Drop in Sales Price for Boyle Heights Multifamily Units
Los Angeles, CA · Member since 2015 · 30 posts · 13 votes
Drop in Sales Price for Boyle Heights Multifamily Units
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Real Estate Broker · Los Angeles, CA · Member since 2016 · 112 posts · 34 votes
8yHey @Jacqua Le Fleur! Came by this post along my usual browse of BP and thought I'd share my 2 cents as well. Seth, Logan, and everyone else who commented brought up great points. I did a few appraisals in LA so I can say that what Roy said was very spot on. Comps do play a major factor in dictating the valuation of the property but like he mentioned, comparable cap rates is what is a large factor which boils down to the rents you obtain. There are formulas and spreadsheets used to back out into the valuation price of a property and this does include pro forma rates, but the current leases you hold that gain you rents NOW is the major factor in calculating a price value.
Boyle Heights was in most people's lists of gentrifying and appreciating areas and I personally think that is still very much the case. The only real issue I've been seeing is that there is somewhat of a backlash from the community that currently resides there pre-gentrification. There was a fair amount of gang activity there which caused quite a bit of trouble for a lot of the developers there initially but once they started hiring a lot of them and getting them off the streets, the resistance has improved a fair amount.
@Seth Borman's comment regarding cash for keys is a great option to keep the rent controlled properties as prospective investments. There are numerous investors who thrive in that market, but it definitely has been hard to buy out the tenants in Boyle Heights because of this backlash from the original pre-gentrified residents. Quite a few of the rent controlled units there, have tenants that were there since childhood so buying them out could become quite the costly endeavor. A great option like that is to just find a deal that cash flows and is not rent controlled, like what @Logan Allec mentioned.
For example, I just picked up a fourplex in Boyle Heights right by the Guisados on Cezar Chavez. It was only a block or two away from a police station and was a 5.7% cap which had me cash flowing right away. Brand new construction 2016 non rent controlled.
If you have any more questions or want to know more about the turnkey off market multi's in that area, I know a few developers that work that area so can be of assistance. Feel free to reach out and hope you have a great day BP'ers!
-Geo
15 Replies
- Rental Property Investor · Phoenix, AZ · Member since 2016 · 553 posts · 314 votes8yAs interest rates rise cap rates will decompress and building values will fall.
- Los Angeles, CA · Member since 2015 · 30 posts · 13 votes8y
Yes, the market will definitely have an effect on the pricing, but I guess my question was whether or not Rent Control (vacant or occupied under rent control), and its effect on the sales price, would be factored in by an appraiser. Rent control, I feel, becomes an additional "market factor," and it seems to be the icing on the cake of these units for sale in Boyle Heights.
- 8yLogan AllecBusiness MemberAccountant · Los Angeles, CA · Member since 2014 · 1k+ posts · 980 votes
@Jacqua Le Fleur Interesting observation. Yes for the older multis in LA rent control can make or break the deal for a cash flow-seeking investor. This is why when I was looking for a multi I eventually purchased in a non-rent controlled area.
Clarita CPA Group516 Reviews - Santa Monica, CA · Member since 2018 · 4 posts · 1 vote8y
@Logan For what its worth, I've noticed this too. Boyle Heights has been on my radar for the past few months since the MFR fit my budget. Are there many buildings in that area built after Oct 1, 1978? This would make it not subject to the City of LA RSO (Rent Control).
- Rental Property Investor · Phoenix, AZ · Member since 2016 · 553 posts · 314 votes8y
Originally posted by @Logan Allec:
@Jacqua Le Fleur Interesting observation. Yes for the older multis in LA rent control can make or break the deal for a cash flow-seeking investor. This is why when I was looking for a multi I eventually purchased in a non-rent controlled area.
Rent control is never a make or break issue. You ability to negotiate tenant buy outs is.
If you can get the vacancies you can get the cash flow. - 8yLogan AllecBusiness MemberAccountant · Los Angeles, CA · Member since 2014 · 1k+ posts · 980 votes
@Seth Borman Please share your experience...
Clarita CPA Group516 Reviews - Los Angeles, CA · Member since 2015 · 30 posts · 13 votes8y
I think you are referring to "cash for keys," be it through a formal rent control method, or through ad hoc agreements with the tenants (cash and free rent for "x" period of time, etc..). This method of creating a wanted vacancy is possible and frequently completed in Boyle Hts and other rent controlled areas of LA. But this brings me back to my original question and general observation on Boyle Heights. It looks like property owners are reducing their sales price because they are "building" in that extra cash outflow that the new owner will have to pay to vacate the current units. Its an informal discount to entice a would be buyer to go through that process, a process that we see can backfire (Rent strikes, collective bargaining by tenants opposed to relocate ). So dont the lowered sales price affect all other comparable sales in the area? What if I paid more for a triplex because it was delivered bacant from the get-go, wont these "discounted" fully occupied properties for sale hurt my equity?
- Investor · Pasadena, CA · Member since 2015 · 34 posts · 4 votes8y
@Jacqua Le Fleur The short answer to your question is YES if you are talking about appraisals based on recent sales prices. Appraisers don't necessarily know if previously completed sales (comps) were delivered vacant or fully occupied. But you likely benefited from the same forces when you purchased your place...as even if it was vacant, the price was anchored by all the previous sales of fully rented units....BUT, for any multifamily, appraisers also value based on CAP rates which WILL reflect if places are selling for less because rents are low...versus an empty unit that will have a higher price because it will be based on the pro forma rent. That's how I see it.
- Rental Property Investor · Woodcliff Lake, NJ · Member since 2017 · 42 posts · 26 votes8y
When pricing a multifamily property like a 4 unit, looking at comps is a major key but also when evaluating the property, we do have to look at what the current rents are AND what the upside potential is (proforma). So we have to use our better judgment. If the building is fully occupied at a GAI of $120K, and the tenants are paying below market, that means there is upside potential IF you were able to buyout/relocate the tenants. So if proforma gross annual income is $165k after buyouts and upgrades, we will reflect that in the ask price. If a building has a 3 cap with the potential of a 4.5/5 cap than damn sure the price will be competitive based on the amount of "upside potential".
- Real Estate Broker · Los Angeles, CA · Member since 2016 · 112 posts · 34 votes8y
Hey @Jacqua Le Fleur! Came by this post along my usual browse of BP and thought I'd share my 2 cents as well. Seth, Logan, and everyone else who commented brought up great points. I did a few appraisals in LA so I can say that what Roy said was very spot on. Comps do play a major factor in dictating the valuation of the property but like he mentioned, comparable cap rates is what is a large factor which boils down to the rents you obtain. There are formulas and spreadsheets used to back out into the valuation price of a property and this does include pro forma rates, but the current leases you hold that gain you rents NOW is the major factor in calculating a price value.
Boyle Heights was in most people's lists of gentrifying and appreciating areas and I personally think that is still very much the case. The only real issue I've been seeing is that there is somewhat of a backlash from the community that currently resides there pre-gentrification. There was a fair amount of gang activity there which caused quite a bit of trouble for a lot of the developers there initially but once they started hiring a lot of them and getting them off the streets, the resistance has improved a fair amount.
@Seth Borman's comment regarding cash for keys is a great option to keep the rent controlled properties as prospective investments. There are numerous investors who thrive in that market, but it definitely has been hard to buy out the tenants in Boyle Heights because of this backlash from the original pre-gentrified residents. Quite a few of the rent controlled units there, have tenants that were there since childhood so buying them out could become quite the costly endeavor. A great option like that is to just find a deal that cash flows and is not rent controlled, like what @Logan Allec mentioned.
For example, I just picked up a fourplex in Boyle Heights right by the Guisados on Cezar Chavez. It was only a block or two away from a police station and was a 5.7% cap which had me cash flowing right away. Brand new construction 2016 non rent controlled.
If you have any more questions or want to know more about the turnkey off market multi's in that area, I know a few developers that work that area so can be of assistance. Feel free to reach out and hope you have a great day BP'ers!
-Geo
- Los Angeles, CA · Member since 2015 · 30 posts · 13 votes8y
Great insight @Geo Tan. Thanks for sharing, and yes, the push-back from the community definitely has an impact. On one end, I would appreciate the quickest "appreciation" of my property (pun intended). But on the other side, I wouldn't mind seeing if Boyle Heights could create a positive renaissance age that is led by both it's own community and the newcomers. Although property appreciation would take a bit longer, the experience of a renaissance would be a once in a lifetime experience.
- Investor · Los Angeles · Member since 2018 · 2 posts · 0 votes6y
@Geo Tan @Jacqua Le FleurSuch an interesting discussion, the appraisal process. I bought a fully vacant duplex in Boyle Heights in late 2018. Just re-fi'd and the appraiser noted the market rate rents currently being collected - but used "market rates" from comps of other buildings fully occupied with long, long term tenants. In this case the No 1 comp used was for rents for $300 & $500/ month and set $1,100 per unit as a standard rather than the 2x $1900 currently collected on leases. It doesn't really matter for the re-fi, but found it rather annoying and worrying if we need to 1031 this building in the future. There's not a lot of listings in the area currently. How has your investments done in the last year? Did you get any of the appraised with similar results?
And of course I agree, community and sustainability over the quickest appreciation any day. We live in Echo Park and it's feels like the balance is still there, it's not quite the super-speed of for example Highland Park and Arts District.
- 6yDavid R.Pro MemberInvestor · Duarte, CA · Member since 2014 · 9 posts · 3 votes
@Sarah R. I purchased/remodeled a vacant duplex in Boyle Heights in 2016. Once it came time for the re-finance we had the same experience as you with the comps in the neighborhood. This concerned me with future values based on where we were in the market cycle. Once it came time to add on to the property, I chose to go with 3 additional units to get in to the commercial space. We are just finishing up the final three units, so hopefully the decision to go with 5 versus 4 units will bear fruit with future appraisals.
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