Real Estate Newbie in LA Looking for Direction

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Real Estate Newbie in LA Looking for Direction

Geo Tan
Real Estate Broker · Los Angeles, CA · Member since 2016 · 112 posts · 34 votes

Hello!

I have just recently started to look into real estate investing and am learning as much as I can. Let me explain the situation I am currently in and hopefully anyone here can help me with any advice they can offer which is greatly appreciated!

**The next 3 paragraphs will explain how I got to where I am today in terms of getting started on real estate investing. If this does not interest you, please feel free to skip the next 3 paragraphs!**

I was fortunate enough to have my father purchase a two bedroom condo in Las Vegas with both our names. I wasn't really hands on with that unit since we had a property manager do the heavy lifting. I just recently was able to sell that property for roughly $200k. I am currently in the contract signing process but I would like to do a 1031 to use this profit to dive into the world of real estate investing. I currently live in LA (Ktown) and have been learning as much as I can through Bigger Pockets and any other resource I can get my hands on.

I would like to start with a buy and hold approach and make some income from renting the units out. I have a full time job currently so I'm not in dire need of income. Through the little information I have learned so far I set my goal as "Earn a steady $2,000 per month of steady income through multi unit properties (duplex, triplex, quadruplex) in LA by June 30th". I know how ridiculous that sounds but I was lacking a lot of researching and learning at that point so that was what got me started.

After some more research I learned that it was extremely difficult to make profits through rent in LA. The more I researched, the more I realized that the 2% or 1% rule cannot work with most of the properties. If anything I was lucky to find a few that would meet the 0.5% rule (if that exists). So now I have expanded my search area to the greater Los Angeles area.

Thank you for taking the time to read this long story. I hope that will answer any questions any of you might have in terms of the history behind where I am currently at.

So bottom line is, I have now amended my goal to "Earn $2,000 per month of profit through multi unit properties (duplex, triplex, quadruplex) in California by June 30th".

First of all, please do let me know if this is a horrible goal to start off with. I am still very green to the real estate world and have yet to fully grasp all of it yet.

Second, I will most likely start with a $200k cash for my previous property I will be selling which I will do a 1031 with to start my real estate venture. So with a loan, I'm leaning towards a spending budget of $500k - $1.2m for a property (or properties).

Well that's about as much information as I can share I think...

So any tips or guidance in terms of the direction I'm going would be greatly appreciated! Please feel free to ask me any questions you may have and I'll respond back as soon as I can. 

Thank you again and hope everyone has a great day!

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Logan AllecBusiness Member
Accountant · Los Angeles, CA · Member since 2014 · 1k+ posts · 980 votes
10y

@Geo Tan, if you're in your 20s and currently renting, house hacking is a no-brainer.  If you do nothing else in real estate, you will have succeeded by getting into a Los Angeles fourplex as a young man with only 3.5% down. Assuming the rents cover your expenses, in 30 years when you're in your early 50s and the mortgage is paid off, you will be sitting on a multi-million-dollar asset that cash flows thousands of dollars per month at the cost of a measly $20k or so out-of-pocket when you were 23. I can't think of any better way for young people with limited resources to prepare for their future so early on in life with so little cash out-of-pocket. Run the numbers and see for yourself.

Also, remember this: you're young. Your priority at this point in life should be setting yourself up to build your balance sheet, not necessarily your current profit and loss statement via cash flow.  It'd be a different tune if you were in your mid-40s with a family.

PM me, and let's talk.  I'd love to get on the phone with you and convince you why you should make house hacking your first investment and then think about duplexes in Indy or Cleveland later down the line if you're so inclined.

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  • Dave FosterBusiness Member
    Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
    10y

    @Geo Tan is referring to is a primary residence conversion and is a very legitimate tactic.  The 1031 is not voided after a year but rather after a year or so of rental you would have clearly established that your intent when purchasing the property under the 1031 exchange was for investment.  

    You are not required to leave it as investment forever so you "change your mind" and move in thus converting the property from investment to your primary residence.  One you have owned that property for at least 5 years and have lived in it for 2 out 5 years you could then sell it and take the primary residence gain exclusion on it after recapturing depreciation and prorating the gain between qualified use (primary residence) and non-qualifying use (as investment.  Still it can be a great method to at least mitigate a taxing situation and obtain a great potential future primary residence in part using deferred tax dollars.

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  • Account Closed
    Investor · Honolulu, HI · Member since 2013 · 3k+ posts · 1k+ votes
    10y
    Originally posted by @Geo Tan:

    @Account Closed

    You're killing me Bob!

    I kid... But in all honesty I wanted to thank you for taking the time to critique all the mistakes I made or plan on making. As negative and overly-critical as you seem to me, you do give great advice and information on real estate investing, and for that I thank you. 

    Thanks in advance!

    Geez @Geoffrey Tan.  Did you think Bummer Bob would be too insulting?   I love the back and forth and think people learn when they see that discussion.  The people that don't want to discuss and get defensive lose.  Successful people want to help but tell you like it is.  People that want to succeed off of you will tell you what they think you want to hear.

    Thanks @Dave Foster for explaining the 1031 process.  I've heard of imtermediaries going out of business and taking the investors money.  Is that wives tales or do you need to take steps to protect yourself?

    My original plan in my retirement was to occupy my properties for the 2 years and take the $250,000 out of my Honolulu properties as I wind down.  Now I am cash out refi'ing because I want to keep the rent growth and appreciation.

    So, with the new laws (2009?) can you give me the simple explanation of what my benefits are of owner occupying say a property bought in 1978 for $35,000 worth over $500,000 now that I lived in for 4 years but would be a rental for the last almost 35 years if I was to owner occupy and then sell in 2 years?  How about a $200,000 investment property from 2003 that would sell for $500,000 now? 

    @Geoffrey Tan, a good thing to do is to have a long term plan as far as CA property because of the costs to sell but also because of the Prop 13 tax base.  Because of Prop 60/90 I could sell my CA property and TAKE the tax base to a new property.  That can be a major benefit.  SF will not take my Alameda tax base but if they did I would transfer in a minute.  Still may go to San Mateo as I think these areas will do better for my goals over the next 20 years.  But laws change so planning too far ahead doesn't always work but churning properties always has a cost.

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  • Dave FosterBusiness Member
    Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
    10y

    @Account Closed, No need to be paranoid.  There's been more banks fail than QI firms but always protect yourself.  It takes less licensing to be a QI than to be a plumber.  But mostly you'll find firms of attorney's and CPAs who have chosen this obscure little field.  Vet them well for expertise and reputation.  One thing that people saw during the last boom was that even with bonding, insurance, etc the time constraints of the 1031 can create severe hardships for the client if the QI goes south because accessing the bonding or insurance will never save the exchange in time.  

    Far better to protect your money ahead of time. We strongly recommend segregated dual signatory FDIC insured accounts. Never an individual or pooled escrow account of the QI. FDIC insurance is the highest most comprehensive level of deposit insurance and over insurance is readily available through private commercial banks. Dual signatory restricts the movement of funds without your specific signature (the IRS agrees that this does not rise to the level of constructive receipt by you. And many states are warming up to the idea enough to require it).

    Regarding your primary residence conversion there's a lot of moving parts to determine your actual exemption position but the proration is only post 2009.  So any ownership pre-2009 is discounted in the proration.  However gain is not so your house that you've owned a long time still would be a good candidate because you will have a good ration of qualified/non qualified time but a ton of gain pre 2009 to benefit from.

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  • Geo Tan
    OP
    Real Estate Broker · Los Angeles, CA · Member since 2016 · 112 posts · 34 votes
    10y

    @Dave Foster

    Always a pleasure hearing from you Dave!

    I honestly have not put much thought into the 45 day identification period... I guess that is a good point in that this isn't much time. What steps am I looking at when I find that suitable property? Are there steps and processes that take place that I should put into consideration and leave a set time I should include in advance in the 45 day period? And if you can clarify what steps you mean by getting a property locked up would be great as well (Just finding a place, signing a contract, closing, etc)!

    In terms of @Account Closed's tactic is definitely new to me and sounds very interesting. Seems like a very smart move and I will definitely put that into consideration with my future investments from now on! Thanks to both of you for the helpful knowledge!

    So basically if I am understanding correctly:

    1. Lease property for 1 year

    2. Live in it for 2 years

    3. Own it for 5 years (So 2 more years after the leasing and house hacking)

    4. Reap in benefits of 250k to 500k tax free when I sell it? (Not too sure what this means either. If either of you can clarify exactly what I would obtain after the 5 year mark that would be greatly appreciated!)

    Let me know if I have no idea what I'm talking about. To be honest I got completely lost after you got into primary residence gain and recapturing depreciation. Which I am looking into so I can understand your last paragraph a bit better.

    Thanks as always Dave!

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  • Dave FosterBusiness Member
    Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
    10y

    @Geo Tan, the 45 day list is simply a written list of potential replacement properties that must be in place by the end of day 45.  After day 45 the list cannot be changed and in order to complete the exchange you must purchase one or more of the properties on the list.  A contract for purchase can count as an identification.

    If you name 3 or fewer properties on the list it does not matter what they are worth.

    If you name more than 3 properties then the total value of the list cannot be more than 200% of the sales price of your relinquished property.

    Unless..  You end up closing on 95% of the value of your list.

    Yes it's confusing.  No I have no idea why the Service decided on these rules other than pre-empting some kind of tax payer abuse.  A good QI watches these timelines and rules like a hawk because they trip people up every day.

    You may go into contract on your replacement property at any time, even before you complete the sale of your relinquished property.  All that is critical is that you complete your sale before you complete the purchase.  The exchange always follows the order of sale followed by purchase.

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  • Geo Tan
    OP
    Real Estate Broker · Los Angeles, CA · Member since 2016 · 112 posts · 34 votes
    10y

    @Account Closed

    Always a pleasure hearing from you Bob!

    You're definitely not a bummer man... I agree 100% with you that people who know what they're talking about say it like it is. I think I got a little spoiled from all the nice people in BP that go out of their way to break it down for me which I am very grateful for.

    I totally understand the long term is great in CA. The biggest issue with my current situation is that I have a full time job that does not reach enough to have me piggy back the property until I can reap in the gains after several years. I can most definitely not make the loan payments on such a property unfortunately. That's my biggest fear and the main reason I took a step out of LA and am researching other cities as well. Let me know if that is a horrible mentality or if I'm mistaken.

    I have to honestly say you completely lost me in your last paragraph though:

    I'm assuming it's because of my lack of knowledge on my taxes and props so I'll look into everything you just mentioned and see if I could figure out what you mean on my end.

    Thanks again,

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  • Ethan Vegas
    Real Estate Investor · Los Angeles, CA · Member since 2008 · 80 posts · 42 votes
    10y

    @Geo Tan, quick question on 1031's; my understanding is that the exchange needs to be between like property types (i.e. owner occupied vs investment). Is this correct? If so, are exchanges between a SFR and an owner occupied Duplex/Triplex/4-Plex allowed? I'm guessing even if that's allowed, you'd have to stay under 4 units and not broach into the "commercial" world of 5+ units. Your expertise is appreciated!

    Thanks!

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  • Dave FosterBusiness Member
    Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
    10y

    @Ethan Vegas, actually "like kind" as it relates to 1031 real estate is very broad.  It does not refer to the type of real estate but it's use and intended use.  Specifically any real estate that it has been your intent to ..."hold for productive use in business, trade, or for investment..." may be exchanged for any other kind of real estate that it is your intent to ..."hold for productive use etc etc".  

    So you can't exchange your personal residence for investment property or vice versa (there's other more advantageous rules for that) but you can exchange any kind of investment real estate for any other kind.  Commercial for residential, agricultural for industrial, single family for multifamily - it's all like kind as long as it's used as investment.

    Your specific example of a duplex would be a mixed use property.  The portion you live in could not be exchanged (if you've lived in it for 2 out of the previous 5 years you get the first 250K in gain  (500K if your married) tax free.  But the other half that has been a rental could be exchanged for any other kind of investment real estate.

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  • Ethan Vegas
    Real Estate Investor · Los Angeles, CA · Member since 2008 · 80 posts · 42 votes
    10y
    Great, thanks Dave Foster for the clarification!
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  • Geo Tan
    OP
    Real Estate Broker · Los Angeles, CA · Member since 2016 · 112 posts · 34 votes
    10y

    @Dave Foster

    So if I'm understanding your explanation to @Ethan Vegas correctly:

    As long as I have met the requirements of owning property for 5 years and house hacking for 2 years, I just need to figure out what is more of a benefit, using the 1031 for avoiding tax costs or paying the tax but gaining the 250k which I can pick by basically deciding how to use my property the last year? 

    So for example let's say I've owned a duplex for 4 years which I house hacked for 2 years already. I just need to crunch numbers to see if I make more profit through the 250k or through taxes with a 1031 which will depend on the property and decide if I'll house hack or rent out the 5th year? Or is it usually the case that 1031 saves more money majority of the time or vice versa.

    I really feel like I'm missing a major point here so feel free to let me know if I'm not making any sense!

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  • Geo Tan
    OP
    Real Estate Broker · Los Angeles, CA · Member since 2016 · 112 posts · 34 votes
    10y

    @Dave Foster

    Sorry for separating the post but I felt like these next few questions I had were unrelated to the question above!

    So simply, the 1031 requires me to send a list of potential replacement properties that I am able to obtain within 45 days. This list is set in stone for my 1031 after the 45 days and as long as I close before I purchase within the 6 month extension I should be golden?

    I was a little confused about this part:

    I thought the value had to be the same as the value I closed for the 1031?

    And lastly, since I'm selling my Vegas property for cash then did a 1031 to obtain a new property, does it effect at all how fast the new prospect property will close when I purchase?

    As always thank you for explaining everything out for me and any lurkers on this thread!

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  • Bill ExeterBusiness Member
    1031 Exchange Qualified Intermediary · San Diego, CA · Member since 2008 · 1k+ posts · 1k+ votes
    10y
    Originally posted by @Ethan Vegas:

    @Geo Tan, @Account Closed......I fully agree, the debate back and forth is very instructive for us forum voyeurs ;)

    @Dave Foster, quick question on 1031's; my understanding is that the exchange needs to be between like property types (i.e. owner occupied vs investment). Is this correct? If so, are exchanges between a SFR and an owner occupied Duplex/Triplex/4-Plex allowed? I'm guessing even if that's allowed, you'd have to stay under 4 units and not broach into the "commercial" world of 5+ units. Your expertise is appreciated!

    Thanks!

    Hi Ethan,

    I'll simplify it for you. There are two requirements:

    Qualified Use Requirement

    Properties must satisfy the Qualified Use Requirement.  This means that the relinquished properties and the replacement properties must be held for rental, investment or business use.  If they satisfy one of these requirements they are considered "Qualified Use" properties.

    Like-Kind Property Requirement

    If you are selling real estate, you must reinvest in real estate.  This means that ANY kind of real estate is like-kind to any other kind of real estate as long as the Qualified Use Requirement has been met.

    Examples of Like-Kind Properties

    The following list of real property asset classes represents interests in real property that usually qualify as like-kind property for 1031 Exchange purposes:

    • Single Family Residential Property
    • Multi-Family Property (Apartments)
    • Commercial Office Properties
    • Retail Shopping Properties
    • Industrial Warehouse Properties
    • Triple Net Lease (Net Lease or NNN) Investment Properties
    • Agricultural (Farm) Properties
    • Vacant Undeveloped Land
    • Oil & Gas Interests
    • Mineral Rights
    • Water Rights
    • Air Rights
    • Easements in perpetuity
    • Leases with a remaining life, including options, of 30 years or more
    • Tenant-In-Common "TIC" Investment Property Interests
    • Delaware Statutory Trusts "DSTs" Investment Property Interests
    • Vacation rental properties (income producing)

    You can 1031 Exchange between all of these types of real estate.

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  • Ethan Vegas
    Real Estate Investor · Los Angeles, CA · Member since 2008 · 80 posts · 42 votes
    10y

    Great, thanks for the feedback @Bill Exeter!

    0Reply
  • Jason Hawk
    Real Estate Services · Olathe, KS · Member since 2015 · 329 posts · 57 votes
    10y
    Welcome to BP! Since you are new investing. You should consider the Midwest. It is a great market to start with good prices on homes and great return. Let's connect.
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  • Mark Creason
    Real Estate Lender and Broker · Dallas, TX · Member since 2013 · 966 posts · 500 votes
    10y
    Originally posted by @Bill Exeter:

    Mineral Rights

    Could you exchange traditional real estate for mineral rights in a gold mine?  Some one asked me today.

    Mark

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  • Grace D.
    Investor · Redondo Beach, CA · Member since 2015 · 12 posts · 0 votes
    10y

    @Geo Tan

    Hi, I'm a newbie from SoCal, too, and am by no means an expert but wanted to share my thoughts and recent (albeit little) experience in case it helps. 

    I initially set out to do a 3.5% FHA house hack and found that at least in the area I looked at (SouthBay):

    (1) it was harder to get FHA offers accepted with all the competition from conventional and cash offers.

    (2) The upfront PMI of 1.75% essentially gets me to a 5.25% downpayment (although you could opt to loop this into the mortgage).

    (3) Depending on your income, the Mortgage Insurance Premium may not be tax deductible. 

    (4) The 75% to 85% occupancy rates that they use to qualify properties led me to areas that I really would not want to live in (by the way, I was told this formula is only used for 3-4 unit properties; duplexes don't need to pass this rule) 

    I modeled out my options (I'm a financial analyst by day), and ended up doing 20% conventional financing on a duplex in a great area, and am working on getting a HELOC that'll get me to a 90% combined LTV.

    Granted, I will pay variable interest rates on this HELOC once I draw on it (when I find good investment opportunities) - but some portion would be tax deductible. BTW, I had the option of using an 80/10/10 financing during escrow but was getting quoted much higher interest rates on the first mortgage, so I chose to just do the HELOC after closing. [If anyone knows good deals on 90% LTV HELOC, I'd appreciate a referral. :) ]

    Am I going to cash flow on this property? Not really, but with net payments just a bit more than my current rent, I'll be getting a good property in a great location that I'd be happy to live in for a long time and has a good potential for appreciation. 

    I guess a lot of it depends on what your goals and preferences are. Hope this helps and all the best to you! 

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  • Dave FosterBusiness Member
    Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
    10y

    @Mark Creason, most working and royalty interest rights in minerals oil and gas are considered like kind to real estate and you can 1031 between. 

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  • Bill ExeterBusiness Member
    1031 Exchange Qualified Intermediary · San Diego, CA · Member since 2008 · 1k+ posts · 1k+ votes
    10y
    Originally posted by @Mark Creason:

    Could you exchange traditional real estate for mineral rights in a gold mine?  Some one asked me today.

    Mark

    Hi Mark,

    The laws in the state where the asset is located will determine whether it is considered to e real estate or personal property (non-real-estate).  Generally, mineral rights are considered to be real estate pursuant to most state's real estate laws.  One of the easiest ways to determine if it would be considered real estate is to determine whether the mineral right "runs with the property," which means that it is transferred via deed.  

    Goldmines are often owned by some form of legal entity such as a corporation, partnership or LLC and are transferred via selling shares, partnership interests or membership interests in the entity rather than actually buying the underlying mineral right, which would not qualify for 1031 Exchange treatment.

    So, the answer will depend on exactly what is being bought. 

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  • Geo Tan
    OP
    Real Estate Broker · Los Angeles, CA · Member since 2016 · 112 posts · 34 votes
    10y

    Hello everyone!

    Been MIA from work and looking at properties.

    I just wanted to run a quick calculation I ran to see if I'm covering as many bases as I can in a short period of time while searching for potential investment properties.

    So for this example the property is listed as $719,900

    If I include $20,000 for rehab to my OPM and take out my $210,000 downpay (Which I set aside $10,000 for any other closing fees, etc), my mortgage would be $529,900

    With a fixed 30 year mortgage at 4.5% interest it comes out to a monthly payment of $2,685. I calculated property tax as 1.25% which divided into 12 months comes out to $771 a month. The potential rent which I looked around for similar properties with rent is roughly $5,000. So $5,000 minus monthly payment of $2,685 minus tax of $771 minus $1,000 for repairs, insurance, etc. comes out to a cash flow of $544.

    That is the usual calculations I go with for skimming through properties and I wanted to see if this was a horrible way to calculate or if I'm on the right track.

    Thanks as always to everyone for the help thus far.

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