Property Analysis BRRR Los Angeles

11 Replies

Here's the breakdown...
Purchased my 2nd property for $645K in an area of Northridge here in Los Angeles.
Comps in the area are anywhere between $850k-2M.
Beat out 15 other offers.
Place needs a LOT of work but I can handle it.
Put down 20% on the property.
Really love the neighborhood as a house I can fix up amazingly and live in it myself with my future family, I'm 28.
Considering putting in around $150K-200K in upgrades.
Considering all I'm going to do to it, I'm a Contractor myself, I feel I could get it reappraised for anywhere around $1.2-1.5M.

I'd love to then take that money out and re-invest in some more property, possibly a bigger multi-family..
Anyone in Los Angeles able to give me some advice and maybe answer some questions I might have as I continue to go forward with this? I'd appreciate any feedback!

Best,
Jamie

@Jamie Garcia

The main issue that I see here is the price of loan you will be looking for. I used to originate mortgages and just remember how difficult and expensive it can be getting a loan over the Fannie/Freddy limit can be. Typically the limit is $417k but in certain areas that are very expensive, they will allow a higher limit. I just looked up a random address in Northridge and looks like the limit there is $625,500 for a 1 unit dwelling. What this means is if the property is worth $1 billion dollars, you can only take a loan of $625,500 and stay within Fannie Mae guidelines. If you go for a jumbo loan, you can get more out (possibly, jumbo cash-out has their own guidelines but the LTV are generally not very generous and the rates are much higher). Another alternative would be a HELOC to tap the equity above and beyond the $625,500, but the guidelines will be dependent upon the HELOC company.

I am in a similar boat as you, no family yet but planning that route.  My personal strategy is to keep my costs as low as I can until I need to move my kids into a good neighborhood with great schools.  They don't go to school until 5 - 6 years old, and I have none on the way as of yet so I have another 6 - 7 years before I need to drop that kind of cash on a personal home.  I own 4 homes, but rent my current residence.  Had I bought my "family home", I would have tied up hundreds of thousands of dollars in equity that I could have used elsewhere.  I would not have been able to buy these rentals or start my eCommerce empire.  A personal home is a poor investment (strictly speaking from a business perspective) as you can achieve the same results (a roof over your head) for MUCH less cash and monthly cash flow.

Just my personal opinion, but fix the place up and sell it (maybe wait the 2 full years so you don't have to pay taxes on the gains) and reinvest it elsewhere.  The money you make from those investments can fund your future home purchase.  If you aren't confident in your ability to invest the money and earn a good return, then keep the house.  My gut says you know what you're doing though.  Not many 28-year-olds can plop down $150k to buy a house haha i'm you got this :)

Oh, by the way, this is the URL for the loan limit look up through Fannie Mae.

https://onlinegeocoder.fanniemae.com/loanlimitgeocoder/pages/Online.aspx

Hi @Jamie Garcia ,

For primary residences it's not a big deal, but for SFR investment properties and jumbo loan amounts, @P.J. Bremner brings up some good points in general. Because of that stuff, there is exactly one jumbo investor that gets >90% of my jumbo investment property business. If you don't fit within that jumbo investor's guidelines, it's as P.J. described. 

If this property is a MFR (you didn't mention unit count), the above will be a bit different.

@P.J. Bremner I really appreciate all the feedback!
I'm fairly unfamiliar with some of the points you brought up.
Your saying I wouldn't be able to implement the BRRR strategy here? You don't think it would work?

@Jamie Garcia

Where there is a will, there is a way. The point I was trying to make is that BRRRR strategy is much more difficult to pull off in SoCal. For example, the first house I bought back in 2012 was $250k and had a mortgage PITI (including PMI) of around $1,800. I used FHA. Later, I refinanced to conventional down to about $1,460. The house would have rented back then for around $1,900 and today in the current market would rent for around $2,100. Here is how it would break down, using previous numbers when the market was great and compare it to current market conditions:

Previous Market:

  • $250k purchase price
  • $1,800 Mortgage
  • $1,900 Rent
  • $100 net without ANY OTHER EXPENSES (recommendation is 50% of rents go towards expenses)
  • If we use legit numbers, I would be lucky to only lose $700 a month but most likely would lose more, especially with a property manager

Current Market:

  • $450k current ARV
  • $1,460 mortgage (this is with a $240k mortgage payment - that's almost 50% of ARV)
  • $2,100 rent
  • $640 net with no other expenses
  • Using 50% rule, I would lose close to $300 per month + whatever property management would cost

If you do all of the management yourself and handle all repairs yourself, you can make a small profit. Based on the current market, I would have had to buy a $450k house for less than $200k in order to get numbers that are even close to reasonable for a BRRRR strategy. Keep in mind, this is in POMONA lol!! For those of you who don't know Pomona, it is not the best neighborhood in SoCal. In the northern part of the town, it's much better but definitely B- to C class area. Southern Pomona has lots of gang violence and pretty high murder rate. If I did the numbers in a decent neighborhood, you can raise the price by nearly 60% but only get an extra 10% - 20% in rents, so the numbers are even worse! BRRR is difficult to do in SoCal, but it is possible. Either you need to find a house at an absolute steal, or you need to find a way to get more cash flow from your property in order to get good numbers. I have yet to find a way to steal homes, so I've worked exclusively on increasing cash flow in order to have rentals in SoCal. Best of luck to you, I hope this helps! :D

@Jamie Garcia Love it man! Keep it up. Excellent strategy.

One thought to consider: You should definitely look at bigger multi-family but instead of just looking at flipping options you should consider cash flowing the place by renting it out as a short-term rental (which has been incredibly hot in the LA market lately).  These short-term rentals have been significantly outperfroming long-term rentals in the owners I come across in the area who had previously been renting out as a long-term rental.

If you go down this route, your challenge might be handling all the additional work, but I have a number of professionals in the area who are still getting investors excellent guaranteed returns without the hassle.  

If you are interested in exploring further, feel free to direct message me or give me a call.

@P.J. Bremner thanks for all the information P.J. I really do appreciate it. My plan is to first work on the back unit and add some SQ FT to it and get the front house cleaned up and ready to rent to help out with the mortgage.
Then finish fixing the back unit and when I'm ready and have enough money move the renters from the front house to the back house.
Then do my thing to the front house and get the house looking like I want ready for me to move in.

Being a contractor I know I can get that house to a 1Mil+ validation.
My mortgage is going to be about $2400 with the recent interest rates going up last week a 1/2 % point.

If I were to refinance after all the repairs are made, what do you think APPROX doesn't have to be exact... would be??

My plan would be to pull out the equity and continue to build my portfolio. As I mentioned in the first post, I'm going to continue to work on my construction business.
If i can save up enough I wouldn't pull out the money on the equity.

Originally posted by @Jamie Garcia :

P.J. Bremner I really appreciate all the feedback!
I'm fairly unfamiliar with some of the points you brought up.
Your saying I wouldn't be able to implement the BRRR strategy here? You don't think it would work?

What you described in your opening post is the perfect recipe for: a flip!

Why not a keeper? Because, unless its revenue becomes close to $8,000/m, how will it cash flow?

You can NEVER have a BRRRR strategy that allows for a negative cash flow once leveraged.

Similarly, if you're saving your own new deposits every time, then THAT'S not BRRRR either!

Basically, anything that gets less than 1% gross rent per month will likely NOT suit BRRRR! My 2c.

@Jamie Garcia

I hate to do this to you, but you're better off asking a mortgage specialist that is familiar with those sizes of loans. I was not in the mortgage industry long enough to have exposure to multimillion dollar homes and dealing with jumbo loans. Typically when someone inquired about jumbo products, I would do my best to steer them towards a HELOC product and briefly go over the numbers for a jumbo loan. Then they heard the rates for the jumbo product, they often would withdraw from the conversation lol they are just that bad (the ones I had access to).

On the flip side, I would much rather offer you an alternative that may interest you rather than doom and gloom lol.

So in southern California, the rent to price ratio is a joke.  Most people quote the 2% rule as a good deal, but it's virtually impossible through traditional methods.  That means you either:

  1. Find a non-conventional method that can achieve that type of return
  2. Go somewhere else where that kind of return exists

When I first set out, I only had enough money for FHA loans. I bought my first place with FHA and figured out a way to get 2% out of a SoCal home. Since this is most likely not something MOST people are capable or willing to do, then I suggest the latter option. You can find a $40,000 duplex in Ohio that will rent for $800 - $900 total. If you figure 50% for expenses, you still make a very healthy return on your money for that. The flip side is that you shouldn't expect your $40k property to be worth much more than $40k anytime soon. Your $1M home will never cashflow the way you want it to, but it MAY go up in value to $1.25M within a few years. SoCal is a market that certainly makes that possible. I guess you just need to pick your poison :P

@Jamie Garcia That's a very creative approach.  

One thing to consider is that if you are planning on living on the property, you will probably have to handle all of the rental property management duties yourself.  Oftentimes, property managers do not want to deal with a place that the owner lives at as well.  That is just the reality.

If you are cool with that, then I believe your strategy is certainly adequate.

However, if not taking on another second job is important to you, it might make sense to rent a place nearby and get a property manager to rent out the property for you (with the added benefit of now having an additional unit in the property to rent now that you are not living in it).

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