My findings after analyzing 123 properties in Los Angeles, CA
Investor · Los Angeles · Member since 2019 · 5 posts · 2 votes
I wanted to share what cashflow looks like in a high appreciation area like Los Angeles, CA. In the video below I showcase what the calculations of 123 properties look like in a gentrified area such as Inglewood, CA. What are your thoughts on investing in a high appreciation/low cash flow area vs a high cash flow/low appreciation area?
Check out my 3min video below to see the calculations and let me know your thoughts.
https://www.youtube.com/watch?v=AP_DJSXoJ6g
These are the global values used in all my calculations:
@Jonathan Lancaster
So you're looking at SFH in LA, buying as is, assuming no forced appreciation. Just plunking down 20% and getting negative cash flow. Here are my thoughts in no particular order:
1. 95 % of properties are not deals, it’s the job of an RE investor to find/make deals
2. RE is more dynamic and complex than you’re making it out to be with these simple inputs.
3. Cash flow is not where the returns are in RE. It's a hedge that makes it so you don't lose your property. It's not a very large percentage of your ROI, especially in LA. Look up and understand the 4 wealth generators of RE. You're looking at one of them, at this point in time, not looking into the future. You're really missing a nuanced understanding of investing with this little video.
4. People usually buy SFH to live in. They are not necessarily some great investment, they are a place to live.
Cool video.
Where were you editing to show the cash flow numbers? Was that a feature that Zillow has?
@Elliot Van Nest Thanks, it's not a feature from Zillow, it's a chrome extension I've been using called cashflowexpert.io
@Jonathan Lancaster I look for multi-family fixer uppers and negotiate the price. Inglewood's best time to purchase is long gone (in my opinion) but deals can still be found, you just have to work a lot harder to uncover them.
You can also go East of Inglewood into Los Angeles and while those neighborhoods may be rougher right now, they are also in process of long term gentrification. You need to jump in before everyone is already there for the best deals otherwise you find a value add property and create a deal in Inglewood (or wherever for that matter).
Good luck!
@Jonathan Lancaster
So you're looking at SFH in LA, buying as is, assuming no forced appreciation. Just plunking down 20% and getting negative cash flow. Here are my thoughts in no particular order:
1. 95 % of properties are not deals, it’s the job of an RE investor to find/make deals
2. RE is more dynamic and complex than you’re making it out to be with these simple inputs.
3. Cash flow is not where the returns are in RE. It's a hedge that makes it so you don't lose your property. It's not a very large percentage of your ROI, especially in LA. Look up and understand the 4 wealth generators of RE. You're looking at one of them, at this point in time, not looking into the future. You're really missing a nuanced understanding of investing with this little video.
4. People usually buy SFH to live in. They are not necessarily some great investment, they are a place to live.
@Lee Ripma covered it well. SFR are the worse initial cash flow choice without a value add. Small MF is only slightly better initial cash flow without a value add. Note the word "initial".
So why has LA been such a great RE market. Case Shiller had it as #2 buy and hold in the nation for this century only behind San Fran. Even the BP location analysis that was released a couple weeks ago showed coastal West Coast cities in the middle on cash flow with an 8 year outlook (2010 to 2018, 2018 was used because 2018 was latest data). Where do you think the BP analysis would have shown for cash flow if they used 10 years? How about 20 years of this century? This is not including the property appreciation, just the cash flow would have been far above the average city if analyzing for 20 years (I am confident that it would have been better than any of the traditional zero appreciation Midwest markets). Remember buy n hold is a long term play. I would be cautious of considering it for less than a 10 year play.
This is what we typically do (it is not rocket science):
Here is an example with a long enough track to show the whole process. Duplex for $390K (2014), spent about $70K rehabbing it mostly hands off (hired out virtually all of the work), all in value at $460K. Projected cast neutral (we use conservative numbers, for example our maintenance/cap ex allocation was $500/month) at purchase (tougher to find now). Appraised at refi at $544K (which was low but refi appraisals are traditionally conservative - I believe $480K would have been closer to selling value) at 80% LTV gave us $435K so we have $25K trapped in a RE that was worth at least $544K. Still projected basically cash neutral. 5 years, market rent went up over $500/month per unit but we had the units at about $150 below market. So cash flow for us (due to charging below market rent) is about $700/month with market cash flow being $1k/month. $700 * 12 = $8.4K on my investment of $25K. These units are currently off the rental market due to a fire. One tenant will return the other we did not offer to keep. The one unit will be at market rent so $850 * 12 = $10.2K on my $25K investment (over 40%/year return on investment from the cash flow). 5 years from now what will be the cash flow? The current value of these units (after being rebuilt from the fire) is ~$690K.
I have basically provided the proven steps (granted at a high level) to buy n hold RE success in coastal So Cal. No guru fees required. Just your hard work and intelligence in following these steps wisely. One topic about wisely. I am a fan of leverage. I love RE in part due to the leverage. If I have an RE at 80% loan to value and the RE appreciates 5% that is a 25% return from appreciation on my investment. However, over leverage can doom investors. Make sure you are in position to handle a worse case scenario. To me that means a Great Recession like scenario. I know it is tempting to want to grow fast, making huge advantage of leverage. This is full of risk. At this time (Corona), there will be tenants that will be unable to pay their full rent. My STR units are both vacant this weekend unless something changes in next couple days. In the last 3 years, between the 2 units, there has been one weekend with a vacancy (in the 3 years). Having both vacant on the same weekend I thought would never happen again (in the Great Recession they were converted to LTR in the school year and STR only in the summer due to vacancy issues with the STRs). Leverage can be good, but over leverage can be terrible.
Good luck
Wow great insight and advice from both @Lee Ripma and @Dan H.! You can tell this is built on years of knowledge and trial and errors. I, too, am an investor in SoCal, except I took my small capital out state to invest, but am looking to hopefully bring it back in state soon with some partners I have made recently.
What's everyone's thoughts on the current 0% interest rate and its potential effects on higher valued markets such as LA and it's surrounding cities?
Wow great insight and advice from both @Lee Ripma and @Dan H.! You can tell this is built on years of knowledge and trial and errors. I, too, am an investor in SoCal, except I took my small capital out state to invest, but am looking to hopefully bring it back in state soon with some partners I have made recently.
What's everyone's thoughts on the current 0% interest rate and its potential effects on higher valued markets such as LA and it's surrounding cities?
We inquired with our mortgage broker yesterday. He indicated the rates are back down to where they were a couple of weeks ago after rising a little. So the recent fed lowering of rate is not yet reflected in mortgage rates to the extent that the rates are lower than they were recently prior to the fed lowing the rate.
We have our docs to our mortgage broker and can refinance when it makes sense. We have yet to evaluate which properties make the most sense for us to refinance. One of the ones with the most equity does not get refinanced because its current loan rate is significantly below what we have been able to get since purchase. The algorithm used to determine which RE to refinance will include both its equity and the rate on its current loan.
You never know if rate decreases will be fleeting or long term, so it is best to be in a position to pull the trigger when the rates fall.
Yeah, I totally agree. My LLC group is meeting tonight to discuss methods of investing locally. I live in the san ferando valley, and have been wanting to do some investing here locally, but I hven't been able to make the numbers make sense. We'll see what the near future brings with what options might come available to us.