Agents who sell "projected rents" when listing a multiunit within a rent controlled area (Los Angeles).

Multi-Family and Apartment Investing
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Agents who sell "projected rents" when listing a multiunit within a rent controlled area (Los Angeles).

Account Closed
Involved In Real Estate · Los Angeles, CA · Member since 2013 · 110 posts · 4 votes

Been shopping for a multiunit. In many of the listings, the agents sell "a tremendous upside in rents" when listing in rent controlled areas with low rents.

Based on my research, with non-owner occupied purchases it's almost impossible to relocate tenants in rent controlled areas. The ONLY option is to raise rents 3%.

Am I missing something, or is this indeed a sales pitch? Thx!

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Joel OwensBusiness Member
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Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
12y

You buy on actual value today that has been proven over a long period of time ( years).

The upside and smoke and mirrors they are selling you do not base offer price on future potential.

Once some brokers/agents get the commission you are left with a dud. Until then some will say anything to sell a property.

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  • Joel OwensBusiness Member
    Moderator
    Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
    12y

    You buy on actual value today that has been proven over a long period of time ( years).

    The upside and smoke and mirrors they are selling you do not base offer price on future potential.

    Once some brokers/agents get the commission you are left with a dud. Until then some will say anything to sell a property.

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  • Joshua McGinnis
    Rental Property Investor · Beverly Hills, CA · Member since 2014 · 472 posts · 272 votes
    12y

    @Account Closed I'm glad you brought this up. Keep in mind, most agents are investor-minded - they're sales people. They know that multi-families appeal to investors so they're doing whatever they can to keep people in the door and sell the property, even if that means that the "tremendous upside" in rents doesn't have a lot of merit.

    Do what I do: do you own due diligence when it comes to assessing potential rents. Even though I'm licensed and my wife is an agent, I treat the listing as a guideline but verify all facts myself.

    You can evict a rent-controlled tenant, but it has to be for one of the following reasons per the LAFLA statute:

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  • Eyal B.
    Investor · Los Angeles, CA · Member since 2014 · 57 posts · 46 votes
    12y

    Some investors will buy the property, and offer the tenants money to leave. This is called cash-for-keys.

    Lets say a tenant is paying $1000 a month, but the unit could be getting $2000 a month. An owner negotiates to pay $20,000 to the tenant to leave, then rents it for $2000. This is an gross increase of $12,000 a year. 12,000/20,000 = 60% Cash on Cash return.

    Some Investors will also look at the cap rate of the building. Lets run those numbers. Investors will assume anywhere between 30%-40% expenses. Lets use 30%. So 12K*.7= $8,400. Lets see how much value this adds to the building at a 6 cap: 8,400/.06= $140,000. 7 cap? 8,400/.07=$120,000

    This is a bit over simplified as its really not looking at remodel work you'd likely want to do and other expenses, but I'm illustrating why investors care about upside in rents. The building becomes worth more when you increase rents.

    Obviously deals where you can double rent are hard to come by. You really have to know the market the building is in, what you can get for that unit, and have plenty of cash. You also have to be comfortable with the risk that the tenant could say FU I want 100K...

    That said, I could care less what a listing agent thinks about what the unit could rent for. Do your due diligence. You should generally know this rental market already to get to a ballpark, but run comps in the area. Craigslist, HotPads, WSR, etc.

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  • Allan Glass
    Investor/Developer · Los Angeles, CA · Member since 2010 · 107 posts · 92 votes
    12y

    this is a great question @Account Closed and is bothersome to most seasoned investors in LA. As an investment broker myself I find it sometimes embarrassing that agents don't understand rent control laws / limitations. For that matter some don't even understand cap rates or GRM's.

    That said @Eyal B.

    @Joshua McGinnis it's important to note the rent control restrictions you've mentioned only apply to the city of Los Angeles and only to certain properties that fall under rent control provisions. Note that Santa Monica and West Hollywood in particular have very different rules. Some areas of Los Angeles County, although described as Los Angeles in the address may not actually fall under rent control, these areas can include San Pedro and Altadena.

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  • Allan Glass
    Investor/Developer · Los Angeles, CA · Member since 2010 · 107 posts · 92 votes
    12y

    Just noticed @Eyal B. gave you the same cap rate example in his post. Sorry to be redundant.

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