Buying & Selling Real Estate
Market News & Data
General Info
Real Estate Strategies
Landlording & Rental Properties
Real Estate Professionals
Financial, Tax, & Legal
Real Estate Classifieds
Reviews & Feedback
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
I am not promoting an area but the correct process to determine profitability.
What di that $50,000 house sell for 20 years ago, $75,000? What will it sell for in 20 years, $30,000. See how $20,000 of your cash faux was your own money? Then look what you lost to inflation and taxes. Doesn't seem so "cash flowy" now.
Now in my markets, not LA, I see 9%+ appreciation on the property. $45,000 equity gain on a $500,000 that I don't even have to lift a finger on renting. Even with 20% down that is a pretty good "return" on $100,000! Now let me add in some rents growing at 6%+. Well, you do the math.
@Lance Knapp As someone who did a lot of his growing up in LA, I have seen a lot of changes since my youth. Frankly, I couldn't wait to get out and moved to the NW some 35 years ago. I go back to LA frequently for visits as I have much family there. I personally think that some markets are pushing up to their peaks or very near (ie: bubbles). I would include LA and SF among those. But that is my 02 cents. In fact, even in my part of the west coast, I don't find cash flow purchases, so I have always invested out of state.
My crystal ball says we have not reached the peak yet, but natural disaster is hard to predict.
Thanks for asking the question Lance! And the responses everyone. Something that's been on my mind as well and very much appreciate the advice
The market is strong but there are deals when it is weak and deals when it is peaking. Nice work on looking at 50-100 homes. What did you learn about them? Are you able to tell a deal right out of the gates now? Are you able to tell the construction numbers right away?
- Ian Walsh
There's definitely some signs we're reaching a peak in the property cycle. Institutional investors are starting to factor in this risk with their offers. While I can't speak for every market I think you'll find when the data comes out this year that it will still be a solid year for real estate but not as strong as 2014 and 2015. With commercial real estate investors they can protect themselves much better as they sign long term leases that could potentially get them through a property cycle. With residential investments you have greater leasing risk as most leases are 12 months so rents can go down. Capital appreciation is what makes you money in residential markets like LA, whether that's long term with little to no cash flow or through flipping.
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.
I'm in the same boat Lance, LA / OC are very expensive!
@Lance Knapp Great question and probably 30,000 LA bpers ask themselves that same question. It is location and deal depending. Many who invest here are wealth preservers. The risk is considered low relatively speaking. So West LA, Santa Monica, westside are considered the pinnacle for that. Still some new do awesome here but it is harder than most areas. A guy I rent a parking spot from in a quad is up one million after 3 years. He lives in the front house.
UCLA says we are half way into a historical bull market. Anything can happen still during that cycle.
You might consider expanding your location. 15% of city is not rent controlled as well as all sfrs, condos, townhomes. If you live in the duplex, tri or quad no rent control either I think?
One way many start is house hack hybrid live in option fix and flip/hold. So you buy and fix a bit and sell or rent or rent some rooms or airbnb etc. Of course flipping straight up is suited well for LA too. Initial cash flow is not why most invest in LA proper outside of airbnb and corporate rentals. If you can get some initial cash flow today...you get creative...off market, rent parking spots, rooms, get high rents with one bedrooms, fix and flip, house hack etc...
To answer is LA better (total profits)? Long term it is number 1 in the nation since 2000. SF and SD are 2 and 3.
Good luck with your search.
All, thank you very much for the insight. This is all very useful for me. @Matt R. and @Andrew Fielder you guys are correct in that flipping or getting creative with fixing up over time could be a profitable route. Also, I had no idea that since 2000 LA is #1 in total profits... That is very attractive, and I would have never known! Also, I am going to dig into why UCLA thinks we are only half way into the bull market.
@Ian Walsh in all honesty I have learned primarily which areas are actually nice vs. which areas I could have tenant disasters. Further, the main criteria I look for is where the property cash flows or not. In West LA, if it cash flows, it might be a deal depending on the area and upside. Tough to find one that I get really excited about!
The more I think the more I realize that I want decent cash flow. As a result, I may need to look out of my area or out of state. Any thoughts here? @Account Closed the markets you are talking about sound very attractive - any insight would be much appreciated. Also, @Larry Fried and @Jack Slattery where do you think?
Originally posted by @Lance Knapp:
. Further, the main criteria I look for is where the property cash flows or not.
The more I think the more I realize that I want decent cash flow. As a result, I may need to look out of my area or out of state. Any thoughts here? @Account Closed the markets you are talking about sound very attractive - any insight would be much appreciated.
Do you need the cash flow to pay your bills? How are you defining cash flow? What happens if you invest out of state and your first tenant decides not to pay? You will NOT have cash flow and you will need to pay into the property, lawyers and property mgt, cleaning fees and repairs. I'd rather pay into a CA mortgage and be reimbursed with appreciation.
Initial cash flow is required by investors that are poor and poor investors.
@Account Closed that makes sense to me. Out of state could turn out to be a huge nightmare. Any suggestions on where to invest in CA?
@Account Closed I do not need the cash flow to pay my bills, but I am looking to grow my income through real estate. Increasing my income will help with applying for future loans.
@Lance Knapp Well certainly if you can make it work invest locally first. For myself, I like Jacksonville, Fl; Indianapolis, NW Indiana the most right now. Kansas City also is one to seriously consider, as is Chicago. In Indy, I particularly like a very passive crowdfunding investment in a portfolio of 10 properties I co-own with the managers and other investors for a number of reasons, including very stable double digit returns without any of the hassle of owning properties outright.
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. Increasing my income will help with applying for future loans.
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.
Cousins that invested about the same amount in Indiana now have maybe $100,000 properties that would maybe rent for $850.
Originally posted by @Lance Knapp:
@Account ClosedAny suggestions on where to invest in CA?
Hands down San Francisco. But there are opportunities everywhere. Don't be afraid to buy quality that you are not paying top dollar for.
Hi @Account Closed i control and have shares in 8 properties in Los Angeles right now i bought all of them with in the last 8 months so the West is good to live but if you want a positive cash flow you might have to look into up and coming neighborhoods like silver lake i purchase a triplex there in December was a fixer bought cash and gives 6.7% cap which is pretty good use the same strategy, in a loan putting 10% down my purchase price was 920k and i put into it 120k, 1.1M investment total after taxes in the area and doing management my self positive at assuming i took a loan at 3.85% for the 990,0000 ill still get about $567 positive cash flow and a ton of equity that i build i but the property cash, but your focusing on the cash flow think about appreciation don't think today, think 5 years from now. cash flow is not the most import, sure is cool to get some cash but not as cool as to get a 1,000,000 check in 10 years when all you did is waited and put 110,000 in. right ?
I would start looking into
La Mirada, Downey, Silver Lake, or anything the the unit price is about 400,000 or less tend to have bigger positive cash flow if thats what you looking for.
and any suggestions were to invest in CA come to San Diego my family have sold 50% of there portfolio in Arizona and downtown san francisco area and invested in San Diego commercial and downtown residential boom is like investing in San Francisco 10 years ago is like crazy awesome
@bob
@Account Closed
Personally I think good equity growth far surpasses a good cashflow. Your good cashflow property may be nice but properties in those area never seem to appreciate. That being said @Lance Knapp LA is a very tough area to get any kind of positive cashflow but you do not need to go out of state to reap good cashflow along with the benefit of appreciation. Im getting 1k a month rents for houses under 100k in Northern CA. and last years appreciation was 13% . I don't need to buy 3 properties for 35k that get 2% rule and worry about 3 roofs, 3 plumbing systems and 3 times the problems. The deposit you are collecting will not even cover the cost to replace your flooring if the tenants damage them. What if your roof leaks? That now becomes 1 year or more of your hard earned profits. Ill stop rambling on and maybe start a post.
I'm wondering this every day...
Market here seems mental, people who shouldn't be in real estate rushing head first into it. Are there still deals... yes, are the harder to find oh you better believe it. The Warren Buffet quote comes to mind daily in CA now. "Be fearful when people are greedy, and greedy when people are fearful"
@Account Closed I hear you man. I worry about people thinking that the market can only go up. The thing that gives me peace of mind is going through the loan approval process. You need to have legitimate income and the underwriting process is sound. Makes me think the market could be safer than we think.
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
- Podcast Guest on Show #12
How do you use RTP ratio? It is not a predictor of profitability. It basically only identifies low demand areas. I'd be concerned why that is so.
@Lance Knapp Sonoma, Mendocino, Sonoma, Butte, Sacramento Counties and some other surrounding counties have good cash flow with good appreciation. You just need to know where to look and to be ready once a deal arises.
Feel free to PM me if want to know more. I have a few investors that I team up with that we do buy and hold along with flips.
I just picked this one up 2 months ago. 3/2 SFR for 80k/ 8k rehab/ 125k ARV/ Now currently renting for 1k a month.