Los Angeles, CA · Member since 2016 · 160 posts · 21 votes
Hello, I've been on the lookout for my first rental property in the los Angeles market. I may have found one in Tarzana which I put an offer down on but after reading a book called
How An Economy Grows And Why It Crashes by Peter D Schiff, Andrew J Schiff, I can't help but be apprehensive. They are predicting another big economic crash resulting from all the debt the US has acquired from keeping the economy afloat over the past few years. What are your thoughts on the market? I'm wondering if I should still buy a property now or wait until this inevitable downturn comes. It really does seem that the market is at a peak. Doesn't make sense to buy now, does it? The property that I'm considering is a 2 bed 2 bath condo in Tarzana for 219k, which would cashflow if rented out for 1700. It looks like a pretty solid deal but I'm wondering if rent prices might go down if housing prices were to adjust.
You are confusing rents with cash flow. Cash flow is the leftover money after you receive rents and pay all the related expenses. Your expenses will include taxes, insurance, maintenance, and more. Buy the book "what every investor needs to know about cash flow" by Gallinelli. It has formulas on everything real estate related. As to your original question, markets always cycle. How much it will change is everyone's guess. I see a lot of investors sitting on the sidelines but see others going full steam ahead. Personally, I would still buy if the deal was good. I expect a minimum of 20% off if not better. Paying retail doesn't make money.
Hi Mario, I am familiar with the Tarzana market (been living in the SFV for the last 12 years) and am like you with little experience in real estate investing. I have been investing all my spare time into tons of research and have noticed huge investment in the neighboring communities like Encino which is good for appreciation however, I observe homes selling at a slower pace than in the beginning of the year. Not sure if that's a sign of a toppy market or something cyclical.
That being, said the long term play is a nice option if your prepared for it. I can't imagine rent prices going down much below 1700/month in Tarzana. If the property cash flows after you've accounted for vacancy, HOA, pm, etc. I would love to be in your shoes and start having a equity build up albeit small.
@Mario F., please don't confuse rent return with cash flow. There are plenty of 2 Br Apartments that do rent out for around $1700/m in Tarzana, so if you are calculating NET $1700/m, that's could be overly optimistic.
Brent Coombs Hi Brett yes thats the property. I out an offer in on it today. The owner is very motivated to sell which is why its priced low compared to other units that have sold. According to the numbers, this should cash flow if i can get 1700 per month. There was a neighboring unit that just rented out for 1700 in that complex and another one that rented for 2k. What do you think about this deal?
You are confusing rents with cash flow. Cash flow is the leftover money after you receive rents and pay all the related expenses. Your expenses will include taxes, insurance, maintenance, and more. Buy the book "what every investor needs to know about cash flow" by Gallinelli. It has formulas on everything real estate related. As to your original question, markets always cycle. How much it will change is everyone's guess. I see a lot of investors sitting on the sidelines but see others going full steam ahead. Personally, I would still buy if the deal was good. I expect a minimum of 20% off if not better. Paying retail doesn't make money.
Brent Coombs Hi Brett yes thats the property. I out an offer in on it today. The owner is very motivated to sell which is why its priced low compared to other units that have sold. According to the numbers, this should cash flow if i can get 1700 per month. There was a neighboring unit that just rented out for 1700 in that complex and another one that rented for 2k. What do you think about this deal?
According to the numbers shown on the ad, it would cost you $1333/m without taking into account vacancy (added expense 1), or special cap ex costs (added expense 2) that HOA's are renowned for springing on owners. The pro forma numbers shown are:-
Principal & Interest $783; Property Tax $229; Home Insurance $55; HOA Fees $266.
Of course, that's if you're only putting 20% down (which is what many/most good investors often limit their own cash to), but you could deduct $783/m from your expenses if paying all cash.
But the common consensus around here is that it's ALL about leveraging your cash, NOT using it all up on one deal when you could be leveraging it over 4 or 5 similar (but not cash negative) deals!
Another question: would you be Property Managing it yourself (added expense 3), trusting your own ability to find good tenants and ensuring their rent payments are on time every time? Those 3 additional expenses will ensure that this one will NOT cash flow positively if 80% leveraged, and I reckon represents a less-than-optimum use of tying up more than $200k cash.
eg. In parts of the mid-west, a $200k deposit could buy you a $1M 40+ unit apartment block that generates $250k gross rent, NETTING ~$60k/y after mortgage and other expenses!
@Brent Coombs Hey Brent, I would be using 20 percent down so it would cashflow only if I managed the property myself. Which I am willing to do. The goal of this first purchase is to simply get out of paying rent and into a property that I coudl rent out in a year and make some kind of cash flow from. I wish I had that 200k in cash to buy a property in the midwest but I don't! I noticed that alot of investors don't recommend investing outside of your market because it's risky and tough to manage. Would you recommend that to someone living in the LA market? It's really hard to find cash flowing properties out here. This 2 bedroom is one of the only ones that I've managed to find so far and it doesn't cash flow unless I manage it. Getting 20% off is really tough. I'm assuming that relying on the MLS is pointless. Do you do direct mail to get these discounted deals?
@John Thedford Sorry John, my mistake. The rent I am approximating on this property is 1700 and the cashflow from it after mortage, taxes, HoA, insurance, vacancy, and maintenance would be somewhere around 100 a month. There are units in this building that are renting for 2k a month, which I am not going to expect, but I'm thinking there might be room for more cash flow.
@John Thedford So you don't think there is any value at all in it considering I'm currently renting? It would reduce my expenses by 200 bucks and also allow me to take advantage of tax benefits of owning a property. When I leave after a year, I could get around 100-200 in cash flow. In California, the market is insane and I've been struggling to find anything better. Should I just wait until prices come down?
@John Thedford I wish I could but this is already really low. The seller if very motivated and needs to sell fast. This condo is getting a lot of interest and will go fast. I already submitted an offer for the amount he is asking for because he's sure to get it. Other condos in this complex are going for 250k. I wonder if prices are just inflating out of control leading up to the election. It's unbelievable how much these condos are going up in price!
@Mario F., the main problem I see with your "rent out in a year" ambition is that you would still then need to live somewhere, and according to your own calculations you'd only have about an extra $100/m that you don't already have (but which is SUPPOSED to be the return for your $44k cash outlay)! Can't find better than 2.7% per year?
And, who can promise you that there WON'T be a downturn?
Plenty of folk find "boots on the ground" teams out of state so they can invest in cheaper markets. What's 10% rent for Property Management, when you can save 75% on the initial purchase price? Trust can take a while, but the rewards are there, waiting. Cheers...
This is a bad investment income property that will likely end up with negative cash flow. My advice would be to pass. Getting started in investing with a poor deal is not a good start point and you will end up regretting your decision if you buy.
When interest rates rise, HOA rise, taxes rise etc. etc. you will be sorry.
@Thomas S. Hey Greg. so you're saying that when interest rates rise, taxes and HOA will rise as well? What if lock in this mortgage with the 3.6 rate that I qualify for right now. Won't that be a good deal? Especially if/when interest rates rise? Or perhaps I should wait until they rise so prices can finally fall?
Hello, I've been on the lookout for my first rental property in the los Angeles market. I may have found one in Tarzana which I put an offer down on but after reading a book called
How An Economy Grows And Why It Crashes by Peter D Schiff, Andrew J Schiff, I can't help but be apprehensive. They are predicting another big economic crash resulting from all the debt the US has acquired from keeping the economy afloat over the past few years. What are your thoughts on the market? I'm wondering if I should still buy a property now or wait until this inevitable downturn comes. It really does seem that the market is at a peak. Doesn't make sense to buy now, does it? The property that I'm considering is a 2 bed 2 bath condo in Tarzana for 219k, which would cashflow if rented out for 1700. It looks like a pretty solid deal but I'm wondering if rent prices might go down if housing prices were to adjust.
thanks
mario
I think I know this complex. Should be no probs renting and doubtful if this will ever rent for less than $1700. That is likely the current low for these. If I told you billionaires have bought up apartments nearby would that make a difference in your opinion?
I have read that book and I believe the authors are spot on. In Peter's book, The Real Crash, his prediction isn't that the stock and real estate markets will crash, but the value of the US Dollar will crash. I'm this case you want to be in inflation protected assets, and RE can serve that purpose.
Peter also has a podcast if you ever want to hear his latest forecasts.
This won't cashflow. I bought a property at the bottom of the market for $225k that rented for $1950 a month. I basically broke even for 5 years before selling it at a nice profit due to capital appreciation.
I took the gamble in 2011, because I knew prices were at multi-year lows. We are not at lows right now, if anything we are getting close to a peak.
It is a terrible time to buy a break even cash flow property in the hope of appreciation.
@Adam P For 225k, I would expect 1950 per month to cashflow. What happened? How did this not cashflow at least a little? I'm not looking for appreciation at this point because it definitely is a peak market. But I am just trying to get into something to shelter my money until the next cycle starts. My goal right now is to reduce expenses and stop renting. Ideally, I'd like to find something that might cash flow at least a little bit. I thought I found that with this place.
Nothing major happened on that property, just those numbers aren't great.
HOA was $510 a month.
Mortgage/Insurance/Taxes payment was $1400 a month
Property was in fantastic condition, but there is always maintenance. Whether HVAC unit, replacing a faucet, broken microwave, etc.
$1950 a month won't sustain a $225k condo. It is a bad investment. I made $100k on the sale, so made out fine. But you aren't cashflowing long term with those numbers.
@Adam P I see, the situation with this unit was a bit different. My mortgage including HOA and taxes/insurance was around 1250 per month. It could have potentially made some money with a 1700 per month rent, right? even if you factor in the vacancy rate, etc. Regardless, it looks like the property sold to another bidder. damn!
It sounds like you may be putting more money down to justify the investment. But you should be making money on your deposit too. I can make any terrible investment look decent by putting down a 60% deposit. That doesn't make it a good investment, just means I am donating my deposit to convince myself I am cashflowing.
You will break even if you are lucky. You may be cash flow negative if you get a bad tenant, or get unlucky with maintenance.
Your deposit is $42k. That is a nice chunk of money that you would want making a return for you. If you just dumped it into peer to peer lending, without much effort you would make about $250 a month. Doing nothing. Real estate involves a lot of effort and potential stress, and there is no way this investment cashflows $250 a month within the next 5 years.
Real estate is my favorite investment class, and where I have made the most money. But maintenance, and vacancy are real cost items.
I just had a tenant cut and run mid-lease this month. The apartment is trashed. It will cost about $1,000 $1500 to get it back to rentable condition. This time of year is a nightmare for leasing, so I am having trouble filling it. I screened the tenants, and have middle income high credit score parents as co-signers. However it may cost me more than it is worth to sue for damages.
Damn! I grew up in Chicago. Wow that's a horror story for sure. But I'm assuming that you're far enough along with your portfolio that a situation like this can be absorbed by your other investments. Was your very first investment a good cash flowing property? I heard Chicago is filled with cash flowing opportunities. It's not so much the case here in Los Angeles. Everything that might come close to breaking even gets bought up extremely quickly. Most are grabbed by cash buyers. So I'm having a damn hard time getting a property like the one mentioned in this thread, let alone one that would come close to cash flowing 250+ per month! Pretty frustrating!