Is Purchasing a Multifamily in California worth it?

13 Replies

Hello BP,

My wife and I have been searching our local market (Los Angeles) to purchase our first home. After reading books and listening to Brandon and Josh on the podcast, we are convinced that we need to start with a multifamily (preferably a 4-plex).

We have been pre-approved for an FHA, and have looked into a 203k Loan. HOWEVER, with interest rates ready to soar, and housing already priced at an all time high, is it a good time to buy?

CASH FLOW is KING! - Yes -- I've heard this EVERYWHERE. But this seems like an impossible feat here in California.  We have been renting for the past 3 years, and avg. rent payments are $2k plus. Frankly, I am sick of paying for someone's mortgage.

Is there ever a good time to buy in Cali?  With all things considered, I would rather pay for my own mortgage than keep renting, even if this means I am not cash flowing. Is my thinking flawed?  Please help!

About the only place I've found something that might potentially cash flow near where I live (the valley, so west of you it sounds like) and would have consistent occupancy (not farm country) is Oxnard. Hopefully someone more experienced can speak up on this but for me it seems as though southern California is an equity play more than cash flow.

So is there ever a "right" time ti buy in Ca?  I do feel like its an equity play, and the housing market is always going to go back up.  So from my perspective, I should move forward.  Just would feel a whole lot better if people agreed :)

What is your budget?

@Kevin Kim

In a good part of Los Angeles you may not be cash flowing right away, it may take a few years; but in a final calculation you'll be in plus (considering interest and insurance tax deductions, depreciation, building equity instead of paying for someone's mortgage), etc). Buying 2-4 unit is definitely the way to go. Just keep in mind that closing on 3-4 unit is much more complicated. It's not only you that needs to qualify for FHA but also the building itself and with low rents (rent control) 3 & 4 units hardly ever qualify. But it happens. And when one comes up on a market you have to be ready to pounce.

BTW there's a good duplex on the market right now in North East LA... You can PM me if you're interested in this area.

Ewa Reza, Real Estate Agent in CA (#01874963)

@Kevin Kim

Is there ever a wrong time to start investing in your future by having the right renter (you will check their back grounds thoroughly) help you pay off your mortgage while enjoying all the tax, HELOC and other benefits extended to multi unit dwelling owners? Obviously, this assumes that you don't over extend yourselves the first time out by buying something too expensive for your monthly expenses budget.

Take a moment to read this recent Bigger pockets post if you haven't already. It pretty much summarizes the main points you need to think of as you make your first foray intro multi unit owning. 

http://www.biggerpockets.com/renewsblog/2015/05/13...

All this is to say, we did exactly what you're contemplating and purchased a multi unit via FHA and feel very fortunate to have done so. Now the sky is the limit depending on how creative I can get. Yes, I have been charged with that task! :-)

Do your home work. The extent to which you're able to find what works for you regarding tenant opportunities and your idea living situation do depends on how motivated you are. Los Angeles will never run out of renters. Digest that with the pros and cons at your leisure. 

That being said, you probably are motivated and subsequently can't go wrong if you stick to your budget and remind yourself that this is your first property. You have a bright future ahead of you once you take that sensible first step.

Start with these zip codes (your approved loan amount will make a lot of sense here unless off course the both of you live far from these locations) but even then, I would take a hard look. 

90037

90003

90047

90062

90018

90062

I have been looking at these and more for a while but my criteria and goals are probably different from yours and so you'll see what your radar points you towards. That's the joy of real estate investing. We all see different possibilities! 

For what it's worth, subscribe to this newsletter about all things downtown Los Angeles. You might get ideas about where to plant your flag.

http://www.ladowntownnews.com/newsletters/headlines/

Good luck! on your journey!

Thank you everyone. Really appreciate any and all advice I can get.

@Kevin Kim

I meant to say "live AND WORK" from these zip codes. If you work too far from here, it might be something to consider, however if the financials bear out to be favorable (rent price etc) you should definitely sign up on Redfin (if you haven't already) to receive alerts anytime something within your parameters is listed. 

As a case study, check out this 4 plex located one mile from USC.

https://www.redfin.com/CA/Los-Angeles/3923-Brighto...

If you already had the experience owning and managing a multi, it would begin to maybe make sense as this building is fully occupied meaning at the very least, you have a chunk of your mortgage covered. You would then look to negotiate with the seller to see if they are open to vacate one of the units for you and your wife to live in (in order to still qualify for your FHA status). The banks would factor in the pre existing income from the remaining 3 tenants into the size of the loan you would have to carry in order to take ownership of this 4 plex.

When we first started looking at multi units (with zero managing experience), all of a sudden we qualified for a couple of $600+k 4-plexes because the income from the units were factored into the banks qualifying equation. What did I do? I ran for the hills. When I looked back, I was the only one running while the realtor stood at the gates of the building with dollar signs in his eyes. If I had known what I know now, I would have tackled it - no problem.

When we eventually bought our first duplex, we were 15 minutes from USC. I wasn't prepared for the avalanche of applicants who came raining down on me to rent a 1 bedroom. 

I can't say this enough. DO YOUR DUE DILIGENCE. Get a Google phone number to handle your incoming prospective renter calls (the voice calls will also be trancoded to text and forwarded to an email address of your choice - sometimes messages get lost in translation so its good that you also have the actual message to listen to at your convenience). There will be a lot of crappy prospective applicants. You will soon learn how to separate the chaff from the potentially good applicants. Trust me, using Google voice (or something like that) is far better than fielding calls in real time once you get the unit(s) you want to rent out listed. You will feel apprehension and sometimes wonder if you're doing the right thing. STAY THE COURSE. 

Be careful what you wish for, it can be a great thing! :-)

Do you plan to sell the property in the near future? I plan to keep them forever. I'm sure that they will be worth more in 10-20-30 years than today. 

With the low interest rates and with a rent of 2k+, I'm sure that you can find something that makes sense to buy. It's not easy to find a deal these days, but if you keep looking, you will find something.

Good luck!

@Kevin Kim

 Welcome.

One thing: If you can, remove the following thought from your brain: Is it a good time to buy?

If anyone really knew when it's a good time to buy, that person would be living in a nice private island sipping margaritas.

One thing buffet never worries about is interest rate timing and taxes. Why? If you find a good deal, the rest tends to fall into place. 

Think in terms of your deal specific criteria and what makes sense financially for you and your family. There will always be good deals out there. 

@Kevin Kim

I feel that its always a good time to get out of paying rent.  Even if your property cash flows slightly negative you will be saving the money that you were spending on rent.

Originally posted by @Jordan Thibodeau :

@Kevin Kim

 Welcome.

One thing: If you can, remove the following thought from your brain: Is it a good time to buy?

If anyone really knew when it's a good time to buy, that person would be living in a nice private island sipping margaritas.

One thing buffet never worries about is interest rate timing and taxes. Why? If you find a good deal, the rest tends to fall into place. 

Think in terms of your deal specific criteria and what makes sense financially for you and your family. There will always be good deals out there. 

 Golden advice right here. ^^^

I'm a mf broker here in the Inland Empire, which obviously isn't LA proper, but I have clients who purchase throughout the Greater LA metro area. As @Jordan Thibodeau said it's about finding the right deal. I'm assuming that you've been sourcing your deals for analysis from the MLS or Loopnet? If you look at those types of listings you'll often see "First time on the market (insert long time) years. These are people looking to cash out. Why don't you put together a small database or list of 4 plexes in the area that you're looking to purchase in and just hit all the off-market owners hard. You may catch someone either looking to exit, owner finance or who just may not be on top of the market. You can build in your value that way...sadly you'll be paying that high rent until you do so. Hope this helps

Hi Kevin,

I am at San Gabriel Valley area.  My husband and I just joined BP and love the valuable info we got here. We want to get into multi family (5-10 units) investment. No luck in/near L.A area so far.  How does your search for 4-plex go?  Good luck!

Polly