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Updated over 8 years ago, 04/04/2016
Is Now a Good Time To Invest? (First Time Buyer in LA, CA)
I have looked at 50-100 deals in my area of West Los Angeles. It is difficult to find properties that are cash flow positive after expenses and debt service. Basically, the deals do not look very attractive. I am curious to know what experienced investors think of today's markets and whether or not now is a good time to buy. It worries me that we have had years of quantitative easing and low interest rates. I don't want to be the fool who buys at the wrong time when attractive opportunities could be around the corner.
Thank you for the help!! - Lance
Is now a good time to buy ?
The answer is almost always Yes. (The town is becoming a ghost town. Then a big NO..)
Almost every market has areas that are good even during the bad times. The differences is during the slow times it usually easier to find good deals.
Example is Detroit - Lots of people were telling people to run away from Detroit but if you take a look people have been making money there too.
Always keep in tune with the desired areas in your market.
Originally posted by @David Greene:
Hi Lance,
I too live in CA and haven't bought here since 2012 or so. Overall, it's wise to follow Warren Buffet's advice "be greedy when other's are fearful and fearful when other's are greedy".
LA has ridiculously low cap rates and is very competitive. That tells me a lot of people see it as a low risk environment and are parking money there. I, for one, do not want to follow the herd. I want to get out in front of the herd so I can have the best area staked out then sell it to them when they all arrive.
For most investors, right now is too late to be getting in in LA. The time for that was when everyone else was crying the sky is falling and wouldn't touch real estate. There are several other markets with much more attractive numbers and upsides I am looking in and I think it sounds like you would prefer.
Here is something to think about. The pro's of living in and investing in CA. Pro-we make a high wage here. Con-property is expensive and hard to buy for cash flow. Why not maximize the Pro (living and working here) and minimize the con by investing somewhere with more favorable rent to purchase price ratio's? Technology has caught up to the point where investing out of state is so much easier than you'd believe. I own 9 out of state rentals I've never seen and plan to buy 17 more this year.
Don't follow the herd. Buy in areas you believe jobs, people, and demand is flocking TO. Wait for the next crash then buy in LA when everyone else is talking about the american economy never recovering.
@david greene what sites do you use to buy your out-of-state properties? And what markets do you focus on? Curious to hear your thoughts on this! Thx.
Originally posted by @Lance Knapp:
I have looked at 50-100 deals in my area of West Los Angeles. It is difficult to find properties that are cash flow positive after expenses and debt service. Basically, the deals do not look very attractive. I am curious to know what experienced investors think of today's markets and whether or not now is a good time to buy. It worries me that we have had years of quantitative easing and low interest rates. I don't want to be the fool who buys at the wrong time when attractive opportunities could be around the corner.
Thank you for the help!! - Lance
Lance,
As a commercial real estate (CRE) analyst, we would expect you to give us advice and provide solid data to back up your thesis instead of asking us questions. Your questions seem innocent for a CRE analyst so it makes me wonder.
Anyways, how involved are you with the real estate market? Do you know how CRE usually transacts? Do you know the percentage of deals being done off-market compare to on-market? They're not kidding when they say Loopnet is where good deals go to die.
If now doesn't appear to be the right time to buy, was several years ago the right time? If so, where were you several years ago? If the deal is good, why on earth would the owner ever want to sell? Would you ever want to sell a good deal that's minting cash? I know I wouldn't unless you offered me an obscene amount of money.
Here's a real life example. @J. Martin wants to buy one of our apartments. It's 90% stabilized and worth around $1.9M according to our lender. I told J he would have to offer $2.4M for me to even consider selling. Otherwise, he would have to buy it from my daughter after I kicked the can. The funny thing is...he totally understands why I would never sell this building. My partner and I bought it last summer for $1.225M and spent about $100k renovating it.
We're always buyers and a sellers. We'll buy for the right price, and we'll sell for the right price regardless of where we are in the cycle of the housing market. We invest for equity first and cash-flow second. We're looking for 100% ROE on each deal when we purchase, or as Warren Buffett said "buy with a margin of safety." My partner and I did four deals similar to this last year. How long does it take for someone to get $1.5M-$2M in cash-flow?
Once you understand the game, you will appreciate Bob's wisdom. People don't like his way of delivering the message, but his message is usually hidden with deep thoughts. The rich invest for equity first while the poor invest for cash-flow. Cash flow will come when you have equity. When the cash-flow comes in a few short months or years, you will be laughing all the way to the bank. I shared the actual numbers with a couple of close BP friends on how I can increase my cash-flow by an additional $44k (my share only) in as little as two years. Did you know that $44k in cash-flow is equivalent to about $600k equity gains in our market? That's why Bob said our west coast markets are so profitable. Don't let the faux cash-flow lure you into the poor house.
Best of luck.
Hello and welcome to BP! Fix and Flip along with Buy and Sell go together well. Today's market is hot for the sellers but you can do well if you are creative and consistent. Inventory is kind of low right now which is making it better for the sellers. Cash buyers are typically getting their offers accepted because they can typically close quicker. Just try to make deals in unsusual places. One thing you might have access to is being a loan founder to renters that want to buy but are frustrated by the FHA guidelines. That way you do not have to worry about customer service. There are several ways you can profit and have fewer expenses. Education is the key to reducing your mistakes. Team members need to be found before you start acquiring real estate. Be patient and consistent.
I am 59 years old and I found BP about 6 months ago and I am still trying to decide what to do. I went to college and got a business degree that emphasized real estate. In that same year, in 1980, I got a broker license. Regardless of what I had I felt more comfortable in the construction business. My father has been in the real estate market for about 40 years and he has taught me a little bit. If you think that I can help you please contact me through BP at any time. Good luck!
Minh Le, I buy homes for cash flow only. As I am 72 yrs old, I won't outlive any of my mortgages. I have enough retirement income that I don't need the cash flow so my homes are slowly turning into a money generating machine that buys me more homes.
I have only been doing this for a few years and my homes are already producing $30k cash flow to purchase more homes. My only regret is that I didn't do this years ago.
When I pass, my children and grandchildren will have the SFHs to do with as they wish.
A side note, I do not do second mortgages. I have watched RE investors go bankrupt due to second mortgages.
Glad I read this thread, I like your insight @Account Closed And was thinking along similar lines while reading so much on here about rent to price ratios and investment in low purchase price areas. I'm also suspicious of people's cash flow numbers as many don't seem to incorporate cap ex expenses, monthly maintenance costs and opportunity costs or increased mortgage payments if using home equity loans/lines of credit. Thanks for the great discussion everyone!
Originally posted by @Account Closed:
Originally posted by @Lance Knapp:
@Account Closed I do not need the cash flow to pay my bills, but I am looking to grow my income through real estate...
Then you are in the enviable position of being able to purchase more profitable properties by having the ability to forgo initial cash flow if needed. My first Honolulu purchase was $329.64 P&i and $110 maintenance that covered taxes. Market rent was $250.00. Have not had a day of vacancy in almost 40 years. The property tripled in value in about 2 years. But I still had negative cash flow. But since I've owned this $35,000 condo I have collected almost $500,000 in rents and have appreciation equity of over $500,000. Not bad for a $2,000 investment in a NON cash flowing property. This was a 1978 purchase converted to rental in 1981...
Bob it's a beautiful story! It is and it makes several important points about long term RE investing.
But implicit in your posts is the assumption that everyone should continue to invest in the areas that you invest in as if the results would be the same.
Are you trying to imply that someone buying from you the $535,000 condo in your illustration above would have long term results similar to yours?
Originally posted by @Alain Perez-Majul:
@Account Closed
So to address the topic with a question: if you can get an Indy property and fix it up right, all in for 50K, that rents for $750 in a neighborhood that never goes unrented, and assuming that half of your monthly rent amount is eaten up by all the expenses involved (so you're left with $375 net), what's so horrible about that? Although it's obviously no home run, and you can do much better in Indy, what's bad with that 9% return?
How do you justify LA being better?
@Alain Perez-Majul I will justify it in San Diego by stating every property I have owned at least 3 years has done significantly better than 9% annual return (100% of the properties not an average of the properties). I have not calculated my average return on those properties but I suspect it is likely over twice the 9%. This is even using what some believe is a high cap rate (I believe it to be close to accurate) of $300/unit per month. Look at the numbers for San Diego, LA, SF. I have not been an exceptional in this market; pretty much everyone who has owned at least 3 years has done better than 9% annual return.
Originally posted by @Jack Slattery:
I think now is a great time to invest. I recently purchased a house for $54K and I put 15K down. My payment including tax and ins is $414 monthly and I receive $750 giving me a cash cow of $336 monthly. I will recoup my investment in under 4 years. Faster if you count tax depreciation.
You won't get that kind of interest at the bank.
@Jack Slattery Not to point out the obvious but rent - (mortgage + escrow) does not equal cash flow. In my market that unit is negative cash flow on my calculations (not by much). For self managed I use 5% vacancy + 5% maintenance + $300 cap expense for average size rental SFR (think ~1000'). I believe San Diego cap expense is higher than most other markets so maybe $200 cap expense is appropriate in your market. Using San Diego cap expense I get 750 - 414 - 75 - 300 = ($39). If cap expense is $200 in your market then positive $61. Without good prospect of appreciation (hopefully value and rent will both appreciate) I would not purchase that property at positive $61; not worth the effort to manage unless there is going to some positive appreciation.
Good luck
Originally posted by @Richard Dunlop:
Originally posted by @Account Closed:
Originally posted by @Lance Knapp:
@Account Closed I do not need the cash flow to pay my bills, but I am looking to grow my income through real estate...
Then you are in the enviable position of being able to purchase more profitable properties by having the ability to forgo initial cash flow if needed. My first Honolulu purchase was $329.64 P&i and $110 maintenance that covered taxes. Market rent was $250.00. Have not had a day of vacancy in almost 40 years. The property tripled in value in about 2 years. But I still had negative cash flow. But since I've owned this $35,000 condo I have collected almost $500,000 in rents and have appreciation equity of over $500,000. Not bad for a $2,000 investment in a NON cash flowing property. This was a 1978 purchase converted to rental in 1981...
Bob it's a beautiful story! It is and it makes several important points about long term RE investing.
But implicit in your posts is the assumption that everyone should continue to invest in the areas that you invest in as if the results would be the same.
Are you trying to imply that someone buying from you the $535,000 condo in your illustration above would have long term results similar to yours?
Richard, that is pretty much what I am saying. Appreciation and rent growth have not been linear but in every decade at one point the figures match up in that the property has doubled in value and rents are up 6%+ compounded annually.
I did get a little boost on that property from the Japanese buying spree in Hawaii in the 80's and the lack of inflation is slowing my snowball growth on appreciation. But I'm probably better off that my appreciation is more based on gentrification (demand) since I'm actually keeping more of that money when I'm buying goods and services.
My mid 2000 purchase for $200,000 doubled in two years and is now worth close to $500,000 so I have 8 years to get to $800,000. My slightly over $500,000 purchase in 2008 (everybody was predicting an immediate crash} has a comparable just sell for $900,000 and a lesser comp on the market for $890,000. That's over $4,000 a month equity gain for a cash flow negative property! Add in about $300,000 rent over the same period. Well do the math.
I am not promoting any area, I just think people should do a correct analysis to determine a good market AND that is not using price to rent or crap rates or cash faux. RENT GROWTH AND APPRECIATION RATE! Investing from afar is expensive and risky. Look for the opportunities in your own back yard but realize cheap does not mean profitable.
@Account Closed I have only been out of undergrad (NYU) for 1.7 years. Asking questions here is a valuable resource for me. My firm only works on deals that are $50MM or higher, so I am unversed with smaller deals that I personally would buy. I am young and trying to learn. BP is a good resource without negativity... Appreciate your other thoughts though. Here's food for thought: you began investing at the absolute bottom of the real estate market in 2009, so any deal you have touched has made money. I am a first time investor in 2016 when the market is near all time highs and central banks have pumped trillions of dollars to patch up ailing economies. It's not as simple as when you started, and if you think it is, you need to think harder.
Dan I don't follow you. I don't need cash flow to live on as my retirement is sufficient for me. Right now, my yearly cash flow after mortgages + escrow is approximately $30K on all my homes. That money goes to my LLC for future purchases and repairs. Save for one home, I have no equity in my houses except for minor repairs. I have recouped all my down payments.
I limit myself to brick ranches and cape cods in nice neighborhoods. They must be in good shape (I don't do rehabs). I gear my homes to middle class customers as they are the ones getting squeezed out of the housing market. My customers don't move.
Appreciation means nothing to me as I'm not selling and I don't do 2nd mortgages. My goal is to leave my daughters with a sizable inheritance of real estate and I get the enjoyment of providing quality homes for my customers.
I don't do the heavy thinking for profits (as I suppose I should) but it works for me. Thanks for your reply to my post. How do you guys do that @ thingy?
@Account Closed the first time I read your post I was honestly too angry to interpret the content. It actually is very useful. Thank you
Originally posted by @Lance Knapp:
@Account Closed I have only been out of undergrad (NYU) for 1.7 years. . It's not as simple as when you started, and if you think it is, you need to think harder.
Oops, didn't see your reply to Account Closed until I posted the below. No one is trying to get you mad. We want to get you smart. Listen to experience and evaluate it.
Lance, Lance, Lance! It is NEVER simple. When Account Closed started there were people posting that it would take 20 years for real estate to recover. For a newer investor it took plenty of confidence and analysis for someone to start investing then. You are always buying in the market as it is, for good or bad. I was telling anyone that would listen to me to load up on real property for the last 6-7 years. Most said they wouldn't touch it with a ten foot pole. GFC my a**! Of course everyone thinks they were handing properties away 10, 20, 30 years ago but I assure it was just as difficult then if not more than today. Think harder on that.
There's always reasons NOT to invest. Some good, most uninformed.
@Account Closed We at my company are brokers. We are incentivized to believe that real estate prices and activity will only go up from here no matter what, so we manipulate data and our narratives to reflect that. Therefore, I came here for some differing opinions and dialogue.
I don't understand why you have no worries of chasing a red hot market with no cash flow, even if you believe you can fix the place up and create equity. What if real estate prices have 20+% downside in SF, West LA, NYC where you buy with no cash flow? What if interest rates rise and property values decrease? What if the end of government/central bank stimulus stops propping up values?
@Lance Knapp For sure anything can happen. The best deals I ever saw were after the 94 EQ for example. I look at historical for some guidance. Samo in 2006 peak for median was $850k and at the bottom GFC 2011 that was $825k. Today 1.3 mil ish. Take away is that is about as safe as one can get historically speaking.
@Account Closed that is a great point. I know that my Dad missed out on many deals during the same time frame. There are always reasons not to invest. But what about in 2007 (not that we are there now), was that a time to invest? I know lending has become much more conservative. I see what you are saying and think it makes total sense. I still think I would feel more comfortable buying at the bottom vs. the top. Anyways, now is not like 2007, so it likely is as good a time as ever. Thank you Bob
@Lance Knapp What if the market for your midwest duplex at 650 rent for 40k crashes? What if the area starts going downhill as urban renewal projects aren't renewed? What if a couple of gangs decided that the boarded up houses two streets over look like great territory to setup a drug house inviting far more crime to your area? Or, more likely, what if the population for area you're going to invest starts shrinking and you go from 650/mo this year, to 635/mo next year, to 600/mo the year after that...and in 20 years you end up with 300/mo rent and a property you can't give away because it wasn't in the lucky part of Detroit. But it had really good cashflow! (Of course, if you studied the market and knew where the likely "good parts" of the city were...)
No investments are safe. You can't rely on houses always appreciating and you can't rely on stable areas remaining stable. There are different risks, which is why people are saying to research the market you're thinking about investing in, and not to invest solely because the cashflow numbers make sense. Or, to rephrase: Don't invest because the cashflow is good today, invest because you think the area is going to go up in value and bring you more money in the future. Unless (and this is a big one) you're currently poor and *need* the cashflow today. If you can't afford to carry a house that's break-even or barely breaking even for a few years until it triples in value because it's a hot market, then you might have to invest for present cashflow. But that doesn't make it the best investment possible.
@Jack Slattery: Type @ and then start typing someone's name. If they've participated in the thread or are on your contacts list a menu will pop up with their name after a second or two.
@Lance Knapp I have invested out of state too. I was able to exit with my shirt still on. Be extra careful with any bp sellers. I have checked a few. I can say some sellers don't know what state they are even offering in much less county. Some would not even get out of their car in parts and yet offer that area as a solid cash flow investement. Meanwhile in their own backyard they could have thrown a dart and did not recognize that opportunity past 5 years. Talk about dumb asses.
Originally posted by @Lance Knapp:
@Account Closed that is a great point. I know that my Dad missed out on many deals during the same time frame. There are always reasons not to invest. But what about in 2007 (not that we are there now), was that a time to invest? I know lending has become much more conservative. I see what you are saying and think it makes total sense. I still think I would feel more comfortable buying at the bottom vs. the top. Anyways, now is not like 2007, so it likely is as good a time as ever. Thank you Bob
Lance see my post above about my 2008 purchase that has gained over $4000 a month in equity. (anybody here touting $4000 a month cash flow in the midwest?) I did not buy at a discount although everyone "saw the writing on the wall" but I did get in when the first buyer failed to secure financing. I knew it was a solid purchase and even if it dropped 10% I had no worries. Well it didn't drop at all and had I not taken an educated risk I would have missed out on all that equity.
Today may be the top of your market or over. Paying market if I have to has always worked for me. Sitting around being fearful does not work. Well except for the coming Zombie Apocalypse. My book will explain how you can capitalize on Zombie life insurance for rent. They are long term and pretty low maintenance.
Originally posted by @Jack Slattery:
Dan I don't follow you. I don't need cash flow to live on as my retirement is sufficient for me. Right now, my yearly cash flow after mortgages + escrow is approximately $30K on all my homes. That money goes to my LLC for future purchases and repairs. Save for one home, I have no equity in my houses except for minor repairs. I have recouped all my down payments.
I limit myself to brick ranches and cape cods in nice neighborhoods. They must be in good shape (I don't do rehabs). I gear my homes to middle class customers as they are the ones getting squeezed out of the housing market. My customers don't move.
Appreciation means nothing to me as I'm not selling and I don't do 2nd mortgages. My goal is to leave my daughters with a sizable inheritance of real estate and I get the enjoyment of providing quality homes for my customers.
I don't do the heavy thinking for profits (as I suppose I should) but it works for me. Thanks for your reply to my post. How do you guys do that @ thingy?
>my yearly cash flow after mortgages + escrow is approximately $30K on all my homes.
Your definition of cash flow does not match mine as I include vacancies, maintenance, and cap expense in my cash flow numbers. As long as you realize that you are not including those expenses and that in reality your $30K cash flow is significantly less when taking those into account all should be fine.
I think you could benefit from reading up on cap expenses just to make sure that you have full realization of these costs. The cap expenses are coming. You point to your heirs eventually getting the properties and doing as they please but someone (you, your heirs, or an eventual buyer) will eventually get hit with cap expense costs.
>Appreciation means nothing to me as I'm not selling and I don't do 2nd mortgages
I have only one property with a second and that is because the second loan is artificially low (it is at 3%). It does not mean that I do not take equity out of the properties as I see fit. I refinance the first loan with another first loan. I can then use the money from the refinance as I desire but I typically use the bulk of it for further investments. I try not to let my equity in any property get too high because it is not leveraging the asset but I will not refinance into a significantly higher interest rate (I do not need the money bad enough to want to pay more interest for it).
Good luck
@Account Closed That is an awesome story. This is renewing my confidence to go out and buy a property where I can create equity off the bat. I am thinking either Santa Monica or West LA, perhaps a nice single family home that I can rent out (since I don't have enough money for anything more than that).
Originally posted by @Lance Knapp:
@Account Closed We at my company are brokers. We are incentivized to believe that real estate prices and activity will only go up from here no matter what, so we manipulate data and our narratives to reflect that. Therefore, I came here for some differing opinions and dialogue.
I don't understand why you have no worries of chasing a red hot market with no cash flow, even if you believe you can fix the place up and create equity. What if real estate prices have 20+% downside in SF, West LA, NYC where you buy with no cash flow? What if interest rates rise and property values decrease? What if the end of government/central bank stimulus stops propping up values?
I have purchased properties at near market highs in 1992 and in 2003. Both had depreciated more than 15% after I purchased them (maybe more than 20%). Both are up significantly today. I look at it as there will be ups and downs but So Cal coastal (San Diego, OC, LA) has limited supply. It has always trended up over the long haul. Market valleys I look at as opportunities but I do not shy away when we may be near a market high. No one knows that we are at a market high. Trying to time it is like timing the stock market which data shows most people do terribly. When the REI market is low most people fear it going lower. They do not purchase due to this fear. So there is always an excuse to not invest and some then look back a few years later and realize that they should have bought then and now is not the right time because we may be near a market high (for them back a few years ago was not the right time either; the right time for them is always some time other than now).
My family and I have only sold a single property for reasons other than 1031 exchange and even that property I would not classify as a mistake (and it got hit by 2 hurricanes: it obviously is not So Cal, a duplex in Gulf Shores Alabama that was beautiful). You know how many properties that I have passed on that I would have profited significantly from (passing on them was a mistake)? I suspect it crosses over 100 (my top excuse is lack of time). Everyone can find an excuse for not purchasing but my experience is that I do fine (most would say far better than fine) on every So Cal purchase. Even the property in Gulf Shores with 2 hurricanes we made a profit (not like our So Cal REIs but a little profit).
My point is that there will always be risk but if that risk always prevents you from getting started then you also are potentially missing opportunities.
Good luck
Originally posted by @David Greene:
Hi Lance,
I too live in CA and haven't bought here since 2012 or so. Overall, it's wise to follow Warren Buffet's advice "be greedy when other's are fearful and fearful when other's are greedy".
LA has ridiculously low cap rates and is very competitive. That tells me a lot of people see it as a low risk environment and are parking money there. I, for one, do not want to follow the herd. I want to get out in front of the herd so I can have the best area staked out then sell it to them when they all arrive.
For most investors, right now is too late to be getting in in LA. The time for that was when everyone else was crying the sky is falling and wouldn't touch real estate. There are several other markets with much more attractive numbers and upsides I am looking in and I think it sounds like you would prefer.
Here is something to think about. The pro's of living in and investing in CA. Pro-we make a high wage here. Con-property is expensive and hard to buy for cash flow. Why not maximize the Pro (living and working here) and minimize the con by investing somewhere with more favorable rent to purchase price ratio's? Technology has caught up to the point where investing out of state is so much easier than you'd believe. I own 9 out of state rentals I've never seen and plan to buy 17 more this year.
Don't follow the herd. Buy in areas you believe jobs, people, and demand is flocking TO. Wait for the next crash then buy in LA when everyone else is talking about the american economy never recovering.
@David Greene - are you at liberty to discuss what tools and websites you use to locate some of your out of market deals or is it via contacts here at BP? Appreciate any knowledge you can drop. Thanks.
Hey David,
I'm always happy to share with someone bearing such a powerful name as yourself.
I don't use any websites for buying or any turnkey companies. I do it the old fashioned way. I use real estate agents to find me deals and contractors to fix them up and add value. I have no problem sharing my contacts if you'd like to PM me. I find more deals than I can buy as it is.
- David Greene
- Podcast Guest on Show #12