Los Angeles Investors, how do you do it?

[Eric Ippolito]

I know LA is an appreciation market, but running through any deals’ numbers, whether single family, or multifamily, I can’t see how anyone’s not losing money unless they buy a property in cash.

In LA, the housing costs are outrageous, but the rent isn’t too crazy (not to say $2400 for a 2bdrm apartment is fun). But it barely can pay for expenses, management, and the mortgage and still cash flow. My own landlord owns several multifamily locations that sold for a few million (if Zillow can be trusted) and rents the units up to about $2400 and I wonder how he’s doing it.

So what’s the strategy?

[Lee Ripma]

@Eric Ippolito

I went out of state in 2017 and I really learned the business in a lower-stakes market. I'm really happy with the portfolio I have in Kansas City and I will continue to buy there. Now that I understand RE and have a portfolio, LA has never looked better to me. Listen to Podcast 280 with @Account Closed pointed out your cash on cash may be very low but your overall ROI will be very high if you buy right. The great thing about LA is that there is often a massive delta between current rent and market rent. So if you can bring units to market you can double the NOI of a building and it's value. Those deltas just don't exist in the midwest markets so upside on building value is more limited. In LA you might spend 30k to get an increase of $1200/mo at a 4 cap. In the midwest you'll spend 10k to get an increase of 300/mo at an 8 cap. Do the math of which market will make you rich (360k vs 45k in value to your building in my example).

Gentrifying areas also see huge spikes in rent prices and there is a huge demand and shortage of housing in LA. We will basically never have oversupply here due to physical and political barriers. As Matt pointed out you need to get into an area that is just starting to turn and really ride that rent appreciation up. You might really have to hunt for that perfect property and really research and chose your submarket carefully. 

Some of the best areas for investing may not be where you would personally want to live, so don't confuse living in real estate you own with investing in real estate. I rent in LA and I'm happy to do so to live in an area that is central, safe, walkable, and has no commute. My landlord bought the 5plex building where I live in 1990 when Echo Park was scary and full of gangs for 200k from a distressed seller. The building is now easily worth 2M. So it was a great buy then but it isn't a great buy now. It is cheaper for me to rent than to own in the location I want to live in. However, there are still plenty of good locations to INVEST in. 

That is my two cents on LA RE. Listen to others who are successful in LA. Maybe cut your teeth in the midwest or in a lower-priced desert area like Twentynine Palms (midwest prices) that you can drive to before you invest in LA.