Multifamily in Los Angeles - Bad timing? Should I look elsewhere?
Mechanical Engineer · Gardena, CA · Member since 2015 · 21 posts · 4 votes
Hello All,
I've been lurking here for a few months now, mostly saving, reading, and absorbing. I finally have some cash to start investing, but the problem is every property I analyze in the area does not cash flow at all. How do these sellers expect to sell a negative cash flowing property to an investor? Are these signs we're in a bubble here?
The original game plan was to purchase the MFR, live in 1 of the units for a few years and rent out the remaining units. I don't necessarily expect to cash flow while I'm IN the property. But if i were to move out in the next 2-3 years, I expect it to cash flow then. So I've been analyzing each deal as if I'm not going to live in it.
Should i give up my MFR idea here in Los Angeles (Preferably Culver City, Marina Del Rey, Van Nuys) really any decent area of LA north of the 105 and west of the 110 and look out of state instead?
How does one pick a market when investing out of state? I'd like to be relatively close by, How does one pick between WA (Washington), OR (Oregon) , AZ (Arizona), NV (Nevada)?
Thanks in advance!
Agree with many on here that Los Angeles is great for price and rent increases, but you need to play the long game to make the returns. That means that whatever you buy, make sure that you are willing and able to hold it long term, no matter what happens in the economy or your personal life. My favorite way to do this is to have a really good equity position, and this comes from putting some money down (instant equity, but you pay for it), buying a great deal (instant equity from buying below market), and doing some value add to force appreciation (fairly quick equity, you work for it). With these 3 sources of short term equity in place, you can hold long term from a position of financial strength, or worse case sell at a profit if you need or choose to. Once you get to a cash flow positive position, then you can turn it to a pure rental and buy your next place. I also actually agree that we are likely closer to the top than the bottom for this cycle, which means that it will be harder to find a deal as mentioned above ... doesn't mean you stop looking, but it does mean it will be difficult and I would not recommend laxing on these investment standards just to get into your 1st place. I was actually in a similar position as you looking for property at the height of the last cycle (2006ish) ... fortunately I did NOT relax my investment standards and as result did NOT buy at that time ... when the market crashed, though, I was already educated on both REI and the local market from my search, and I happened to be sitting on a pile of cash that I'd been saving to invest. The acts of saving for investment and searching in 2006 was NOT wasted effort and my patience was rewarded. Now, after holding for a bit, my properties cash flow like crazy even after several cash out refis. It can work out great, you just need to keep your eye on the long game.
I wouldn't necessarily give up on the LA property. I forget which one, but there was a podcast that had an investor that lived in LA that was creative with his financing/units and ended up with close to 20 units. I feel in a city like LA or Seattle (where I am currently) you have to spend a little more time than in a city like Orlando (where my units are) purely because of the market. If you're really analyzing 3 deals a day and not just looking specific properties you'd like to live in, then you should run into something that cash flows (even though it might be a very small amount or breakeven). So to your first question, I think it's completely doable. Search on here for some locals in LA and ask them how they did it.
As for investing out of state... Is there a particular reason you picked those states other than proximity?
I lived in LA for 2 years and starting doing my research on my own, moved to Seattle for work and finally decided to invest in an area I knew over in Florida. If you're going to invest out of state, I personally don't think it is all about how close it is, but more about how well you know the area and the market. I knew the Central Florida area much better than anywhere else and my biggest problem was finding a decent management company. So if you do choose out of state, I'd say make sure you know the area well and find a good management company. Also something you can find here. Good luck!
I wouldn't necessarily give up on the LA property. I forget which one, but there was a podcast that had an investor that lived in LA that was creative with his financing/units and ended up with close to 20 units. I feel in a city like LA or Seattle (where I am currently) you have to spend a little more time than in a city like Orlando (where my units are) purely because of the market. If you're really analyzing 3 deals a day and not just looking specific properties you'd like to live in, then you should run into something that cash flows (even though it might be a very small amount or breakeven). So to your first question, I think it's completely doable. Search on here for some locals in LA and ask them how they did it.
As for investing out of state... Is there a particular reason you picked those states other than proximity?
I lived in LA for 2 years and starting doing my research on my own, moved to Seattle for work and finally decided to invest in an area I knew over in Florida. If you're going to invest out of state, I personally don't think it is all about how close it is, but more about how well you know the area and the market. I knew the Central Florida area much better than anywhere else and my biggest problem was finding a decent management company. So if you do choose out of state, I'd say make sure you know the area well and find a good management company. Also something you can find here. Good luck!
I'm interested in those areas almost exclusively because of proximity. Because i do not know those areas I figure the closer they are, the more frequently I could fly out there to learn the area before making each investment in that area.
Point taken about knowing the market though. As for LA, because i'll be living in 1 of the units for at least a few years. I have to be a little picky on the area, specially since LA has so many "not-so-great" areas.
Hopefully a investor friendly real estate agent in LA can chime in here.
Thanks!
My plan originally in that area was to search in Studio City, Van Nuys, North Hollywood (NoHo especially with the constant gentrification) and just go the FHA route and live within it for a year. If you can handle moving within a year you fall within the FHA loan guidelines and can get a paying tenant in there, unless you wanted to stay in there for some reason.
My plan originally in that area was to search in Studio City, Van Nuys, North Hollywood (NoHo especially with the constant gentrification) and just go the FHA route and live within it for a year. If you can handle moving within a year you fall within the FHA loan guidelines and can get a paying tenant in there, unless you wanted to stay in there for some reason.
Sounds like my original plan too. I was planning on staying a little more than a year just to avoiding constantly moving. Just want a safe area for my wife to come home to, does not need to be Beverly Hills by any means. The areas you mentioned are great, again it's just hard to find a property that cash flows decently.
Hi Aimen
The areas you mentioned you anted to invest in are some of the hottest areas in Los Angeles. The CAP rates are running 3.5 to 4.5 percent sometimes even lower. If you wanted to invest in a 4 plex you might look at the Inland Empire. Examples Ontario, Pomona, Upland, etc But it would be difficult (but not impossible) to find a positive cash flow situation in most of Los Angeles.
If you decide to purchase anywhere outside you local market, one of the most important issues would be to find a good management company.
The reality is you are talking about buying in LA closer to the top of the market than not. Things don't normally cash flow here (appreciation is the golden ticket here instead, but then you are into the category of speculation), but prices are super high right now. At least relatively. It's just not that realistic to find a property anywhere near where you would want to live that will cash flow. Appreciation later, maybe, but again you are talking about closer to the top of the market than not.
As for out-of-state (that's all I buy....I live in Venice), you're going to run into basically the same issue with cash flow in all of the areas you mention. The west coast just isn't the hot spot for cash flow. In those areas you might can find some random off-beat property that might cash flow some, and Vegas used to be good for cash flow but really isn't so much now, so if cash flow is your main focus you'll want to keep drifting more east. Indy, KC, Chicago, Texas....
@Aimen Shawki If you can pull off the plex deal in LA I think that would be your wisest long term move. LA is number in the nation for total returns since 2000. There are many underlining reasons for this and they all revolve around one word...location. Good luck with your search!
@Aimen Shawki with the areas you mentioned, you have a pretty big area to work with and the deals are there, and just outside of the areas you can find some good deals as well.
The strategy for investing here is different than investing out of state. You have different goals. Here you get great rent growth and appreciation. It is a great place to invest if your goal is to build wealth rather than maximize cash flow. There are deals that cash flow here, look at value add opportunities. If you are doing FHA low down it will be even harder to cash flow.
Also consider rent control when buying and if it is something you understand and are willing to deal with. There are plenty of areas that do not have rent control.
Agree with many on here that Los Angeles is great for price and rent increases, but you need to play the long game to make the returns. That means that whatever you buy, make sure that you are willing and able to hold it long term, no matter what happens in the economy or your personal life. My favorite way to do this is to have a really good equity position, and this comes from putting some money down (instant equity, but you pay for it), buying a great deal (instant equity from buying below market), and doing some value add to force appreciation (fairly quick equity, you work for it). With these 3 sources of short term equity in place, you can hold long term from a position of financial strength, or worse case sell at a profit if you need or choose to. Once you get to a cash flow positive position, then you can turn it to a pure rental and buy your next place. I also actually agree that we are likely closer to the top than the bottom for this cycle, which means that it will be harder to find a deal as mentioned above ... doesn't mean you stop looking, but it does mean it will be difficult and I would not recommend laxing on these investment standards just to get into your 1st place. I was actually in a similar position as you looking for property at the height of the last cycle (2006ish) ... fortunately I did NOT relax my investment standards and as result did NOT buy at that time ... when the market crashed, though, I was already educated on both REI and the local market from my search, and I happened to be sitting on a pile of cash that I'd been saving to invest. The acts of saving for investment and searching in 2006 was NOT wasted effort and my patience was rewarded. Now, after holding for a bit, my properties cash flow like crazy even after several cash out refis. It can work out great, you just need to keep your eye on the long game.
Thanks for your inputs.
So if you were in my position, would you recommend buying cash flow properties with the cash I have saved up (I could probably purchase 2 @ ~80-100k each with 20% down) out of state (perhaps eastward as Ali mentioned).
Or should I hang on more, continue to analyze locally and save more with the hopes to purchase something here once the market turns around.
I know it is nearly impossible to speculate but I've started to come to the same conclusion you both have about the LA market (its at/near the top). Do either of you have a guess from your crystal balls about when we'll see the downward trend start?
I appreciate the replies.
Thanks!
I think Van Nuys was one of the better locations btw and up 20% YOY. Why? Location...I suspect partly due to proximity to highest paying jobs, film/tv studios, Westside, easier commutes etc...My buddy rents his 3/2 there for $3500. A couple years ago when he told me I was like you are kidding me, now that might be a bargain. At one time his tenants gave him 30 day notice...they quickly asked him to please disregard that notice. His cash flow on that one 3/2 is 10 times those 80k out of staters. His appreciation could buy 10 out of staters. It is no joke comparing what is better for most beginning investors long run.
If you want to know where the market is in southern California relative to the top, go to see Bruce Norris talk. He studies it in depth and give talks at local investment clubs. He is also presenting at the Apartment Owners Association convention May 19 in Long Beach (free). Google the Norris Group to see his calendar.
Also if you decide to invest locally, check out David Schumacher's Buy and Hold. I agree with @David Faulkner that if you buy in the areas in LA that you described, you want to look long term.
Good luck with everything.
Do a search for "I Survived Real Estate." There is a video on the site featuring 6 industry experts and Bruce Norris interviews Doug Duncan (Fannie Mae), Leslie Appleton-Young (CAR), Eileen Reynolds (California Builders Industry Association), David Kittle (former Mortgage Bankers Association chair), and Sean O'Toole. They have some interesting insight into the market and their forecasts for California in 2016 are pretty spot on.
Aimen,
I'd check out the top 10 markets and that usually involves strong growth in people and jobs moving in. I don't know about LA, when I researched this topic about 3 months ago LA was not popping up, living in Texas and not needing to go far, San Antonio and Dallas are still areas that work. Houston short term is on watch w/oil but B/C properties still work there and Austin where I am is a bit crazy for MF so I'd proceed w/caution. Dallas you can find solid cash flowing properties in mid-6 cap as well as San Antonio. I also like San Antonio for small MF along the I-35 corridor between SA and Austin. I drive this route monthly and there is nothing going to stop this train. Find a community close to I-35 and hang on. We also syndicate large apt deals mostly in Texas so if accredited let me know and can keep you up to speed on latest opportunities.
If you want to know where the market is in southern California relative to the top, go to see Bruce Norris talk. He studies it in depth and give talks at local investment clubs. He is also presenting at the Apartment Owners Association convention May 19 in Long Beach (free). Google the Norris Group to see his calendar.
Also if you decide to invest locally, check out David Schumacher's Buy and Hold. I agree with @David Faulkner that if you buy in the areas in LA that you described, you want to look long term.
Good luck with everything.
I definitely would hold the property long term - but if it's not cash flowing positive (or even breaking even) on day zero. It sounds like I would just be speculating on the hopes of increased rents and increased property values.
That seems to go against everything I've read so far.
Aimen,
A few years ago I was in your shoes and I know how hard it can be to find the right place were you will live with your family. I agree with @Jeff T. the timing is not that bad were only 4 years into this up cycle and jobs are still coming to town and the lenders are still very tight so the increase in home values is real not froth, when lots of buyers a paying all cash you know it's real. Glad Jeff mentioned my favorite book Buy and Hold: 7 steps to a RE fortune. You should read it! That said come to my neighborhood and you can find cash flow positive small multi-family. Not easily but doable. Mid city LA just east of Culver City- if you want check out my success story outlining how we did this and are now cash flow positive while living there!
@Aaron Norris Thanks for your info. Can you summarize the basics for LA? That presentation was all over the map for Cali. I could not get any definite conclusions for LA other than downtown LA was in a redevelopment phase when I watched the first time. I know there is the theme of lack of affordability and that always seems to be the case in some areas. What was your biggest take away moving forward? Thanks!
These are some of the biggest names in real estate from all over the real estate sector sharing their forecasts for 2016. There's no way for me to distill their awesomeness in a single sentence. That's like asking me if Bakersfield is going to do the same thing as San Francisco! None were expecting a California bubble pop in 2016 if that's what you mean. I can't cheapen the content because they all had some very smart things to say.
I see @Aaron Norris chimed in, great to see that. He has a good suggestion. If you can see Bruce give his talk on "Stay Put, Cash Out, Or Change Seats?" he discusses what to do in the current market. What to do depends on your goals, also, and your age and timeline. You are on the right track by asking the questions, though. I'm not sure exactly what I would do in your situation, but long term, decent areas in the places you mentioned will do well, as long as you can make the payments.
We really focus mainly on single family and understand your concern on multifamily. I share your concern. Those prices got driven up pretty fast during the downturn. I've never invested in multi but I would probably approach it the same way I do single family. I'm more of a long-term guy. My family is best known for being flippers. But there's just something about boring cash flow that helps me sleep at night. And, having two exit strategies makes me feel much more comfortable in California.
Do a search for "I Survived Real Estate." There is a video on the site featuring 6 industry experts and Bruce Norris interviews Doug Duncan (Fannie Mae), Leslie Appleton-Young (CAR), Eileen Reynolds (California Builders Industry Association), David Kittle (former Mortgage Bankers Association chair), and Sean O'Toole. They have some interesting insight into the market and their forecasts for California in 2016 are pretty spot on.
Going to watch this tonight.
Thanks Aaron.