Strategy for first time buyer in LA, duplex or condo?

Question

Hello, I've been trying to think of the best strategy for my first home purchase in LA and wanted to tap into this forum's wisdom!

As we all know, prices have sky rocketed which makes buying a property in Los Angeles very difficult. For my first home, I'm debating whether to buy a duplex, which would range around 400-500k, or to buy a 200k-230k 1 bed 1 bath condo in the burbs for starters. The condo option appeals to be me because I'm pretty sure I'd be able to pay it down quick and then acquire another condo in a year or two. Paying down a 200k property isn't as daunting as dealing with a 500k duplex as my first purchase.

My Agent says Cypress Park is on the rise and a duplex in the area is sure to give me appreciation. My agent does not recommend going the condo route because of HOAs and dealing with neighbors, etc. The duplex would hang me up for about 3 years at least, if not more, because I'd have to deal with a much bigger mortgage and also TONS of rehab work. Whereas, if I go the condo route, I'm mainly looking for something I could pay down quick and then make a decent cash flow once it becomes a rental. Not so much hopes on appreciation.

I'm also worried about real estate prices going way down once interest rates rise so I don't want to buy anything too expensive. I keep hearing that prices will correct eventually and would like to save a bigger purchase for when that happens.

Does it make sense to stick with a lower priced condo as a first purchase (just so I could get out of renting)? Or should I go the route of the duplex and ride on the hopes of appreciation in an up and coming part of town? The area isn't nice at all right now so it wouldn't be fun living there for a while. I'd love to hear your thoughts on my dilemma!

Thanks!

mario

Michael Lee · Answer

Hello and welcome to BP! You sound you have at least have a little experience. The first thing that popped in my mind was the traits of the HOA and who they are and the safety they have for the homeowners. Are they in control and what type of control have they shown. They are not always a bad thing but definitely need to be checked out. Check them out by asking current residents and see if they have any complaints. Talk to the person that runs it and get a feel of how they react to complaints and do they have any trouble with neighbors or the city? Ask them how often they get together and where and do any tenants stay involved. Are they kept under control by existing owners? How old are the units and do they have any capital expenses planned or scheduled? What, if anything, is going to take place in the future? Duplexes seem to be more independent than condominiums which can be bad or good for your property. You want fair maintenance but not a group that is out of control. The main things are who and what is running them and the control they show. Are they collecting more for repairs or maintence and does that increase the value of the property? It's location is always a factor in determining value.Does one's value increasing more than the other? Does one have more appreciation prospects over the other? I probably covered all good and bad potential. It's location, it's surrounding, and the answer to what you are paying for are the biggest factors that need to be graded. Does that fit-in? Knowing what you are getting into is a big deal as well as the future of them paying-off? Is there any HOA and are they in control?

Good luck to you!

Geo Tan · Answer

Most investors stray away from condos since you're paying money monthly on things a group of strangers want to spend it on. You don't have direct control over how your money is being spent for your investment. I had a condo property prior to my investment here and I definitely am against any investments with an hoa involved from now on. But there are also many other investors who thrive with condos and I did make money on my previous condo as well so to each their own. Hope to hear how this deal went! Cheers.

Kiersten Vance · Answer

Hi @Mario Furmanczyk I would be very hesitant to buy something that does not even cover the mortgage with both units rented. That doesn't seem like a good investment to me, it becomes very much a gamble on appreciation. Could the condo rental at least break even when rented? Make sure you are comfortable with the payments on either option. You don't want to jump into something that is negative cash flow for the next 5-10 years hoping that it will appreciate enough to make it worth it.

Chris Mason · Answer

@Mario Furmanczyk,

Most landlords want control. A landlord with an HOA that's basically splitting half of the landlord responsibilities, for a cut way bigger than any property manager would charge, is giving up a lot.

There's also the fact that the HOA budget is democratic-ish. Democracy and budgets don't always work well together. See: US national budget & deficit. That lack of responsible control over the budget can lead to HOA shortages that translate into "surprise!" $5,000 bills to you. As a landlord of a detached property, at least you can look at the roof or air conditioner to see if you might have a surprise bill in the pipeline.

You mention paying the mortgage down to improve your cash flow situation. Generally you must refinance to lower your minimum P&I payment. That's not necessarily a bad thing, but it will be if five years from now the era of historically low rates is gone and a refinance would come with a massive interest rate hike.

Food for thought.

Mario F. · Answer

@Kiersten Vance Thanks Kiersten. I think my other agent is an awesome guy and was trying his best to put me in a winning situation. And I'm sure that area will benefit a lot of investors. But I think it was just too much for me as my first investment. He has a very negative view on condos, which is understandable because there is so much out of your control with HOAs, etc. But it's more in line with my character to be a little more cautious financially. It has cost me a lot of money being this way over the years because I couldn't get myself to take a plunge. But I can't help but feel more comfortable taking a smaller step forward and giving me more time for education. But it is frustrating to think how many opportunities I've missed over the years! The duplex sounded like it could have been a big home run but it also coudl have been a huge burden for a few years.

Kiersten Vance · Answer

Hi @Mario Furmanczyk That sounds like a good way to start investing, stop paying rent and learn a little about the market ect without jumping in to something you will be underwater on for a while. Make sure your agent is on your side and understands your needs and budget. It is not right for him/her to have their own agenda or push you into a deal because they think it is "good." If your agent is not 100% on your side, get a new one. Its very expensive to make a mistake in this game and if your representative doesn't have your best interests in mind, you are the only one that loses.

Mario F. · Answer

@Kiersten Vance This is exactly my line of thinking but my agent wasn't being supportive of this approach. He was more inclined to put me in an up and coming area for a property in the range of 400k-500k, which would sink me for a few years. Also, appreciation in LA at this point is something I don't even want to count on.

This 209k condo could be a great way for me to stop paying rent first of all. It would lower my monthly expenses by almost 300 dollars plus give me tax benefits. I love the idea of selling in a couple years to move into something nicer. But if the market goes down and I'm under water, I won't panic because I can easily afford this property. In the long run, the value will go up. The HOA isn't too bad either. ($270) If I can manage to rent this place for 1500 a month, which seems reasonable according to my research, I can make a couple hundred bucks in cash flow per month while having that mortgage pay down. This option is seriously much less stressful to me haha. Thanks for your thoughts! I wasn't sure if this idea made sense to more experienced investors but it's nice to know that someone agrees with me!

Kiersten Vance · Answer

That sounds like a better idea if the rent can cover both the mortgage and the HOA/Property Tax/Insurance, ect. What areas are you looking in? Putting 20% down is great as that eliminates the PMI payment. Awesome you can do that. If the mortgage is cheap enough so that you aren't stretching your income to make it work, that is the best. It leaves you open to save to flip something, or buy a rental or a single family home. Condos haven't been historically the best rentals but I do believe you can get a good deal and make money renting them. It is a really good way to start as the prices are lower and you can get into something with 20% down and a good interest rate. Ideally, you would stay there for two years (maybe buy something else as a rental in a year) then sell it and take your gains all tax free and put it into a larger/better location one for yourself. You can do this every two years and help yourself upgrade your home tax free. That is what we started doing. We are on our second home right now.

Feel free to call or text me if you want to chat more about condos or rentals!

Mario F. · Answer

@Kiersten Vance Yes this is exactly why I officially backed out of the duplex deal. Too much would be depending on appreciation. It would get nowhere near covering the mortgage with both units rented.

I think I will go for the Condo idea. My criteria right now is to get something for around 200k with around 45k down so that once Ileave after a year, the rent can cover the mortgage. What do you think about that idea? The mortgage would be cheap enough for me to save another 50k for the next one the following year. I want to keep doing that for a few years.

Strategy for first time buyer in LA, duplex or condo?

Strategy for first time buyer in LA, duplex or condo?

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