Is it possible to get a "good" deal in downtown Los Angeles right now? Expert advice needed.

29 Replies

I'm definitely a newbie at real estate ownership / investing, but I'm in a situation that I hope some better experts can analyze for me. I apologize in advance for the beginner-speak :)

Here's my situation:

I'm trying to buy a 1-bedroom apartment in downtown Los Angeles, particularly in the 90017 zip code (Here is a better diagram of location: http://bit.ly/1urYTX0 - the closer to 7th/Figueroa the better). 

However, I'm worried about the market being "too hot" or prices being too high - I have money for the downpayment and can comfortably pay rent, but I don't want to buy something at the wrong time and then have the place plummet in price.

My budget for a 1-bedroom apartment is 250-400k, and I want to live in it for 5-10 years, and then rent it out for a reasonable price (or at least one that covers mortgage/HOA fees) after I move. I love the area and I want to live in it for the short-term, but definitely don't want to raise a family in downtown 5-10 years from now. I'm 27 years old.

Are there any experts that might have any advice for me? What would you do in my situation? Is it possible to find a deal like this in the area, or am I "too late" to the party? What might I be missing? 

I TRULY appreciate any advice - I'm trying to create a plan of action to make ownership a reality, and I really don't like paying 1700/mo for "empty" rent right now. I'm trying to buy a place with Renting in mind down the line. My only requirement is that I stay within that zip code.

Edit: I can also slightly "increase" my budget for a bigger place (2-bedroom, etc) if that makes more sense from a renting perspective (+/- 150k)

@Jason J.  

You struggle with the same problem that everyone in over-priced urban areas seems to. I live in NYC, LA, SF, Boston, Seattle, and DC tend to struggle with the same issues.

I personally have decided to get my money out of NYC, primarily because I can't find numbers that I like. The key to your statement is that you are renting for $1700 / mo but you want to buy a place in the $250 - $400k range. On the good side (250k), monthly rent will be .68% of your purchase price, on the bad (400k) .425%. Granted the monthly rent will fluctuate in there, but both will still hit below 1% of the purchase price.

Some people on the forums have beef with the 1% rule, but you can't beat it as a method for quick evaluation. Basically, I aim for all my rents to be at 1% or greater than the purchase price. If not, the deal better have some major additional upside, but usually I would just walk away.

On the flip side, if you think that LA rents are going up up up, then you may be saving yourself some trouble by locking in a loan at a good interest rate and living in the place for 5-10 years. Needless to say, it always depends on your situation. 

One point of aggravation/benefit of these urban areas is that there is usually a large political contingent attempting to control rents. While I am opposed to this for ideological reasons, as a renter in NYC, it's nice to know that I live and rent on the popular side of this populist argument. I don't think rents in urban areas can inexplicably rise forever, so I am happy to put my money in the midwest, southern New Jersey, or my home city... moreso than NYC. 

At the end of the day I live on the mantra that 'where I live' is consumption, 'where I invest' is where the numbers make sense.

@Trevor Ewen  Thanks for the honest and thorough response. From an investment perspective, it seems like most of the properties I'm looking at don't make sense. Here's a couple of my thoughts:

a) I am a bit confused about the 1% statement you made. The $1700 is what I am paying for at my current apartment, but I don't own it. Shouldn't I be assessing the mortgage on the place I'm looking for, rather than my current "dead rent" spot? 

b) Even if I apply the 1% rule at places I'm looking at, the numbers don't look great. If you had a second, I was curious on your thoughts about the properties on this Trulia map: http://www.trulia.com/for_sale/90017_zip/map_v ?

c) Lastly, if all of the places on the above map look pretty bad (from an investment perspective), do you have any advice on how to find motivated sellers / hidden gems in the area?

Thanks in advance for your advice.

What are the HOA fees now, and what might they be in the future? What is the condition of the building? Expensive items have to be paid by special assessments, so the condition of the entire building, not just one unit, has to be considered.

Do you really need to live in downtown LA?  

By budget do you mean you have that much cash, or you plan to get a loan and hope nothing goes wrong?  Do you have any other debt?   

There are many brand new apartment buildings being built, and the coming seismic retrofit requirements will lead to some smaller apartment buildings being replaced with larger new buildings, so the older buildings will suffer by comparison.    

Originally posted by @Stephen Masek :

There are many brand new apartment buildings being built, and the coming seismic retrofit requirements will lead to some smaller apartment buildings being replaced with larger new buildings, so the older buildings will suffer by comparison.    

This is largely incorrect information.  There are a few new apartment towers in the city, but by and large Los Angeles is completely built out so for a developer to find a parcel that is desirable they have to tear down a building.  That is very expensive in the few places where it is even really possible.  Also, these buildings don't really compete against B product as they are A buildings with big prices.  Sure, if tens of thousands of them were built it would have an effect, but a few thousand new units in a county with over 10M people is a drop in the bucket.  This is why dense older cities like SF and LA tend to have older housing stock and what some see as a housing crisis no matter the price signals from the market.

On the seismic issue, you can't just build a bigger building on these parcels with more units.  In most cases, the zoning is already maxed out.  These are buildings with soft stories above parking.  To build a new building, you are going to have to build an underground garage in most cases and with a setback equal or even greater than what is being replaced.  Also, in LA you have to buy the tenants out of the old building you are replacing.  That all is going to be cost prohibitive.   It does happen in a few wealthy spots, but it is tough.

I think your basic plan is a good one- buy a 1 or 2 BR place that works for you now, in a good up and coming location. Then years later you keep it as a rental when you buy a bigger place, get a life partner, etc. That's the smart way to build RE wealth. 

I'm not an expert on the LA market (my market is SF) but I know DT is revitalizing, and probably is a good bet for future appreciation. I don't know if the DT market is maxed out right now, but it will always seem expensive. I'd talk to numerous RE agents, follow articles in the LA Times about this, go to RE meet ups in the area, search this forum, and try to make an assessment on that. Even if DT is expensive now, look for a good deal for a good unit. Remember that in general costal CA usually has one of the best appreciation rates in the country, but can drop temporarily during a downturn. I don't know many people who brought CA property 10+ years ago who regret it. Even the 2008 downturn is starting to fade a away, as most of costal CA is at or above the 2007 highs. And that recession was more substantial than any we have had in years. Most likely you make a wise purchased now, and in 5-7 years you haven equity, plus rents will have increased by a few hundred bucks, and you have a great to long term investment. I brought my first condo in SF 20 years ago, and now I own 11 prime units in the city and live off my rental income.  Key to success is to buy in prime or up and coming locations.  It's tough starting out and everything seems super expensive, but stay focused!

@Jason J. There is a L.A. meetup today 457 N Fairfax at the Open Space Cafe 3-5pm.  See you there.

I lived in LA for 3 years, and I don't truthfully understand how anyone could invest there at the numbers you're talking about. 

If you have 20k-40k to put down, you could buy a nice MFR in a 2% market, have it managed, and be earning a solid cashflow from that. Eventually, your cashflow will be enough to cover your rent wherever you want to reside, in LA or elsewhere.

@Jason J.  Obviously when you are looking at an area with high demand, and little supply, the prices are going to be high. At the same time, because of those two things, prices may never again be lower than they are today.  

There are no guarantees in real estate. The only thing we can look at is historical values and demand. The real estate crash that we had was probably a once in a lifetime thing. In many areas, prices may fall again. However; in areas close to major hubs for work, being able to walk to work and not pay parking, toll roads, etc. plus save time is a huge benefit, and actually has real value, therefore; properties in neighborhoods like that will always be popular. 

The question is, what is the rental market like in that area? Is it tight as I suspect it is? What are rents? 

From what I see on MLS it will take from the mid $400's to $600 to get a good 1 bdrm. apartment, and you may only be able to get loft space. If you move off your mark a little, it may go down. HOA fees look to be in the $300-400 per month range.

If you're wanting to live there for 10 years, you love the area, and it's within your price range, if it were me, I'd do it, but ... YOU have to make the decision for yourself. Good luck.

I lived in the zip code 90017 the Medici, and I was paying $2300/month with double Masters bedroom for one year and a half. I was 28 years old, single, and I wanted to enjoy the DTLA nightlife and I have no regrets doing it. Over time, I thought about the money that could have gone to building equity, and building wealth. I decided to move out of DTLA because it was very expensive as an investment. Instead, I decided to buy a duplex in Alhambra, 15 minutes east of DTLA. I can still enjoy all the restaurants, bars and lounges in DTLA, but instead of walking,  I now take Uber.

If you really want to stay in that zip code, then you have to pay the high price. I personally moved out, but within a striking distance of DTLA and I never looked back.

You can check out Koreatown, Boyle Heights and East LA, northeast LA if you want other value buys near the city. But DTLA is just what it is as an expensive city. PS: of the properties I own, the ones with HOA fees are the least of my favorite. If you're willing to pay those high HOA fees short term aND long term, then "hope" that you get it all back on appreciation. Happy Investing!

Thanks for all the responses guys. Lots of great information here for me to think about.

I think my main problem is that I want to live in DTLA for the short-term, and rent it out in the long-term. Based on the discussion here however, it would be much better to find an MFR in a nearby city and rent that out... but then my problem is that I have no interest in living in that. Mixing up my long-term and short-term goals kind of sounds like I was trying to "have my cake and eat it too" :) I guess I shouldn't have expected that to be very likely...

I think I'll try to start looking for better value-buys in neighboring cities for my long-term interests, and then find a cheaper place to rent from for the short-term. Hopefully it's somewhere/near 90017 - still kinda bummed that I will most likely have to continue to pay "empty" rent for the next few years...

@Jason J.  

I don't think you're too late to the party at all. DTLA prices are probably the most stable as there's always market of ready to buy people here. I've been living and working DTLA for 5 years and finally decided to move out a year ago. If you'd like to buy a place here and live in it and count on appreciation you should do it. If you just wanted to buy to rent it out, that's a bad idea. You won't be able to lease it out for amount equal or greater to your PITI + HOA. But 5-10 years down the road you will probably be able to!

Sales in LA slowed down lately... but not in downtown. Almost all properties that come up for sale receive offers within 2-3 weeks! This market is hot. And always will be. 

I think you have a good plan. But there may be better... Why not buying a SFR or duplex somewhere on the Eastside or NELA that you can buy with 3.5 % down and rent a loft in DTLA in the same time? More cash in your pocket!

Hi @Ewa Reza  - thanks for the encouraging words.

I may sound like a total amateur asking this, but is it really possible to make enough money from renting out a SFR/MFR on the Eastside/NELA to pay for my monthly rent in DTLA (~1700)?

My other two properties (in lesser known areas) only make me like ~300 a month, so I just figured that making ~1700 would be a pretty big stretch... but I'm starting to think I'm completely off?

Updated over 3 years ago

Update: Would love to hear your thoughts on what the top 2-3 cities around LA county that you think are up-and-coming and would be good value-buys for MFRs? Assuming I don't live in it

If anyone has done any research on the LA area, I'd love to hear more about what you think are the top 2-3 cities around LA that you would look for duplex/triplexes in?

Preferably in an up-and-coming area. Thanks in advance for any assistance!

NoHo seems to be getting more attention from the millenials. Mid City might qualify as well. Westlake looks prime geoghraphically speaking. All three would qualify as up and coming but parts are still a bit hard on the eyes....

My realtor just sold a NoHo one to a young couple.... main request was can they walk to the bars from the location. Good luck with your search!

My advise would be to run the numbers on a few scenarios.  There are cash-flow spreadsheets in the document sections which could be helpful.  Of course you will need to make a few assumptions and estimates, but if you take it seriously and work hard to plug in realistic figures (do rent surveys, etc) then it could be reasonably insightful.  Running numbers and having a few options on paper that you can compare might help you come up with a solid plan.  

Originally posted by @JT Spangler :

I lived in LA for 3 years, and I don't truthfully understand how anyone could invest there at the numbers you're talking about. 

If you have 20k-40k to put down, you could buy a nice MFR in a 2% market, have it managed, and be earning a solid cashflow from that. Eventually, your cashflow will be enough to cover your rent wherever you want to reside, in LA or elsewhere.

 Agreed, the numbers in LA are a little crazy. I guess if you are a long term holder today the numbers will play out according to historical returns. Timing can make that dramatically different in most cases too. If you already live in LA, investing there might make sense.

The competition makes it tough now but those are the exact reasons the prices and rents historically rise. When I hear of the folks who bought LA in the 1900s the returns are pretty close to winning the lottery and thats average. When my ding repair guy sells his 900sqft house for 1.4 mil cash in 48 hours...it makes one re think about LA investing again. You could always hedge that LA property with some pure cash flow areas too. I imagine all of this depends on your personal investment expectations.

I like the idea of cash flowing paying for your rent. The average LA 2 bedroom rents $2500 so thats near 5k gross in the CF markets. I am sure some do make that happen and use to pay rent where ever they want. That strategy makes sense. I think the math has to played out in terms of decades to evaluate the long term investment comparisons. A 5k gross cash flow paying your rent works....or at least until they raise your rents beyond the CF net. 

Anecdotely, the LA 14 units I used to manage were purchased for 365k in 1995. I heard the 24 condos the city approved building on that 14 unit lot would sell for about 12 million. That is one reason people invest in LA, or 12 million reasons but were talking two decades now. That 14 unit guy lives in Sweden. From all accounts he has been to the property one time in 20 years....when he bought it. Was he betting on LA appreciation or was it already there? 

Hey @Benjie DeVera  

I think I'm going to postpone looking around directly in the downtown area for now, and try to look for better cash-flow investments in cities that are in southern California, but not as high in demand. Also doing some research into finding some up & coming areas.

Currently looking into West Adams, Bakersfield, or an MFR near a college town. Still need to look into this more though.

But I would love to hear anyone elses' thoughts on MFRs in up & coming areas in SoCal that are great from a ROI perspective.

Boyle Heights, 90011, and 90032. I'm buying this year in those areas. Stay in touch

I had a home in West Adams.  Its have been 5 years and do miss the area.  Good area to invest in.

@Jason J.  Check out San Bernardino. Housing prices haven't recovered as much from the downturn as LA has. You get more bang for your buck as far as rental income. IMO, there's still a lot more upside than the rest of SoCal. Plus, it's still local enough if that's what you're looking for.

I'm a believer in looking at your personal residence differently than your investment properties. Everybody has to live somewhere and only you can weigh the importance of your lifestyle choices vs your investment goals. If you want to maximize your returns, consider moving away from downtown and "house hack" in a less expensive area. By "house hack" I mean buy a 2-4 plex, occupy one unit, and rent out the others. If lifestyle is more important, buy your 1 bedroom place and be happy. Sell it when you decide to move since the numbers aren't so good for a rental. You can use the proceeds to buy rentals in places where the numbers make sense or towards your next personal residence.

I've had a great life and really enjoyed the places I lived in my younger years. If I had to do it over again, I'd "sacrifice" to do the house hack and really cut down on my expenses. I would have had just as great a time but would have amassed a lot more wealth.

Good luck!

A big part of Bakersfield's economy is oil, and layoffs have already started.  It will be interesting to see what the effects of this most recent oil bust will do to housing prices in Bakersfield. 

@Benjie DeVera   - Thanks for the recommendations. I'll definitely stay in touch with how things go - best of luck to you too sir.

@Joe Moore  - West Adams is particularly intriguing to me, as I work in downtown and Santa Monica - the proximity between both areas is great, and overall, the area looks like it has some good properties to invest in. If you don't mind me asking, why did you sell your home/leave the area? I'm a little concerned about the crime/safety aspect of that area, but I can't honestly say that I'm extremely familiar with the district. I'd love to hear your thoughts on what areas to avoid, and what areas to focus on.

@Andreas Mirza - Thanks for the advice, Andreas! It took me a while to realize it, but now I finally see (and completely agree) with the differences between residential/investment properties. My goal now is to buy an MFR in the LA area and do it with the "house hack" style you mentioned, Hopefully I can find something closer to work (downtown/Santa Monica), but I will definitely take a look into San Bernadino.

@Gene Hacker  - Did not know about this. Will definitely keep watching the trends in the area. Thanks!

Thank you all for contributing and helping a novice out - I've learned a ton. Very glad to have found the BP community - hopefully I will have some updates as things progress!

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