Next Financial Crisis:Should I Hold of Buying as a 1st time buyer

3 Replies

Hi Everyone,

I am a first time RE investor looking to invest in the LA area. I have been looking since last year (2016), but it just seemed the market has been very high. In the past year, I made two offers of multi-fam buildings (both around1.3 M) in the echo park area, where everyone thinks is the hottest place with the most potential to grow. However, both times after calculation, we decided not to proceed because 

1. the CAP does not make sense considering the risk (eg. rent control and all tenants have been there for more than 15 years and did not have any intention to consider leaving)

2. fierce competition. both time we have 15 other competing offer. Even though both time we made to the final rounds, we decided to back off. 

Cutting to the chase, I hope I can get advice on 

1. is now (late 2017) still a good time to enter the market? Considering historical economy cycle where recessions happen every eight years on average, it seems that we are due for another recession soon, as now the economy has been expanding for the 9th year. 

2. If the answer to 1 is yes, it's still a good time to go in, I want to get some suggestion on a. what kind of commercial RE b. any location recommendation.

I appreciate the responses!

Thanks guys

I grew up near Pasadena.  The market is very high.   One of the reasons that real estate is so costly there is the inability for the market to add new inventory.   It is difficult to get properties rezoned for larger usage.   Most major cities have large apartment and condo buildings to house their large populations.  Southern California resists this and is more orientated as a horizontal / automobile dependent city.

There is probably not a crash on the horizon for your market.  But I do expect a slowdown because affordability is probably tapped out soon.  

Echo Park is gentrification.  When I grew up there, the real estate in that area was most likely cheap.  Prices in these areas are like tech stocks - they may not make sense because of the perception of future growth.  

Maybe you can try East Hollywood area.  Or other places like the Valley.  Further inland is less desirable and had the steepest declines in value in the real estate downturn (2010).

If you buy at cap rates that are too low, you probably will end up feeding the investment.  At least for awhile.  You'll need some rent raises or you'll be working for free.

Hey Catrina - I have found some good opportunities lately in the Long Beach market.  Especially north long beach and downtown.  These areas are  really improving from what i've seen the last couple years

I agree with @Brian Ploszay ... I don't see signs of a "Financial Crisis" in the near future, but prices do seem to be at the high end of the cycle 

If you can tell me exactly when the next financial crisis will hit, how much prices will go down, and how long it will last, then I can tell you what the optimal strategy will be.

I never invest in rent controlled properties. Just because a neighborhood has some rent controlled properties does not mean that ALL of the properties are subject to rent control ... if you study the ins and outs of the rent control ordinances you can find out which properties are exempt. I myself prefer to buy in cities that do not have rent control. For example, Glendale on the higher end and Lancaster/Palmdale on the lower end ... there are other areas in LA not under rent control also that you can find with a bit of research.

Finally, cash flow is an important thing, but it is not the only thing ... you need to analyze ALL of the REI profit centers in order to get a complete picture of the total expected returns of the investment. The best way to do this IMO is to project out the financials using reasonable assumptions and compute the IRR ... then make sure you have multiple profitable exit strategies you can choose from at any point in time in case your projections are off. With all of this, it is possible that you still may not be able to come up with anything worth it for you personally to invest in ... that is ok ... keep looking and studying ... better to keep looking than to compromise your standards and get into something you may regret later.

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