Echo Park, Los Angeles Oppurtunity

[Coty H.]

I have an opportunity to purchase an off market 2-unit property in the Elysian Heights section of Echo Park.

To those familiar with the market:

First and foremost, the property would be my primary residence and would greatly decrease my personal basis as my % of the mortgage would be less than my current rent in a much inferior unit. Saving money from that alone.  On a $/psf basis, this transaction would be at the very top of the market which is scary, however, applying the rent for the unit which just had a lease signed at very high rents and applying market rent to the other unit (which I would occupy), the deal breaks even in year 1, (including all operating expenses, mortgage, mgmt. fee. etc.).

So my question:

Echo Park has seen significant rent appreciation over the previous few years. How safe is it to rely on appreciation in a market as desirable as Echo Park. Even if we see some sort of market correction in say 2018/2019, I honestly only see this neighborhood appreciating, especially as this would be a long term hold due to the location and the functionality of the site/property.

Thanks for guidance

[David Faulkner]

I would look at the long term averages for appreciation in rent and prices. Not this year or last year, but the long term averages over the last 30+ years, certainly long enough time period to capture both up markets and down markets and being careful not to cherry pick your start or end dates to be an up or down market.

If after underwriting with those averages and other reasonable projections you still like the investment under nominal scenarios, then you need to stress test your investment to make sure that under any bad (but still somewhat reasonable) circumstance you have the intent and ability to hold onto this property, or at the very lease have multiple exit strategies to sell at profit if you need or choose to. For example, could you afford to hold this property vacant indefinitely on your W2 income? If not, how long could you afford to hold with your W2 and capital reserves? Is there any reasonable scenario where you may need to do this? Are you well prepared to cover major CapEx events (eg: new roof)? These kind of questions ... you need to be sure you can make it to the long term before you can see the long term appreciation and over a multi-decade hold period Murphy is sure to come a-knockin' more than a few times.