Triplex Investment in South Central, Los Angeles Analysis / Advice

20 Replies

Hello BP! I have entered into contract for a Triplex in South Central LA for $345,000 and would like to get your advice on whether I should go forward with this deal. Here are the numbers:

Basic Information:

  • Built in 1925
  • Triplex with 3 separate units (2BD / 1BA each unit)
  • Landlord pays trash/water, tenant pay all other utilities

Terms:

  • Contract Price: $345,000
  • Down payment: 25% ($86,250)
  • Mortgage payment at 4.25% ($1,273)
  • Improvement: $2,500 (Cosmetic)
  • Lease at $3,000 total
  • Closing cost: 2.5% of Purchase price ($8,625)

Financials – Annual Number:

  • Annual Rental Income: $36,000
  • Annual Expenses: $16,810 (w/ Property tax, Vacancy, Repairs, Utilities, PM and Insurance)
  • Net Operating Income $19,430
  • Mortgage: $15,275
  • Total Cash Flow: $4,155
  • Total Equity Accrued: $4,362
  • Total Cash ROI: 4.27%
  • Total ROI w/ accrued equity: 8.75%

Other:

  • For anyone not familiar with Los Angeles, this is in a B/C class neighborhood
  • Rental market is hot in this area of town, normally there are no vacancy (I have estimate a one month vacancy/loss rate)
  • Rent control area
  • I am familiar with this area, have bought other properties a few blocks from this triplex
  • I self-manage all my properties and will continue to do so for the next few years till I get to 20 units+. This increase the return to 6.98% and 11.46% w/ equity accrued.
  • Investment goal: Being in LA, I will never meet the 2% rule. However, I am just more comfortable investing in the same city I live. The goal is to hold for the next 5-10 years while generating cash flow and sell when the market is great.
  • Exit strategy, will do full rehab when it is time to sell to generate forced appreciation and take advantage of the LA/California market appreciation (sensitive topic)

Thank you very much

Not a bad deal, but not great! I bet you can find something much better than 4.27% ROI. ESPECIALLY in South Central.

I usually help people find 2-4 units with FHA loans and ROI in North East LA can be more like 20% ROI. Obviously with your 25% your numbers will be different but should be THAT much lower.

Ewa Reza, Real Estate Agent in CA (#01874963)
323-455-7575

Hi Reza,

Thank you for your suggestion. I have been looking at South Central and also in East LA too. I have not seem anything that comes to the 20% ROI that you mentioned. Can you give me an example of a property that you recently helped a client with that come close to the 20%? I am afraid I might be looking at the wrong properties all this time.

Thank you !!!

As a SoCal native and an investor, South Central Los Angeles is a C / C- neighborhood - depending on the area.  

Given the location, the numbers don't look bad, but they don't look that great either. 

Not much really happening in SoCal right now.

Good luck!

Thanks David !

I guess you are right to say South Central is a C neighborhood, but it definitely has gradually improved over the last 10 years.

I like this area (3rd property) as there are less competition comparing to other areas in SoCal.  

Hi Billy, 

For Vacancy, I am using one month rent, which is 8.3%.  On the repair, I am using 9-10%. 

You are looking to buy in this area too?

I would have to agree with some previous posters - I live in SoCal too and invest professionally for European retirement funds and we don't do a whole lot here as the yields are very low, and hard to tell where the market is going.

Based on owning a lot of properties in C (on a good day) class areas across the country, I often find vacancy and especially repair costs climbing much higher than expected. I also don't know how much growth South Central will see, to compare it to say SE Michigan or Metro Chicago, where the wealthier areas see huge increases from time to time, but the worse areas pretty much flatline. 

so it's only getting $1000 per 2br unit?  That's cheap- tenants must have been there for a while and rent control is keeping them below market. First question is, what is market rent?   If a unit is vacated, can you rent to better class tenants in that location?  If so, maybe worth to buy the tenants out, renovate, get better tenants and max the rental income. That may be a sensitive topic too, but trust me, not as crazy as what's happening here in San Francisco!

Thank you Amit and Andreas for your comments and advice.

Yes, the market rent for this area for 2/1 is about $1,100 - $1,200. One of the tenant is paying below market rent. It will be challenging to get the tenant out because it is in a rent control area. However, it will definitely be one of my priority to see if I can get a new tenant in. I want to be conservative with my estimate so that is why I am going with the current rent in the property and assuming it will stay the same.

@Andrew Helen - did you ever move forward with this? Do you have any other buy+hold properties in the South Central LA area? I'm keen to find out how they are doing (vacancies, quality of tenants, maintenance, etc) - because as we all know South Central is considered a ~C class neighborhood but some parts are getting much better.

@Adam Ng

Yes, we are in escrow with this property. We do have 2 other buy and hold properties in the South Central area. They are doing well and it is cash flowing at 10% + COC return. South Central is definitely not a great neighborhood but we are making a decent return on those properties. The quality of the tenant is definitely not as great as other cities, so the key in this area is screening / managing tenant.

Which area are you investing?

Originally posted by @Andrew Helen :

@Adam Ng

Yes, we are in escrow with this property. We do have 2 other buy and hold properties in the South Central area. They are doing well and it is cash flowing at 10% + COC return. South Central is definitely not a great neighborhood but we are making a decent return on those properties. The quality of the tenant is definitely not as great as other cities, so the key in this area is screening / managing tenant.

Which area are you investing?

Thanks for sharing your experience, I appreciate it! I'm getting started and looking to purchase my first buy and hold property. At the moment, South Central LA is on the top of my list, and I've been heavily researching some potential properties in that area.

You should be fine with this deal that you've locked in. Good news is your current rents are below market. I own duplexes on 83rd and Main, 2 triplex on 93rd and Avalon and SFRs west of the 110. Market rents for 2bd/1b range from 1200-1350 depending on several factors of course by my 2 beds rent for that. I manage all my props and as far as vacancy, trust me, the minute one moves out you will have 20 applicants trying to rent from you. I normally provide $50 bonus to the tenant leaving if they allow me to show the units to prospective tenants before the tenants move out. This way as the tenant moves literally the other one jumps in. Finally, look into LADWPs offer to install water meters in units where only one exists. This way in the future when one tenant moves out you'll be ready to have the pay for the water. BTW, these are my best tenants. cheers

The rents look pretty decent from what I've been seeing especially for this price point and for the amount of reno you're forecasting.   

How many days on the market before you had it under contract? How many offers were there? Let us know how it goes. Good luck with it! 

@Andrew Helen undefined

Originally posted by @Victor Argueta :

Finally, look into LADWPs offer to install water meters in units where only one exists. This way in the future when one tenant moves out you'll be ready to have the pay for the water. BTW, these are my best tenants. cheers

 I didn't know you could do that. Can you share a few words on your experiences with this? How much does this cost per unit? Thanks in advance!

inquire with ladwp for current info. If i recall correctly, I paid ~$125 per meter as we participated in a water conservation program. Normally it runs around 400-500 bucks. also the area is no longer referred to as south central, its South LA and soon SoLA. ha

this sounds like a good deal for southern CA. Do you usually purchase an earthquake insurance for your rental property?  What would the cost be?

@Elaine Lau

 What you end up getting with earthquake insurance isn't really that great of a deal when you factor all the exclusions. It has been said that you might be better off getting your property bolted instead. 

@Victor Argueta

 Thanks! That seems like a pretty good deal. Even if the installation was $500, that's still less than a year's worth of water. 

@Adam Ng

My pleasure.  Best luck with your search, make sure you understand the rent control issue in this area, it can make or break the deal if you have existing under-market renters in the property. 

@Victor Argueta

Thank you for the vote of confidence. I definitely agree with you on the "best tenant", never had any issue with any of the tenants and any vacancies were filled out immediately.  I was doing the same thing of offering the tenant some cash to allow me to show the units to the prospective tenant.  I will call LADWPs now on the water meters - great advice !!! What other areas are you investing in?

@Lee L.

We do not buy earthquake insurance on our rental. Please look up and search for earthquake insurance in the forum.  There are a lot of discussion on whether it make sense to buy it or not.  We decided not go buy the earthquake insurance on our rentals due to the exclusions, deductible and coverage limit.

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