Los Angeles, CA · Member since 2017 · 6 posts · 4 votes
Hey BP Folks!
I have started to play around with the Calculators and I don't know if I am doing something wrong, but how does it make sense to invest in the Los Angeles area? I am using a listing for a triplex in North Hollywood for this calculator posting and, based on what the Calc is showing me, the owner would not start cash flowing until around year 5 - and that is even with a 30% downpayment on the property! Am I missing something crucial to investing in a market like Los Angeles or any other coastal metro market?
Ideally, we would want to get into a small multifamily unit, 2-4 units, and live in one of the units but I don't know how that makes sense numbers-wise for anyone.
Rental Property Investor · Prairie Village, KS · Member since 2015 · 2k+ posts · 2k+ votes
6y
@Matthew R
I’m not able to click on your link, however you’re likely missing several things:
1. Most deals are terrible. The job of an RE investor is to find or make a deal. 95% of properties are not a deal. Learning this made me feel much better about dismissing most properties I look at.
2. You're likely missing how much appreciation you can force in LA and that most ROI is from forced appreciation rather than cash flow. Cash flow does come later but we're not in a heavy cash flow market.
3. Watch out for tenants rights investing in LA. Until you understand the Rent Stabilization Ordinance (RSO) you should not be buying MF real estate in the City of LA or any of the local cities with similar policies, it’s most of them.
4. The returns on this deal might not work for you. There are amazing deals in LA and money to be made here in RE.
Rental Property Investor · Prairie Village, KS · Member since 2015 · 2k+ posts · 2k+ votes
6y
@Matthew R
I’m not able to click on your link, however you’re likely missing several things:
1. Most deals are terrible. The job of an RE investor is to find or make a deal. 95% of properties are not a deal. Learning this made me feel much better about dismissing most properties I look at.
2. You're likely missing how much appreciation you can force in LA and that most ROI is from forced appreciation rather than cash flow. Cash flow does come later but we're not in a heavy cash flow market.
3. Watch out for tenants rights investing in LA. Until you understand the Rent Stabilization Ordinance (RSO) you should not be buying MF real estate in the City of LA or any of the local cities with similar policies, it’s most of them.
4. The returns on this deal might not work for you. There are amazing deals in LA and money to be made here in RE.
Realtor · Arcadia, CA · Member since 2014 · 145 posts · 46 votes
6y
@Matthew R Boudia Depends on which area you are looking at. I would say most and most I meant by 98% of deals wont work out a cash flow in LA...lol. But it can work and its out there!
Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
6y
First off, that calculator is assuming 50% of gross rents goes to operating expenses. In NOHO and in So Cal in general, you should be able to operate at lower expense margins than that. Keep in mind that the 50% rule is NOT a rule at all, it is merely a guideline and I wish we could jump in Doc Brown's Delorean with Michael J Fox and go back and rename it the 50% GUIDELINE. So many make this mistake. It was meant as a quick back of the napkin analysis without having to dive into each line item and it was intended as an average, spread over multiple units, all over the country. But we know that the real estate market is NOT National, it is local and every state and every county, will each area of each county will have different price points, values, costs, etc.
Here in the LA area, you should expect operating expenses to be in the 30%+/- range for your price points, plus vacancy factor and then you need to deduct cap ex. All that together should get you in below 50%.
The other thing I notice is that your gross income looks low, does that factor in no rental income for your unit you will live in? If so, in your analysis, you need to plug in market rent for your owner user unit as when you sell it, it should be rented out and part of the valuation of the property.
All that said, like others mentioned, deals that cash flow in our area here are very, very tough to find, more often, they are created through great negotiations, hard work finding the right property and motivated seller, and then forced through value adds and rental increases and other added income streams.
Cash flow in So Cal is NOT your only source of income from these investments, appreciation (forced or otherwise), tax free cash out refi money, etc all come into play as does amortization, depreciation, etc.