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Los Angeles too expensive to invest for newbie ?
I live in Los Angeles and I am trying to find my first deal to buy and hold . Should I look for deals in Los Angeles or out of state ?
Originally posted by @Jonathan Taylor:
As hard as the cost of an eviction and relocation in LA is, @KL J is right. LA is very very tough cashflow market for new investors. Deals have to be made.
I just bought a fourplex in rent control and the MINIMUM amount to relocate a tenant in rent control who is protected (over 62, disabled or single mother over 3 years tenancy) is $20,450. That is a number set by HCIDLA, the oversight committee in LA for all Rent controlled areas. I just paid out a tenant last week and she was happy to get a small payday. But she was paying 824 and her unit would go for 1500-1600 in my area. After rehab I will make that back in 27 months so the first few years are tough and new LA investors need cash to get things going and stable. But being that I got the property for 725,000, when nearby fourplexes are 900-1.1, Ill get it in appreciation and market rents.
Hey Jonathan. Thanks for sharing your experience, I have a couple more questions.
1. Did you offer your tenant cash for keys or did you go through eviction process?
2. What neighborhood is your property in?
3. Is your property completely vacant or are you evicting/rehabbing units one at a time?
Before we closed on the property we spent a good amount of time at HCIDLA because of the horror stories we read here and talking to long time landlords. There was a cash for keys paper that we had to legally give the tenant when we presented cash for keys. Funny part is as a small time owner (less than 5 units) I can give 15,900 per the city but they did not print it on the sheet I had to legally give so I was stuck with 20,450. If I would have had to evict Im sure my story would have been similar to yours.
The tenant I bought out was a head case and would flip from a nice accommodating lady to spewing balls of hate at me and my wife so we limited out contact with her. Once we both signed the move out documents, which gives them 30 days to reconsider if they change their mind, we gave her the check and she left. We did not want to bother with the W-9. Sure we could write it off but the hit I will take on that is worth her out of my life.
HCIDLA has 3 tiers of buyouts.
First is less than 3 years non protected tenant is 7900
second is over three years 10,450
Last is protected and its 20,450
You are correct that it is a suggested price but the doc they sign has these 'Suggested' prices printed right on the form so no tenant would take less. It is a dumb system but that is LA landlording for you.
I purchased in Glassell Park
I had a vacancy contingency but the tenant that I bought out wouldn't leave so I was able to get 3 of the 4 units vacant at close ( one was the owners unit)
Now onto the rehab which will be a good 4-6 months depending on what we find behind the walls....
How is your process going?
@Jonathan Taylor
Wow! Geez, the city "forgot" to put the $15,900 on the sheet? Sounds like bullsht. Our tenant called the city on us when she was served eviction papers so the case manager called me trying to probe into our eviction process (she was trying to see if we violated any rules). My eviction lawyer told me that most of the city workers are very liberal aka pro-tenant so they're going to try to protect the tenant as much as possible.
Honestly for the w-9, i think you can probably still report it with the amount, tenants name, and tenants SSN (if you have it). I dont think the govt would forgo collecting taxes just because the individual didnt sign the document. As long as you have proof of distributing the funds you should still add the relocation fee as an RE expense and if you have the tenants' new address, you (or your cpa) should send her a 1099.
Glassell Park is a good area! Congrats on your acquisition. There are fourplexes that are close to coliseum listed for $600k-800k because of the low-rent tenants. If people have the thick skin to deal with the tenants and the eviction process, they can make a good deal out of those properties.
@KJ L. Yeah it is BS, through and through. I had a city official tell me that if he arrives at my property, it is the beginning of a bad day for me. Most of the folks working at the office say a variation of 'Its a bad town to be a small landlord' due to their relentless protection of tenants. Such is life though and makes me study even harder for screening criteria to avoid an eviction down the road. Like you said, if you have thick skin you can make it in this market.
I was originally looking in that area but was not able to find a deal that fit my parameters. I may be heading down there on my next one.
Thank you for the tip, Ill ask my accountant about it and hopefully can get something for it.
Now that your tenant is out, how is your process coming along? What are you next investment moves?
@Jonathan Taylor our tenants are scheduled to be out by the end of March or the sheriff will pay them a visit.
Yeah south LA is going their rejuvenation stages. We’re seeing more people move in, more bandit signs, more flipped homes and more cranes up the street. We actually host the south LA Biggerpockets meeting because this area has so much investment potential. Come invest in South LA.
As of now, we’re in contact for a warehouse in Alabama and we’re keeping an eye out for cashflowing properties in Alabama, Arkansas, Florida and Ohio. We also have to finish renovations on the duplex.
@Mark Christopher Javier and to all those who invest in out of state:
When owning out of state properties, do you title the rental property in an LLC incorporated in that particular state? If so, would you have to pay the $800 annual FTB tax fee? Curious to know what your strategies are when owning out of state properties. Any comments are greatly appreciated
@David T. Yes, unfortunately I had initially put my out of state property in an llc and had to pay the $800 ftb. I have been hearing there is a more costly efficient way when you start to buy multiple properties. I believe it's called Series LLC, I'm currently trying to understand how it works to structure multiple "series or llc" within that umbrella but also separating the liability from each other.
If any accountants or lawyer who is reading this that can give better clarification on how that works, that would be awesome.
@Mark Christopher Javier
One idea I was thinking about to avoid that $800 annual FTB tax is to title the rental property to a living trust. Granted, it may not provide the liability like the LLC but at least it's not in my personal name. Have you thought about this strategy as well or is not a good idea at all?
I also read and heard about the series LLC that you mentioned, but I think this make more sense if your strategy moving forward is to buy a lot of properties and put them in an LLC.
@Mark Christopher Javier @Alex K. Great stuff. Love to hear more about TX. How you found your wholesaler and deal. There are always property to be invested in. You just have to figure the best starting place for you.
@KJ L. Dead on. These are great notes for new investors.
@Mark Christopher Javier @David T. The whole point of the LLC is the reduction of liability and protecting your other assets including yourself. Living trusts are fine for personal property as that is more for tax benefits.
@David T. eventually I will create a living trust that has all my assets and llcs but I would still create separate llcs per property to safeguard my other assets. So a S-LLC would probably work better in my case since I do intent to buy multiple 2-4 properties in SA prior to scaling to commercial. So I do agree living trusts won't have the liability protection like an LLC. @Dennis Maynard has pointed out.
@Dennis Maynard a business partner and I flew to SA to meet with lenders, agents, and wholesalers. We drove around town and specifically identify pockets we like and what others have recommended that was up and coming near downtown SA.
As far as the deal, a wholesaler brought it to our direction which we initially decline but they ended up lowering the ask and reduce the closing cost so it could a bit better for us.
We like the deal since it was 4 units, all vacant and a complete rehab so we would attempt to implement the brrrr strategy. So far we are about 2/3 done (date of completion is first week of April). By that time we would most likely refi 75% with proforma rents out pay off hard money and potentially pull most of our inti capital out. We are 10k above on our rehab so we don’t anticipate getting it all back out even @ 75% but it was our first deal and we understood the risk of potentially having to keep the money in there.
More lessons to be had but we are ready to tackle it on.
Originally posted by @David T.:
@Mark Christopher Javier
One idea I was thinking about to avoid that $800 annual FTB tax is to title the rental property to a living trust. Granted, it may not provide the liability like the LLC but at least it's not in my personal name. Have you thought about this strategy as well or is not a good idea at all?
I also read and heard about the series LLC that you mentioned, but I think this make more sense if your strategy moving forward is to buy a lot of properties and put them in an LLC.
I see many investors from California form and use the Delaware Statutory Trust, rather than the LLC or Series LLC. You are charged the franchise tax (minimum $800) PER LLC or "series" within a Series LLC. The DST is a trust that is formed pursuant to the laws of the State of Delaware, and is an excellent option for Californian investors. Like the parent Series LLC, the DST allows for anonymity and lawsuit protection. The DST also works with the individual child series structure (just like a parent Series LLC), so it is infinitely scalable. In other words, the structure is about the same as the parent Series LLC, in that there is a parent that creates individual child series.
The reason this isn't referred to more often is that the costs of establishing the DST is a bit higher, and more complex than the LLC to form so DIY isn't as realistic. But the DST can arguably be the predecessor of the Series LLC. If you have more questions just ask.
This isn't legal advice, just my opinion as a real estate investor.