First Investment - Los Angeles

[Bruce Banner]

Hey all,

I’m relatively young (30), and in the fortunate position of having the capital to afford a $1M - $1.5M mortgage. 

I live and work in LA, and I’d love to know: for those familiar with the market, what would you do in my position? Stated another way, what do you wish you had done at my age (in this market)?

Based on some very cursory research (Zillow) it looks like I could afford a decent duplex (and maybe a triplex) on the east side (Silver Lake, Echo Park, Atwater, etc.). The same is true for a nice SFH (2/2). Options are more sparse and worse on the west side (Venice, Santa Monica, etc.).

My general understanding is that I’d be doing so mostly for appreciation — cap rates are going to be very low in this market. I’m fine with that, and I like the idea of getting a home now, living there, subsidizing it to some extent (via either a tenant or roommate), and then moving out/renting fully in 5ish years when I need more room.

I’m just beginning my real estate journey, and I’d really appreciate some quick takes. Generally, I like the idea of getting an asset now and paying into it vs rent, but I also know this market is nuts + LA is a tough market. Maybe I should just invest my money elsewhere. 

Thanks!

[Arie Van Gemeren]

I've been looking at LA for a while. 

So I think in markets like LA, or my own SF Bay Area, cap rates are low but that's also because in-place rents are low (because of rent control), and a lot of buildings have a lot of embedded upside. Rent control is not fun, but it has some unexpected benefits - it shrinks available supply of housing, which drives up market-wide rent levels and means that WHEN a tenant flips you reap the benefits. So if you're buying long-term, and you are disciplined enough on your entry you could stand to do really well. Markets like LA are not (in my opinion) going to go away. Just no way. Same goes for the Bay, IMO - you don't have the confluence of academia, industry and money that these places have. I don't really care what people say - they are always going to be top-tier places, with standard ups and downs - but these are world-class and world-famous, locations that will continue to attract talent, money, and immigrants. Sacramento is working hard to mess it up, but things could be way worse here. 

There are some serious legitimate negatives to investing in California (can't speak to LA precisely, but I imagine some of this looks the same there). For one, our property tax regime is rough (as compared to Oregon, where I also invest). Secondly, I don't know LA transfer tax laws but it's shocking the price you pay to enter (or exit) an investment in the Bay Area (and I think LA is not THAT different). Some places have lovely city taxes (or county taxes) which are a % of your income from the property (Berkeley, for instance, is like almost 2% of gross rent consumed by city taxes per year). So know all the tax impacts and ramifications because that can catch you by surprise. My first EVER deal was a 4-plex I tried to buy in Oakland and was caught off guard by how much the transfer tax cost me. There was also a 90-year-old woman living in one unit paying ~ $700 / mo in rent, and I didn't love the business model of ... you know ... waiting for her to go. So we dropped out of that deal. But somebody else bought it, and 2 years later they flipped it for $300k+ because that woman moved along and they remodeled that unit and were getting close to $3k per month for it. So they reaped that benefit.  

All this being said, LA isn't going anywhere. Personally, I'd bet on owning property in LA long-term, if you find the right opportunity. Everything I just described scares some people away, but if you figure that stuff out then you operate at an advantage in the market. Just my 2c. All that being said, I did my first deals out of state ;) so you have to figure out where your advantage is and go for it.