Buying a Duplex or Triplex in Los Angeles?

Question

Hi,

I’m looking for a Duplex or a Triplex in LA as my first investment. I would live in one of the apartments and then rent out the other one(s).

How does one go about it?

What would a “good” deal look like?

Is it even wise to look for something now with all the uncertainty in the market because of Covid? (Renting out, evictions , etc.)

I’m new to BP. I’ve never invested in properties before. I’m still learning a lot and reading as much as I can. Anything & Everything is useful. Please share your wisdom!

Jon Schwartz · Answer

David,

Welcome to the party!

I'm an investor, a duplex-dweller, and also midway through getting my salesperson license. I've completed the courses, have mailed in my application, and now I'm just waiting to schedule an exam. LA's insanely backlogged; I'm hoping to sit for the exam by the end of the year!

What you're describing is usually called househacking. One iteration is buying a 3- or 4-bedroom house and having roommates; the other is buying a multifamily property and having tenants. I prefer the latter. I househacked a duplex last year, and I'm extremely happy with the investment.

One goes about buying a duplex, triplex, or fourplex almost exactly as one goes about buying a single-family home. Any property with 4 units or less is considered residential, and all residential properties are financed the same way. What that means for you is: get preapproved by a lender, browse Redfin or Zillow for multifamily listings, inquire about interesting listings by way of an agent (or yourself when you're licensed!), and eventually start making offers.

The big difference between buying a multifamily and a house is in the numbers -- and this is where we start figuring out what a good deal looks like. Unlike buying a house, your mortgage and expenses will be offset by rental income, so you'll effectively be paying much less to own a house or even rent an apartment in that neighborhood. (I pay less per month than my tenant and significantly less per month than people who just bought a house a block away.)

That's the reasonable expectation: to significantly lower your cost of living. In Los Angeles, you really won't find a multifamily that will cashflow while you're living in it. The ideal property, in my searching, is one that costs less to own than you'd pay in rent while living there *and* will cashflow when you move out. That's a good deal.

What's really powerful about househacking is that you're earning outsized principal paydown and appreciation relative to your monthly out-of-pocket. It's like double leverage. You're paying the equivalent of rent, but you're getting a tangible net worth boost every month in the form of principal paydown and you're reaping the benefits of longterm appreciation on a large asset. I could go on forever. Househacking is the bomb.

Anyway! I just finished making a calculator spreadsheet for figuring out the numbers on househacking -- literally, I was up to 1 AM last night double-checking all the formulae. Find a property, enter basic information from Redfin and Zillow, and the calculator will tell you monthly out-of-pocket, when the property will cashflow, longterm projections, etc. Send me a colleague request and I'll send you the spreadsheet. (BP members need to be colleagues in order to send each other attachments.)

Regarding your timing, I think now is *not* a great time to buy. Nobody reasonable is forecasting a housing crash; that's not the problem. Rather, there's just a ton of uncertainty with any purchase right now. Tenants have a lot of leeway through Jan 2021 at this point, so you shouldn't buy a property unless you have enough reserves to survive no rent collection for the next 4-6 months, minimum. The other scenario in which you should consider buying now is if the cost-of-living savings will be significant. Otherwise, take your time, learn the market, and we'll have a clearer picture of the future later this year.

Regarding multiple co-applicants on the loan: could you be more specific about your scenario? Are you and several buddies planning to buy and occupy the property together? Or are you aiming to have a more affluent/higher income party (like a parent) co-sign with you for their impact on the underwriting? Or something else?

Looking forward to helping you with this! Househacking is awesome, and the younger you get started building that foundation of equity and wealth, the better you're setting yourself up for your life as an investor.

Best,

Jon

Elise Marquette · Answer

Have you gotten preapproved yet with financing? Generally that's the first step. Many realtors won't even take you shopping until you have the preapproval. To get preapproved, a lender will review your credit, income, debts, and assets to determine what purchase price you're looking at and what your monthly payment will be (roughly.) Additionally, once you're preapproved you can put in an offer on any properties that will work with your numbers.

As far as it being wise to get a property now- I say if the right deal comes across your desk then there's never a bad time to make an investment that will make you money. Yeah property prices might go down in the next year or so, but that doesn't mean you should hold off- no one can predict the future. Maybe they won't go down. Who knows? In any case, what I'm trying to say is don't let a good opportunity pass you by because "the market" seems crazy right now. Jump on it if you happen across it.

Unless you're buying cash. Then of course, you don't need any financing at all

Clarence Johnson · Answer

@David Leibman the first step would be pre approval, 3.5% FHA loans are what we commonly suggest for first time buyers looking to buy a multifamily property.  After approval link with an agent that knows multifamily and your mkt (not just geographic but LA  rent control laws).  A good deal for me would usually have you paying mkt rent to own or worst case scenario no more than $200-300 more than mkt rent (for the unit you occupy).  The closer you are to mkt rent the sooner you can but again and rent your first property with cash flow.  Covid is making us tread even more careful with multis when it comes to inheriting and vetting tenants.  I think if the deal makes since and risk can be mitigated then buying now makes as much sense as ever.  I spoke to a listing agent for a duplex this evening and the section 8 tenant is only responsible for $250ish of the $1300 rent and the rest is subsidized.  This is an example of risk mitigation, the worst thing that can happen is that this tenant gets a job or is promoted and their portion of the rent will increase.  Study the mkt, ask questions, shoot your shot.

David Leibman · Answer

@Elise Marquette

Hey Elise, thank you so much for replying!

If I am going into a partnership for my first purchase with a few people, do they all need to be approved as well?

My current assets won’t get me much approval however the people I’d be investing with, combined, would help me get that first property with a higher sticker price than I could afford alone.

Buying a Duplex or Triplex in Los Angeles?

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