Am I missing something out here in Los Angeles?

10 Replies

Hi all, 

I am fairly new to the world of real estate. I've only worked in the field for a little over a year now and that's mostly been in the maintenance side. I'm still pretty young, but have been studying voraciously about REI and I am really eager to jump in a start investing asap.

The only problem for me is that I got my experience out of state. That didn't seem to be too big of an issue for me until I started looking around my local market. I just moved to Los Angeles last month and pretty much immediately began scoping out deals. However, I have noticed that real estate here is prohibitively expensive. 

I'm mostly interested in buying and holding small multifamily units and I am noticing that dublexes/triplexes/quadplexes are selling out here for a fortune. And what you get is a junked out place in a crappy location with ridiculously low rents. 

So what I want to know is who is buying these places? And how are they making any money at all? For example, if you're having to spend upwards of 350K for three units that are only grossing $750 per month, per unit, how are you ever even going to come close to achieving the 1% rule? And that's a very forgiving example, by the way, just based on what I've seen. 

Anyone familiar at all with the Los Angeles market feel like chiming in and setting me straight? Because at this point I am seriously considering the prospect of making all of my investments somewhere besides LA, and that is really not what I wanted to do. 

But that's still what some investors do, even if they live there. They invest elsewhere.  Or, they buy that $400k property, then just negative cash flow until they can sell it for $600k.

We're in LA and we build/develop locally and buy cash flow in Arizona. (It used to be Texas but that market is overheated).

Dawn is right. Your example is actually not bad for LA so I hear ya. The sophistication and competition in LA is major leagues for sure. We are at a top now, as time goes by more inventory will come online but the multis are off the charts for low inventory and high demand. It is basically a land grab for infill. Not sure if that is ever going to end. The niches for LA will evolve is what I am hoping for.



Thanks everyone for your responses. 

@Matt Rosas, no kidding about LA being the major leagues. I grew up in Florida and prices are at least double what I'm used to seeing for the types of properties you can buy out here. I think I'm definitely going to have to invest out of state and get really creative if I'm ever going to crack this market. 

@Matt Skinner, thanks for your input. At one time I almost moved to Austin and was amazed at the deals out there. But I understand people have caught wind of that recently. What has your experience with buying out of state been like for you? I take it you don't manage it yourself. And how does the distance factor when you're looking to buy? I would never do a deal sight-unseen, and I take it you wouldn't either. 

@Dawn Anastasi, I'm definitely starting to see lots of people talking about doing their deals out of state - it just struck me as adding a lot more risk to buy outside your home turf. My main concern is avoiding what pitfalls I can if I go that route, because it definitely is not a beginner's market out here in LA, especially price-wise. I also never realized someone would buy a negative cash-flow property on purpose. Unless you have some kind of inside information about that market improving in a major way. Anyhow, thanks for your two cents - and Go Packers (my folks are from the Milwaukee area) .

Investing out of state has it's challenges.
First, getting your investors to go with you (not physically but financially) was a real challenge at first. I had to sell them on the market first - after all most Californians are pretty ethnocentric.

But I bought 144 units in Texas for $2.2m about the same time I bought a 23 unit in LA for $2.7

Larger assets are easier to manage because you have onsite employees and a management co. But I'm still willing to jump on a plane at the drop of a hat.

As to never buy anything site unseen:
100%. Never.

I spent 8 months flying back and forth to Texas getting to know the market and putting a team together before I pulled the trigger.

I started watching Phoenix in 2010 and just started investing there 2 years ago.

"Ya gotta know the territory."

And the map is not the territory.

@Matt Skinner

I read you loud and clear on all of that. Thanks so much for taking the time, I really appreciate the insight. I guess I'd better start scoping out in some easier territory, hahaha - a 23 unit for 2.7 million is absolutely outrageous. I'm sure you're netting way more on that Texas deal.

@Adam Gresch You are correct. I live in LA and I invest in NJ. it helps that I was born and raised in NJ, but regardless, there isn't much cash flow within the LA city limits. There is, however, some cash flow a little bit east of LA. You are right about the low rents. It is great when you are a renter because of the rent control. I know people that have had the same apt for 10+ years on the beach and pay almost nothing. LA is a very "tenant friendly" place. These are all reasons investors find it easier to rent elsewhere. That is not to say its impossible here. 

I asked the exact same question when I started looking into real estate around LA about three years ago. To answer your question, the only people buying these properties are either 1. people who don't understand cash flow and the difference between a good and bad rental property investment, and 2. people who are banking on appreciation.

The good news is you aren't just missing the mark, that's how it is out here. The bad news is, cash flow is impossible out here. The appreciation players stay out here and flippers, but even the flipping model can be hard because it's high capital flipping. 

I've always bought out-of-state, I know a lot of other LA-ers do too, but it depends on your goals.

The great thing about Southern California is there is tons and tons of properties and that makes for lots of Sellers to structure deals with.  

I just bought an 8-unit for 180k in Inland Empire rents should be $4,500-$5,000.  The previous owner was collecting $800/month from ALL the units.  

At the same time, I am buying a decent single family house for $190,000 to rent.  Only get $1,500/month in rent but the owner is financing the whole purchase at 3.5%.  

To make Southern California work you have to know what is a deal and how to look for them.  It has changed a couple times during my time in the business and will change again but money is to be made.  

CA will give you appreciation, cash flow over your holding period, less vacancy and expenses.  That results in more profit!  That is what I invest for.  If you NEED $100 a month now or 1% this or 70% that then you'll be forced out of state to less profitable/more hassle investing.

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