Los Angeles Duplex - Trying to Make the Numbers Work

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Los Angeles Duplex - Trying to Make the Numbers Work

Matt Kautz
Landers, CA · Member since 2016 · 9 posts · 4 votes

Just getting started looking at investment properties in the very competitive Los Angeles area and found a duplex today with a highly motivated seller who needs to unload quickly.  It's a great area, units will be delivered vacant, and with some work unit rents can be increased significantly to market rates.  So, in theory it seems like it should be a great opportunity since there's plenty of room for negotiation on purchase price.

 Since this is my first property analyzed, I'm working for the first time with my cost assumptions worksheet, and no matter how much lower I go on price and higher on rent, I just can't make the numbers work.  In all likelihood it's not that great a deal (nobody hits a homer their first time at bat), but I'd love your opinion on my calculations to be sure I'm not over- or under- estimating anything.  

Screenshot below of the cash flow calculations I'm making... left side is what the offering price is, right side is with aggressive assumptions on increased rent/lowered purchase price.  As you can see, even if the purchase price were 17% lower and rents were 45% higher, cash flow is only breakeven. 

Feedback welcomed/appreciated.  Thank you!!!

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Christian Mkpado
Los Angeles, CA · Member since 2016 · 9 posts · 13 votes
10y

@Matt Kautz

Could you give more information on the location of the property such as a street name or zip code? That would help in determining the quality of the deal.

Given my knowledge of Los Angeles and the areas that would command ~$1M for a duplex, your baseline rents seem on the lower end, especially if you are going to put in ~$25K in to each unit. In my opinion this indicates 2 possibilities: 

  1. The purchase price is too high, and this is not a good deal. Could post your spreadsheet of sale comps in the area? This would help in determine if the purchase price the seller is asking is reasonable? Is the property off market or is it listed on the MLS? If this is an off market deal, make sure that you are shaving at least 6% off what you think the property would be worth on the open market as this is what the seller would have to pay a RE agent if they did list. Also, seeing as you said the seller needs to unload quickly make sure you shave off a few more percentage points given you are willing to move quickly.
  2. Your rent comps are too low. Could you please post what you are using as rental comps? Could you also post the Sq. Ft. of the units? Your aggressive rents seem more in line with what I would expect to get for a ~$1M duplex in a nice area of Los Angeles. 

A final parting thought: There are areas in Los Angeles where it is almost impossible to cash flow given the strength of the market and the amount of buyers who are buying purely on appreciation potential and don't care about cash flow. If this is one of those areas, you might consider flipping this deal. That being said, if this is in a great area and if you can get the numbers to break-even, I would much rather hold a break-even piece of RE in a great part of Los Angeles, CA than a cash flowing property somewhere else in the country. In the long run, strong markets (e.g. Los Angeles, San Francisco, New York) have outperformed the greater United States when you account for cash flow and appreciation combined. A word of caution: Do not purchase the property if you will need to dump cash into it every month, this will hamper your ability to scale your investing going forward. If you can answer the few questions that I posed above, I may be able to give additional thoughts. 

Best,

Christian M. 

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  • Brent Coombs
    Investor · Cleveland, OH · Member since 2015 · 6k+ posts · 2k+ votes
    10y

    @George Gammon, you posited: "If the macro picture is "obvious" to you, you're far smarter than I am. I'd love to get your views on where interest rates will be in 5 years and whether the US will experience inflation, deflation or stagnation over the same time frame. Lastly, are US housing prices going to be higher or lower in 5 years"(?)

    Exactly! If you, and I, don't know the answers - even though we have all available resources at our finger tips, then pushing for the 50/50 approach gets us nowhere!

    All of those lovely graphs, help your decision to invest $500k right now - how?

    But of course, by all means, study the graphs. Be informed. But just don't expect to be a predictor of the future with 100% accuracy. More like: same odds as winning at roulette. Viva Las Vegas...

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  • George Gammon
    Flipper/Rehabber · Las Vegas, NV · Member since 2016 · 174 posts · 251 votes
    10y
    Originally posted by @John P.:

    @George Gammon that's a great analysis.  I tend to think macro. I always like when the entire real estate market is going down and people say "ya, but it doesn't affect my neighborhood because it's so desirable..."  Ya!  Things are different from hood to hood but macro trends persist.

    It's way above my knowledge but it seems your numbers don't factor in inflation when you compare 2007 numbers to now!? That has to play a part as that is basically 10 years ago. Even low inflation will change the numbers somewhat over that timeframe. 

    Also, with interest rates so low people can borrow cheaper than ever.

    Also, with the stock market scaring people there are many investors looking for other opportunities.

    Lastly, I have bought some properties in your city. I have bought some nice properties in Summerlin recently.  They are still well below the market hights of 2006.  For example one sold new in early 2005 for $440k and I recently bought it for $310k.  I paid a lot more than the flipper who bought it 6 months earlier but he fixed it up to move-in condition.

    I am not suggesting your analysis is wrong. I just don't think the signs are as clear as you indicate. 

    John the housing price chart is from the St. Louis fed (I believe they got the chart from Case Shiller) so I'm 90% sure it's inflation adjusted...Also, if you look at prices from 1988 to 2000 they're almost flat which wouldn't be the case in nominal terms.  

    To be clear John, I'm from Vegas but I don't live there nor do I invest there.  

    Lastly, I'm sincerely hoping the take away from my post was not a prediction but the following: 

    1.  Risk analysis is not complete without a thorough understanding of macro economic conditions.  Understand that, to the best of your ability, first not last.  

    2. Put ROI on the back burner and obsess over Risk Adjusted Return.

    3.  Think in terms of probabilities not certainties.  To your point, signs aren't clear, therefore the question becomes "what is the likelihood of xyz happening, what's my risk and is the upside worth the risk?"...  

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  • Manolo D.
    Contractor · Los Angeles, CA · Member since 2015 · 4k+ posts · 1k+ votes
    10y

    Micro, macro, just buy raw land and develop, easier, faster, most profitable, 2 years, rinse and repeat but bigger this time. I know one individual who built a sfr, then 4 plex, now 18 unit apartment to fill then sell. I think it's the easiest way to make money vs waiting for micro and macro markets to push up.

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