BRRRR in Los Angeles Santa Monica / Venice

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BRRRR in Los Angeles Santa Monica / Venice

Elliott Perrigo
Member since 2020 · 2 posts · 0 votes

My wife and I have been saving for a while and have lived by the beach in LA for a long time. We always thought our plan was to just do the traditional home purchase and save for retirement via 401k, etc. We are both successful and have lived in a rent controlled apartment by the beach for almost 10 years. With Covid, I have had some time to reflect and realized that we need to invest, rather than move to a tiny house in an "up and coming neighborhood" that we barely like for $1.5M. Then, maybe in a few years, we can afford to move somewhere else with passive income, or subsidize our mortgage with passive income,.

I am just really curious if anyone has tried starting their journey in a larger market. The only two markets I know are Seattle and Los Angeles and both are pretty expensive. We have a lot of cash to play with, but without the previous experience, it means risking--but also potentially gaining--a lot more.

I don't have a specific question, but am looking to start a discussion on here or a private conversation with someone who understands the market. As I see it, the options in my comfort zone are 1. buying and rehabbing STRs in Joshua Tree, 2. House Hacking in Santa Monica/Venice (although I am 37) 3. BRRRR in Los Angeles.

My goal is to move to more BRRRR long-term, but I think I have to prove to my wife that real estate investing is working before I can go all-in.

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Victor Ong
Developer · Los Angeles, CA · Member since 2020 · 90 posts · 50 votes
6y

I would say the easiest way to start is to use FHA 203 to buy a Duplex and add value to it. You can put up just 3.5%~5% to get it started. Granted, the FHA loan amount has to be under 980k combined. Then you could use your on hand capital to build 1-2 additions on the same lot to create more appreciation. Eventually, you will turn your property from cash flow even to cash flow positive. Once stabilized, you cash out refi the remaining equity out. Rinse and repeat until you hit a wall with max loan amount to carry on hand. That's when you start looking at 5+ for commercial MFRs.

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  • Aaron K.
    Specialist · Riverside, CA · Member since 2015 · 6k+ posts · 3k+ votes
    6y

    I would ask yourself a couple questions.

    1. What is your rent now, some of those rent controlled units are so low it almost makes it worth it to not move while you continue to save.

    2. How important is it to you to live close to the LA beaches, and where are your jobs? For example that same $1.5M goes a lot farther in the San Gabriel Valley or even OC.  A house hack in a pretty good area in either of those places is entirely doable with that budget.

    3. What is t=your goal for investing? cash flow? total return? something else?

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  • Victor Ong
    Developer · Los Angeles, CA · Member since 2020 · 90 posts · 50 votes
    6y

    I would say the easiest way to start is to use FHA 203 to buy a Duplex and add value to it. You can put up just 3.5%~5% to get it started. Granted, the FHA loan amount has to be under 980k combined. Then you could use your on hand capital to build 1-2 additions on the same lot to create more appreciation. Eventually, you will turn your property from cash flow even to cash flow positive. Once stabilized, you cash out refi the remaining equity out. Rinse and repeat until you hit a wall with max loan amount to carry on hand. That's when you start looking at 5+ for commercial MFRs.

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  • Elliott Perrigo
    OP
    Member since 2020 · 2 posts · 0 votes
    6y

    Thanks for the responses. To answer a few questions.

    Rent is currently around $2500 for a 2br. It's a lot, but probably about $1000 less than the current market rates.

    I would love to stay near the beach if at all possible. Not a necessity, but we are only a mile from my wife's work and we go to the beach literally every day and riding bikes on the boardwalk is a huge part of our life. 

    For our investment goals, in the short term, we would like to start investing in properties to hold for the long term and then use any cash flow to reinvest. We would like to learn how to be landlords and property owners as we grow our portfolio. In 3-5 years, we would hope to start turning some of the investments into additional cash flow.

    I think I am going to see what type of FHA we can qualify for and see if it makes sense. I guess I didn't realize that the FHA loan amount can only be 980k. That probably isn't going to be enough to get into a 4-unit building, but it might be enough to get into a duplex.

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  • Victor Ong
    Developer · Los Angeles, CA · Member since 2020 · 90 posts · 50 votes
    6y
    Originally posted by @Elliott Perrigo:

    Thanks for the responses. To answer a few questions.

    Rent is currently around $2500 for a 2br. It's a lot, but probably about $1000 less than the current market rates.

    I would love to stay near the beach if at all possible. Not a necessity, but we are only a mile from my wife's work and we go to the beach literally every day and riding bikes on the boardwalk is a huge part of our life. 

    For our investment goals, in the short term, we would like to start investing in properties to hold for the long term and then use any cash flow to reinvest. We would like to learn how to be landlords and property owners as we grow our portfolio. In 3-5 years, we would hope to start turning some of the investments into additional cash flow.

    I think I am going to see what type of FHA we can qualify for and see if it makes sense. I guess I didn't realize that the FHA loan amount can only be 980k. That probably isn't going to be enough to get into a 4-unit building, but it might be enough to get into a duplex.

    You probably won't qualify for 4plex. FHA requires "self sustainability" test where 3 out the 4 units' rent has to be cover the debt service. FHA loan amount caps out at 1.427M. Most of the 4plex around the LA beaches are 3.5-4m above.

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  • David AcostaPro Member
    Wilmington, NC · Member since 2014 · 208 posts · 144 votes
    6y

    Hey @Elliott Perrigo - I love that you're using the Covid period to stay productive and grow.  There are definitely a few Southern California investors here that feel your pain and can relate with your dilemma.  There are certainly different ways to go about this, and I think that the best decision will come down to your comfort level and criteria.

    Outside of using a low-money down option to house hack a small multifamily, I would take a look at your out of state options.  If you like the idea of hanging on to your location and fixed living expense, this could be a good alternative that would allow you to enjoy the boardwalk and build a portfolio (just elsewhere).  BP has a book on long-distance investing, and there a few players in your area who are doing this successfully. @Lee Ripma is an investor who comes to mind -- really sharp and has made it work.  But again, this will all come down to your comfort level and criteria.  
    Best of luck moving forward!

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  • John Collins
    Investor · Tx, GA · Member since 2019 · 313 posts · 337 votes
    6y

    Have you looked at the process of acquiring BRRR's in the LA area? Anything with a pulse or sliver of potential is gone real fast, and the competition for off market properties is even higher. So I'd get feelers out with agents in the area who have access to these properties and ask them about the process of acquiring one - even though you do have cash, you are always competing with seasoned investors or very aggressive agents who represent investors.

    An STR in a spiritual place liek Joshua Tree is likely to fare better than an event destination like Indio. Again, talk with agents who know the area about occupancy rates and their projections for demand.

    Overall, I don't think you need to be frightened about any market if enough due diligence is done. That being said, the rates you get on rentals in LA are very , very poor compared to most cities in America. Even with a large down payment, cash flow is not easy to achieve. If you find a duplex or triplex that needs renovating, you're in with a chance, but a traditional home is very tough. So another part is to talking to banks and lenders, big and small, to see what your monthly payment would be on different sized down payments for these homes. 

    Once you get a clearer idea of those issues, you'll have a better understanding of what strategy to use. 

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  • Lee RipmaPro Member
    Rental Property Investor · Prairie Village, KS · Member since 2015 · 2k+ posts · 2k+ votes
    6y

    @Elliott Perrigo

    Rent controlled apartment on the beach and a mile from your wife's job??? And you love the beach. I would advise you don't give that up but do start investing in RE. Get to know RE markets where the numbers make sense without the bias of you living there. That way you can just objectively look at the market not where you want to live. I have seen people make the house hack thing work in LA but you'll never get a payment less than 2500 on the beach in LA. Two on a lot houses often work for it in the valley. Sometimes you can find a vacant 3 or 4 plex in an east side neighborhood. You can also buy a SFH that already has an ADU.

    Start learning and think about what you want to invest in, then pick a market. It might be LA which is a great market but don’t complicate it by living there. All the places I invest I wouldn’t live. I rent the place I live in, great area, terrible numbers. Just trying to give an alternative perspective to the owner-occupy house hack way of investing in RE.

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