East Los Angeles Fourplex for First-Time Buy and Hold: Decent Deal or No?

Question

Area: East LA, specifically City Terrace (NO rent control)
St. Ft.: 3,500
Beds: 10
Baths: 4
Price: $572,000
Current Rents: $4,800
Monthly Payment to seller (seller-financing): $3,500/month for 30 years
Down Payment: $30,000

Accessibility: on main street; next door to elementary school; walking distance to grocery store
Roof: replaced within last 5 years
Termites: N/A
Tenants: Long-term
Parking: No off-street parking, but that doesn't seem to make too much of a difference in this heavy-rental, working-class area.

It's obviously not going to cashflow like $572,000 worth of property in the Midwest, but at least I have $1,300/month leeway between rents and monthly payment for expenses, maintenance, vacancies, etc. So taking into account the potential for appreciation in Los Angeles (though keep in mind that this is East LA), and the fact that the seller is willing to provide owner financing so that I have to put up only $30k up-front, does this sound like a decent deal for a first-time buy and hold?

Account Closed · Answer

@Huy LyThose rules do not apply across all markets and property types. For example, if I get $3000/month rent on my SFR (which I actually do) in a market where vacancy is next to zero (which it is in the Bay Area), should I really put $1500 aside for repairs? Of course not. And as for the 1% and 2% there are coastal markets where 1% puts you in the war zones (if you can find it at all) while in the midwest, 1% puts you into a solid B or even A neighborhood. Is it the same thing?

Phil Hong · Answer

Logan A.

$3500/mo to finance $540k? Sounds like you are paying the seller about 7% interest. That's about double what banks are asking. I'm assuming you do not have a 20% downpayment to pursure traditional financing.

You need to account for property taxes and insurance. Those will be your top expenses after the mortgage. Then vacancy, maintenance, and management. $1300/mo doesn't leave much room for all those expenses.

What are the comps in this area for this type of property? Is it possible to improve the property so it appraises higher and allows you to use traditional financing? If so, do the deal, improve the property, and then refi with a bank in 6 months to bring your mortgage payment down to a more reasonable $2500/mo.

It would be a decent deal if you could get traditional financing. Otherwise at 7% interest I would pass.

Brent Seehusen · Answer

@Huy Ly

The rent ratio is 0.5% when paying retail in Orange County so anything higher than that would be considered a good deal around here.  I agree with Anish Tolia that it's completely dependent on the individual market.  East LA is a different market so 0.88% might be right at market, or it could be a good deal or it could be paying too much.  The more crime that an area has then the higher the rent ratio buyers demand to compensate for the headaches.  I have no idea what it's like in East LA.  So many areas of LA are gentrifying and a good strategy is to target these areas even though the starting rent ratios are low, because the improving neighborhood will increase your values.

Ian Cosley · Answer

A great resource for LA outsiders to find relevant information about the little neighborhoods inside Los Angeles is:

http://maps.latimes.com/neighborhoods/

...it shows how wildly Income, employment rates, rent-to-own ratios, and crime statistics differ wildly between the little neighborhoods of L.A.

My opinion  is that this sounds like a good deal to me if the place is turn key, full of long term tenants and doesn't need improvements right away. I like Phil's idea to get more profit out of the property down the road by improving and refinancing at a lower interest rate.

Good luck!

Logan Allec · Answer

Thanks, all.  The $3,500 includes taxes and insurance.

Account Closed · Answer

I dont know the LA market so cant say whats a good rental ratio for that property. But I do have a friend who bought a 4-plex several years ago in Echo Park and has made a killing on appreciation and rental growth because of gentrification.

Amit M. · Answer

This sounds solid to me IF:

1- I'm assuming tenants are paying close to market rents?  Sounds like they are stable, and if the bldg's systems are in decent shape and the bldg is not being abused by crappy tenants, it should be reasonable to manage. If tenants are significantly under market rents, then you could turn them over, but you will probably need to update the units (cash $$) to get decent new tenants and top rents.

2- if you believe that neighborhood is as @Matt R. says, it could be a great appreciation play buy and hold.

If that financing include prop taxes (about $600/mo?) and insurance (about $120/mo?), then that is decent. The trade off is that you get into an LA property with only $30k down- not an easy thing to find in CA!

interesting deal, I like it. Wish I could find something akin to that in SF :)

Matthew Nixon · Answer

That is a good resource @Ian Cosley. Thanks for sharing. It appears they need to update to the most recent census data.

Matt R. · Answer

City Terrace is actually up in the hills over looking downtown. Mostly dead end streets and nearly all single family homes. Spanish style non cookie cutter old school charmers style. Many have world class views and sort of upper class for the immediate area. Patroled by LA county sheriffs and very low relative crime stats for the area as compared. It is not close to being gentrified yet but there is little doubt in my mind it will be eventually. Personally, I would not hesitate investing in this area. It might be the last of its kind left in LA.

Huy Ly · Answer

Anish - Thanks for your contribution. It is great to know more about your market area. So could you suggest Logan to invest in this property or any advise on his numbers?

East Los Angeles Fourplex for First-Time Buy and Hold: Decent Deal or No?

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