Pros/Cons of Los Angeles?

Question

I (25) live in LA with my parents and am chugging along at work saving up money for whenever I figure out what I want to do with it. Recently, my uncle (who owns a few condos near his businesses that he rents to employees) called me up and said he's willing to go 50/50 on an investment property with me. Thus begins what could be the most important financial decision of my life.

Between then and now, I've started reading a few books and listening to a few podcasts to get some ideas. But at the moment ideas without enough background knowledge is all I have. Being in LA my entire life, its sort of the elephant in the room for me lol. So I ask the more experienced folks, what are pros/cons of Los Angeles?

Jon Schwartz · Answer

Rajan,

You're going to get a lot of nay-sayers poopoo'ing LA real estate -- like the gentleman who has already commented. Please know to take any advice from out-of-staters with a huge grain of salt. They really don't understand real-estate investing in LA. It's a whole different beast.

LA is unique in many ways: an extremely constrained inventory, an extremely high gross rent multiplier (GRM) in most submarkets, a rent control ordinance, massive barriers to entry in both cost and permitting.

All of these can go under "Pro" and "Con" category depending on how you approach them. For example, the high GRMs mean property is expensive -- but it also means that converting a garage into an ADU will produce an ROI like you just don't see in other parts of the country. Or rent control: most out-of-staters see it as a bane that no landlord would willingly subject himself to, whereas seasoned LA investors know how to use the ordinance to their advantage.

I would say this: given your age, current living situation, and that offer from your uncle, it comes down to your income outside of real estate. If you have a good job/career that you can rely on for income for the next decade or so, definitely buy in LA.

Invest in a less expensive, but gentrifying submarket in order to cashflow. Your equity growth over the decade will be substantial and will outweigh any trickle of cashflow from the Midwest, no question.

Or house hack in a nicer neighborhood. The financials might be more difficult to work out with your uncle, but maybe part of your 50% can be the property management of the asset. House hacking will allow you to move out of your parents' house without having to pay typical LA rents. And again, in ten years, you'll have substantial equity in a grade-A asset.

What LA isn't great for is immediate cashflow. If you're just looking for an extra $100/month, look to the Midwest. But if you have a more longterm view, I'd stay in LA.

Best,

Jon

Shiva Bhaskar · Answer

One thing to add to this discussion: We have a net of highly affluent people (over $200K) moving in, and poorer folks (under $50K) moving out. I am not saying this is good (it's not), but I think it sheds some light on the trends here. I need to find the citation, but have seen this a few times.

In Los Angeles, there are quite a few people making over $100K or even $200K who are still renting, and if you go further down the income chain, many more are renting. Heck, in this city, even Section 8 is a very strong play if you buy the right property and find the right tenant. It's got it's pros and cons, like all markets.

Dan H. · Answer

Pesky facts part 2:

2010 to 2019 CA had the 3rd largest population increase (2.25M) only behind Texas (3.85M) and Florida (2.67M).  No other state had over a million increase.  CA therefore had over twice the population increase for the past decade than the state with the 4th highest population increase.  Because CA population was already so high, this increase as a percentage/rate was not that high.

Note when it comes to housing and housing shortages, the number of people is a bigger factor than the rate of increase.  For example a state with a low population like Wyoming could have 10% population growth and would need far less additional housing than CA with a 1% population growth.  CA would have a housing shortage even it the population declined by a couple percent over the next decade.  This is especially true in the coastal large cities (SF, LA, San Diego, OC, San Jose, etc.).

Los Angeles has a housing shortage and will continue to have a housing shortage for the foreseeable future.

Charles Renn · Answer

Hi Account Closed, thanks for sharing your situation and interest in investing the LA market. It's great you have support from your family not only in finance but experience. Let me start by saying that investing in SoCal has many benefits, and also some drawbacks.

First, appreciation is better here than most places in the US. You'll find that the cheap money (low interest rates) today will pay off in just a few years when you wealth in invested in real estate that grows about 8% annually, about double inflation.

Second, Los Angeles is your home. Having an investment close to home means you can manage it directly or even live in one of the units, aka househack. My clients find this to be the best option since you can qualify for a low down payment and use your cash to rehab or save for your next property. After 1 year, you can move out, rent your unit, and use the money in the bank to find your next property.

Now some drawbacks. Due to high property prices, it's hard to cash flow from the beginning. It's not impossible though. Tenant laws are strict in CA as well. However, the moratorium is about to end Oct. 1st, and if you househack you might be able to evict at least one tenant for your own living space.

I hope this helps [Solicitation Removed by Moderators]

Will Barnard · Answer

Account Closed - As you can see, you will get OPINIONS from many on both sides of the fence. The out of state members will persuade you to invest out of state and claim to know the on goings of investments here. Take that with a tiny grain of salt.

@Jon Schwartz nailed it in his response which I have reiterated here. There are many pros and cons to investing anywhere, not just CA. It is SOOOOO common for out of state members to toss in the population decline (net migration). Mathematically (which is the greatest importance in real estate, with location, location, location being a close second, 200k net loss in population of a total 39.7M is less than 1/2 of 1% of the population. Hardly anything to get your underwear in a twist over.

Investing locally where you have boots on the ground and limit the need to rely on others for your investments is a strong positive for investing in your own backyard. Others laid out many of the pros and cons so I will not repeat them but offer you this: Find a duplex (or a single family home with a detached garage) and purchase it with your uncle. Live in one unit paying rent towards the partnership and collect rent from the second unit. In the SFR with detached garage situation, convert the garage to an ADU and live in that and rent out the main house. Your cost to live will be very cheap in this situation all the while pulling tax deductions for your W2 income and begin building long term net worth with market appreciation, amortization (principle paydown from the tenants) and over time (likely not the first year or more, but soon after) cash flow - monthly income.

One of the best investments you can do when starting out in my opinion. Learn your market and strive for the best deal at acquisition as possible. Then force appreciation through repairs/upgrades/ADU and reap the benefits of CA's high RE appreciation. Over long periods of time (decade plus), it will out perform any other state.

Tony Kim · Answer

LoL, hilarious how you say let's stick to the topic but bring up unfunded liabilities from the public endowments. And you also bring up so-called low COVID utilization.

Like I said in my original post, I only invest in LA because I live here. If I lived in Texas I would invest in Texas. But when someone posts something that outrageously incorrect, I feel compelled to point that out. It's amazing how a false narrative can be perpetuated for so long. No need to get so defensive. We're all here to learn. :)

Rick Albert · Answer

So I invest here in LA and have helped many clients do the same.  I also manage a Facebook group of Landlords with over 300 members.  Here are some thoughts:

Cons:

It is higher priced market so the barrier to entry is a little more difficult.

Rent control puts in some limitations.

Very tenant friendly and frankly the government doesn't care about us.

Pros:

You are dealing with bigger numbers, therefore bigger returns in the long run.  A 3% increase in rent on a $3,000/month rental is better than a 3% increase in rent on a $1,500/month rental.  It would require more rentals in the midwest to get similar cashflow than it is here.  I have a client who has 8 doors and pulls in easily over $100K a year.  You would need way more doors in the mid west to accomplish this.  It is easier to manage 8 doors than who knows how many you would need in the other markets.  Plus once the mortgages are paid off (which would be paid off by the tenants), you will have unlocked a very large amount of money each year.  I'm projecting over $100k a year off of my two properties later on in life as I get closer to retirement age.

Because of rent control, this is keeping inventory low.  This is for two reasons.  The first is some landlords would rather invest out of state, therefore NOT creating more units to rent out.  The second is it actually incentivizes tenants to stay put because if they move, they will most likely be paying a larger premium.

Definitely an appreciation play.  LA is expected to appreciate much better than other markets in the mid west.  I can show you proof if you would like using data.

More people are moving out of LA County than moving in.  HOWEVER, the data shows that the majority of people moving in are coming from areas like San Francisco and New York.  These markets are actually more expensive than LA, and infers that people with money are moving here.  This could result in better, more financial stable tenants over the long run.

There are a wide variety of markets to choose from, which makes things interesting.  I rented out my ADU in the Valley for $1600/month (includes water) but I have a client on the west side who rents his out for $2,150/month.  It cost the same to do the garage conversion, so his cash on cash return is much great (granted he bought his with it already built).

There are multiple markets to consider depending on your goals and finances.  This includes going into Ventura County.  I have clients who invest/house hack in a variety of areas with a variety of results.

Shiva Bhaskar · Answer

HI Rajan, we invest locally in LA (buy multifamily properties). Below is a quick summary of the pros and cons

Pros:

1. Very high long term appreciation. This market is hard to build in and heavily regulated (rent control etc), and has a large population. That means rents tend to grow over time. If you want to build long term wealth, this place is fantastic.

2. Favorable property taxes thanks to Proposition 13. This drives the appreciation in part, that I mentioned in #1

3. Easy to sell: There are an endless supply of local and international buyers for every property, from condos to huge apartment buildings to retail centers.

Cons:

1. High purchase price: This means it takes longer to get started.

2. Very regulated: You'll need to learn about various rent regulations and rules, and evictions are very tough.

3. Incredibly competitive: Because this is a strong place to invest, you won't be the only one bidding on properties. You'll have to fight for it.

Will Fraser · Answer

Hi Account Closed, welcome to the Biggerpockets forums!  I don't have a lot to offer here, so I'll just throw in my 2 cents and leave the major meat for the LA pros.

The key issues with Los Angeles are 2-fold- It is situation in California, which is both currently toxic to . . . wealth(?) and eager to become more toxic to wealth(?) as it appears to an outsider like me, and to the hordes relocating out of the state.  While I recognize that California will likely always grow, or at least not shrink, the fact of the matter is this:  money goes where it is treated best.  This happens on an individual level, institutional level, and everything in between.

- LA is a cyclical market (as opposed to being a linear or hybrid market).  Therefore, when you are investing in a cyclical market you are truly banking on the value of the underlying property increasing, which it does . . . until it doesn't.  Due to a relatively high cost of entry and cyclical instabilities many savvy investors look for linear or hybrid markets across the country to deploy their money in, thereby creating a sort of Arbitrage . . . you live in a high-income part of the country and deploy profits from income into real assets in markets that cashflow well in different areas.  It's a beautiful thing!

Those are my thoughts, imperfect though they be

Bruce Woodruff · Answer

Except that only an estimated 9% of that $$ actually went to Covid related issues.

Add to this the $200,000,000 in unfunded liabilities due to (largely) the CalPERS dilemna. Cali is so upside down it ain't even funny. Stop comparing it to other states, lets keep it all about Cali.

Look, dude, if you love it there, bury your head and enjoy. I and many others have left or are going to. 'To each their own' as they say.

Over and out.

Pros/Cons of Los Angeles?

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