA County" and start making calls. Local and regional banks offer HELOC products with all sorts of different terms.

Moving on...

Keeping $100K in the bank isn't a terrible proposition right now. I think we're headed into a protracted recession. How are your tenants? Specifically, do they have job security? If you're at all worried about them, I wouldn't be in a rush to deploy that $100K.

If you are looking for the next acquisition, though, I'd consider investing in a fourplex in an area of Los Angeles that will see infrastructure improvements ahead of the 2028 Olympic Games here. I'm really excited about Inglewood and some of the neighborhoods surrounding USC. If I were in your shoes (and I'm in pretty similar shoes), I'd stick to a fourplex for the longterm residential debt. Rates are super low, and you won't have to worry about refinancing at all. You're a seasoned landlord, so your rental income will count toward your DTI ratio, even at the big banks. If you were to step up to 5+ units, you'd be talking on commercial debt with a much shorter term. I think you might find yourself having to refinance in an unfavorable environment down the line.

Those are my thoughts. Like I said, I'm in a similar situation: solid income from non-RE job, $300K in the bank, looking for what's next. I'd love to chat more if you'd like to compare notes further.

Best,

Jon

Jon Schwartz · Answer

If you're considering a large SFH, I'd also consider a duplex in an affordable part of town. Or even a small triplex. This little property sparks my interest:

https://www.redfin.com/CA/Los-Angeles/2911-Maple-Ave-90011/home/6930384

(I don't know if links are blocked, so if you don't see a Redfin link, lemme know.)

It's a tiny triplex (2 1-beds and a studio). Current gross rents are $2865, and with 20% down, the PITI cost would be around $2300. Add $100/month for the water bill and $286/month for 10% maintenance/reserves, and you're looking at a $179/month cashflow day one.

I like this area just south of downtown for its longterm potential. It's near USC, Exposition Park, and downtown. Near the 101 and 10.

Personally, I'd buy something like this before a SFR.

Ricardo Paredes · Answer

@Clarence Johnson I live in Gardena. If the bank you work with is able to do 85% of better LTV could you please message me. Thanks.

Clarence Johnson · Answer

@Jon Schwartz you are spot on, it is definitely not too late for Inglewood.  I would warn that Lennox is a completely different area and not part of the city despite many Lennox properties being marketed as such.  Also, South Inglewood has 3 of the most expensive mkts in the city, with 900k townhomes coming soon.  I would say that some of the historically less desireable areas are the best positioned for appreciation and growth.  Hope this helps.

Clarence Johnson · Answer

@Rajan Ch yes sir, I'm sweeping MLS for properties that already have legal ADUs, if you search specific keywords you can set up an automated search that only fields results using the word ADU.  Building an ADU is a great strategy, but from a cost of acquisition perspective its great to be able to acquire a SFR with ADU for less than the cost of building an ADU (likely 5% down using conventional financing).  As I mentioned before, appraisers do not have comps for ADU properties and there is not really a rhyme or reason to valuing them, this is resulting in values coming in short (not to mention the flippers building many of them are overpricing them).  Short appraisals are a fool proof negotiation tactic, just shrug your shoulders and ask the seller what are they going to do lol.

Rajan Ch · Answer

@Victor Ong This is true On my current multi family if I have vacancy or somebody stops paying it’s very difficult to recover since the margins are so slim. Luckily did appreciate but properties don’t always appreciate as quickly as you would expect

Rajan Ch · Answer

@Clarence Johnson great specific and actionable information.  I have been looking for SFR with detached garage and big lots under the plan to convert detached garage to additional unit.  You are saying to buy it already made ?

Clarence Johnson · Answer

@Rajan Ch I would suggest getting a HELOC to have access to the equity, if you owner occupy it will be easy, if not will can be difficult to find a lender willing to HELOC on an investment property.  Pre COVID I was aware of 1 or 2, but now most banks are not offering HELOCs at or or only on owner occupied properties.  If needed theres a small Gardena bank I use thats works great for owner occupied HELOCs.  Also, your next purchase should be a SFR with a legal ADU.  This allows you to purchase using 5% down, low MI, and buying another multifamily property with low downpayment.  With there being no sciencebehind the valuation of ADUs I have been seeing properties with them appraise for lower than the list price, bad for SFR/ADU flippers, great for you.  One of my clients in Carson purchased a SFR with ADU last year and the appraisal was short and helped us get a $25k price decrease.

Jon Schwartz · Answer

@Brandon Carlson, I love City Terrace! I think it’s undervalued. As a place to live, it’s surrounded my already great areas (downtown, the eastside, Pasadena), and the topography makes it ripe for gentrification. It’s a relaxed, hilly place to live.

The Olympic sites are spread out around LA, but they’ll focus on Exposition Park (next to USC) and the new stadium in Inglewood (with some satellite locations up in the Valley and down in Long Beach).

I don’t think you’re too late to Inglewood. Inglewood is a surprisingly diverse little area, from the expensive area in the NW to the crappy part of down south in Lennox. This year, I’ve seen 2 properties in Inglewood that I wish I could have pounced on — one fourplex and one 5-unit. It’s all about specific location and pricing in Inglewood.

Victor Ong · Answer

your ROE is 1.2% based on your $300/m free cashflow, which is equivalent to a CD rate.  Appreciation won't come in the next few years as we are struggling through the pandemic. I would say free up the equity and looks elsewhere. Plus $300 a month of FCF doesn't offer that much cushion and buffer against any tenants skipping rent.

300 K equity and 100 k cash in LA area what to do next ?

Most Popular Reply