3 questions about investing in LA/SoCal

19 Replies

I am looking for Cash flow properties in LA and SoCal.

I’ve been doing research and have 3 questions. I am from England, so my questions might be culturally related.

Question 1: “Ghetto areas” in LA



I’ve found a few promising properties in LA zip codes that, according to Best Places & City Data, have high levels of violent crime.

In the UK, we’d call such areas ghettos and they are not worth investing in, as the tenants lack income, the monthly rental prices are low, and the property management companies provide a poor service.

However, I notice that these ‘ghetto’ LA Zip codes tend to have high monthly rental asking prices. There also seem to be several property management companies that service these areas and the companies have stellar reviews. The average income of people who live in these areas is also reasonable.

So are these ‘ghetto’ areas worth investing in? Also is there a definitive list of bad areas in LA? I found this list (and all the properties I have found are in those zip codes), but the author doesn’t state what his list is based on.


Question 2: Family homes vs apartments 

In UK cities, apartment tend to be rented out by younger people. They usually stay for 1 to 2 years before moving on. They don’t tend to be so fussed about the condition of the property, as they are desperate for housing.
Family homes tend to be rented out by families who usually stay for 5 to 8 years. They are more fussed about the condition.

Is it the same in LA?


Question 3: Areas outside LA 

I have been looking at Riverside, Redding and Sacramento and these areas seem to have potential.

I have seen people recommend Niland, North Edwards, Chico, Palmdale and Bakersfield but from my initial research, these seem like duds.

Anyone have any other recommendations?


Background information

I know, I know, you can’t get cash flow properties in LA/SoCal and it’s better to wait for the LA property bubble to burst.

But as mentioned I live in England. I am going to an extended family function in LA & SoCal. There’s going to be a lot of waiting around, so I thought I’d use the time to look at properties.

You can find cash flowing properties in LA. The thing is if you find a cash flowing property 10% or more you likely can flip it and make a lot of money. If you don't find a good deal you will need to put a large down payment to put it in a cash flow posistion.

LA is a unique market IMO for investing. If you buy at the right price in almost any part of LA County, you should do ok. Affordable housing is hard to find in LA which is why people look to Riverside, Palmdale, etc.  I've made money rehabbing  homes in both of those cities well and personally wouldn't mind owning rentals there if it made sense. 

I've done projects in inglewood, compton, etc and higher end areas. There are certain pockets you may not want to buy in, but for the most part, at the right price, these homes can still be great buys. 

LA is gentrifying quickly and people are getting pushed out further twoards palmdale, lancaster, san bernardino, or out of state.  

The key is to buy low and to know if you are playing more of the cash flow game or hoping for more appreciation. Appreciation in Palmdale and Riverside is likely less than LA, but cash flow may be higher on the typical deal.

Hi @Catherine Underwood

1. It's worth noting the list in the link is over 4 years old, many of these neighborhoods are completely different today as a result of gentrification as Brett mentioned. As for investing in "ghettos" I would say I have invested in mostly "ghetto" neighborhoods and have seen the crime decrease steadily over the years and the demographic change rather quickly. It's just important to understand the area and where it is headed.

2. There are still long-term tenants in apartment-style homes. One of my quads has a 31-year tenant and a 25-year tenant, I think they are going to live there the rest of their life, they are under rent control. 

3. I agree with Brett, Riverside, Palmdale and Bakersfield may have a higher cash flow, but appreciation will likely not be as good as Los Angeles. Another thing to consider is vacancy rates, well priced, clean units in Los Angeles rent very quickly.

Hope that's helpful.

Personally, I would prefer to invest in class B/C in a secondary market than a class D area in a primary market. 

I will not invest in unsafe areas.  My metric is that if my wife would not feel safe walking down the street at night, then we do not invest in that area.  In class D or C- there are issues beyond just safety.  Tools and materials are stolen.  I have seen properties in the hood where water heaters and AC compressors are stolen the first night there is a vacancy.  Hood properties have much higher expenses than most new investors account for.  The numbers rarely look as good in reality as they do on the proforma.  

What metrics showed that Niland, North Edwards, Chico, Palmdale and Bakersfield were all "duds"?

@Brett Goldsmith  @Stephanie Trevizo @Christina Peterson @Gene Hacker

Thanks for all the help! You have all given very good advice, which I greatly appreciate.


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Stephanie Trevizo said:

As for investing in "ghettos" I would say I have invested in mostly "ghetto" neighborhoods and have seen the crime decrease steadily over the years and the demographic change rather quickly. It's just important to understand the area and where it is headed.

Gene Hacker said:

In class D or C- there are issues beyond just safety. Tools and materials are stolen. I have seen properties in the hood where water heaters and AC compressors are stolen the first night there is a vacancy. Hood properties have much higher expenses than most new investors account for. The numbers rarely look as good in reality as they do on the proforma.

These are both good points.

What sort of strategies can I use to assess if a neighbourhood’s lack of safety would be a barrier to investing?

I’ve checked the ratings on Best PlacesCity Data and Street Advisor. The data given for the areas of LA I am looking at (such as 90001, 90002 & 90011) aren’t that great. But I know such data gives an overview of a whole area, and so may be misleading for individual spots.

When I visit these areas, are there any checks I can do to see if the lack of safety would result in a problematic investment?

Also what strategies can I use to assess the possibilities of these areas becoming gentrified?

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Gene Hacker said:

What metrics showed that Niland, North Edwards, Chico, Palmdale and Bakersfield were all "duds"?

I looked for properties that were for sale in these areas and then looked at properties being rent in the same neighbourhood (or 1 mile of the same neighbourhood if there wasn’t any property available to rent in the same neighbourhood). The monthly rent didn’t seem that great in proportion to the price of the property. Would you recommend giving these areas another look?

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Christina Peterson said:

Redding, Chico and Sacramento are in Northern California, not near Los Angeles. Were you interested in investing in all of California, or just the SoCal area?

Yup, I got a bit mixed up about Redding, Chico and Sacramento. I am primarily interested in LA and SoCal, so those three Northern areas were an error. 

As far as determining if an area is "safe", for me it is less about statistics and more about spending time on the ground and getting a sense for it.  

I do inspections for investors in areas that I don't really feel safe during the day and I am 6ft 3 and 200lbs.  I would never want my wife to go into those areas.   There are people that make it work but I would rather stick to areas with are a bit nicer.  

Bakersfield has more value than most areas but prices are up nearly double what the were at the bottom in 2011. It is still possible to get cash flow but not on the MLS or loopnet. Most successful investors in know in Bakersfield are either finding off market deals or are focusing on value add.

There are rural areas in Kern County where prices have not really recovered like much of the state and better cashflow exist,  But these areas don't have the solid job base that bigger cities have so finding solid tenants is a challenge.  

@Catherine Underwood Hi there! So as an expert in the Inland Empire Real Estate Market, I can tell you that cash flowing properties are far more abundant in the Riverside area than they are in LA. While our appreciation might not grow as quickly as LA County, there is a reason why Riverside and San Bernardino Counties are the fastest growing areas in the state of California and have helped the state recover from the terrible recession. Our properties have seen on average a 15-30% growth in appreciation since 2010. Houses that were purchased at $100k are now worth $300k+. 

Listen, LA is a great market, but you get the most bang for your buck by coming out to the Inland Empire or ancillary areas. Your money goes a lot further and you can ride the appreciation train in the fastest growing real estate/economic market in California. 

Best of luck finding solid cash flowing properties. You've got a good eye for solid areas to purchase properties, but your choice on areas just depends on your certain investment goals. Feel free to reach out should you want some more information or help! 

When looking at investing in CA, you must know about rent control.  Some areas are very difficult to work in because of the rent control policies.  

Especially before you invest in LA, read the rent control policies, especially those that relate to how you can have a tenant move out and how much you MUST pay them to move, based on how long they stayed there, etc.  It can and will be thousands of dollars, and you must consider this when looking at your bottom line.  

Before you buy in any area in CA, check into the rent control requirements for that area.  And that duplex may be a real bad idea!  Or the newer property may be a 'replacement property' by law and you do not know because you did not know to ask.

Here is an example from LA, but each area has different rent control laws.:

https://hcidla.lacity.org/rso-overview

And I know you did not write about this, but being from another country, I am guessing you do  not know enough to know that you should ask about it!

Originally posted by @Lynnette E. :

Before you buy in any area in CA, check into the rent control requirements for that area.  And that duplex may be a real bad idea!  Or the newer property may be a 'replacement property' by law and you do not know because you did not know to ask.

Thanks this is really useful, and like you said, i wouldn't have known to ask.

Looks like I am going to be doing more research! 

Also, in CA if people want a new law they can put it onto a ballot for a vote.  This process uses "propositions" on the ballot which are just numbered.  A prop that may affect rentals is going to be on the ballot for vote.  It has already qualified to be on the ballot.  It is called prop 10.  So you may want to Google "prop 10 in California"  and follow it as if it passes it could changes things for rentals a lot.

@Catherine Underwood

SFR's in Los Angeles are only partially subject to rent control laws. Raising rent on these properties is not subject to the 3% or so annual cap that multi-units are subject to. However, the part of rent control that pertains to asking them to move out when the lease is over still applies. Displacing a tenant against their wishes when their lease is over may cost a significant amount of money, if the tenants know their rights.

Prop 10 would be terrible for all parties involved, IMO...and early indications are that it will not pass. But you can never say never...especially with these polls which are not exactly representative of the voting public (Early polls also indicated a much different result with our presidential elections!). With that said, I'm still in the process of doing a 1031 exchange, selling my SFR for a fourplex in Los Angeles.

Also, if you are still serious about finding a property in Los Angeles, as mentioned by a previous poster, that "ghetto" list is a bit outdated. South Los Angeles is in the process of being gentrified and properties are selling very quickly here. The George Lucas Museum, Coliseum & Exposition Park renovation (preparation for the Olympics), USC's continued investments in the area, LA Ram's stadium, Metro Rail development, and the fact that much the rest of Los Angeles is unaffordable, are all contributing to the development here.

@Catherine Underwood thanks for asking your questions.  My answer to this would be to look for growth.  Los angeles has undergone a huge growth spurt recently, especially in the realm of price.  

Please remember this quote, "Buy low, sell high"

Regardless of if we are in fact at the top of the market, I think what needs to be narrowed down is if you are looking for cash flow or appreciation.  

In my opinion, I believe if you are looking for appreciation then LA is the way to go, however, don't expect to be earning anything on that investment in the mean time if you have it financed.  

My recommendation would be to look at surrounding communities that can provide you a good balance of both investment characteristics.  For example, here in Bakersfield we can find you property that will appreciate at an average, almost double inflation, which isn't great compared to LA but it is stable.  Next, Bakersfield provides a good cash flowing market to you as well.  

Looking at Bakersfield specifically, we have a good historical growth rate that puts us in the top ranks for CA.  Looking at future growth rates, some estimates say that we should be able to double our population within the next 10-15 years and triple our population in the next 20-25 years.  Growth is quite staggering in this area, and with the new industries opening up we are seeing a lot of jobs flooding into the area.  

I hope this was helpful in some way, but feel free to PM me if you would like to chat further!  Best of luck!

main thing to remember, UK and los angeles have very different economics.... local economies in each specific area in los angeles even vary quite a bit

the income or industry in south la vs west la vs north la are all very different.

pick an area and dissect it make the best decision

"ghettos" in Los Angeles have a lot of life long renters that are very much govt subsidized  so you are not investing with a tenant but more so with the government and managing a tenant as a way to get a premium 

Originally posted by @Alex J. :

"ghettos" in Los Angeles have a lot of life long renters that are very much govt subsidized  so you are not investing with a tenant but more so with the government and managing a tenant as a way to get a premium 

Does the government pay the landlord directly or does the money go to the tenant who then pays the landlord. 

Gov pays landlord directly, tenant pays a smaller portion... usually 80% govt %20 Tenant or something around those numbers 



Originally posted by @Catherine Underwood :
Originally posted by @Alex J.:

"ghettos" in Los Angeles have a lot of life long renters that are very much govt subsidized  so you are not investing with a tenant but more so with the government and managing a tenant as a way to get a premium 

Does the government pay the landlord directly or does the money go to the tenant who then pays the landlord.