Refinance or Sell? Relocating to LA from Nashville

[Pablo Hernandez]

My gf and I are in the process of moving to Los Angeles and currently own 2 properties in Nashville that cash flow about $500/mo (total after all is said and done). I bought the first one knowing nothing about REI using an FHA for 365k and now have it listed at 415k, and the other at 200k , put about 30k into it and am planning on listing it for 275k. We will likely have around $115k to put down on our next property.

Our plan is to put the cash down on a fourplex in Los Angeles using an FHA. (LA allows you to borrow up to 1.4mil on an fha)

Is this a sound plan, or should We keep these as rental properties, refinance both, take cash out of the equity and try to buy something in LA with whatever that affords us?

Our long term goal is to have enough rental income to allow us to quit our 9-5!

Grateful for any and all tips

Cheers

[Jon Schwartz]

Originally posted by @Pablo Hernandez:

My gf and I are in the process of moving to Los Angeles and currently own 2 properties in Nashville that cash flow about $500/mo (total after all is said and done). I bought the first one knowing nothing about REI using an FHA for 365k and now have it listed at 415k, and the other at 200k , put about 30k into it and am planning on listing it for 275k. We will likely have around $115k to put down on our next property.

Our plan is to put the cash down on a fourplex in Los Angeles using an FHA. (LA allows you to borrow up to 1.4mil on an fha)

Is this a sound plan, or should We keep these as rental properties, refinance both, take cash out of the equity and try to buy something in LA with whatever that affords us?

Our long term goal is to have enough rental income to allow us to quit our 9-5!

Grateful for any and all tips

Cheers

 Pablo,

An early welcome to LA! It's an interesting and complex real estate market out here. Rent control laws and a huge diversity of submarkets make LA difficult, but very rewarding with the right amount of research and diligence.

I think you'll be in a great position to househack a fourplex if you're planning to enter the market in the second half of 2021. Right now, the eviction moratorium both A) makes it difficult to estimate cashflows in the near term and B) makes it potentially difficult to move into a fourplex if it involves relocating a tenant. This is allowed under LA rent control, but if the tenant refuses to move out, you have to go through the eviction process -- and evictions of any kind are still on hold. Come mid-2021, the eviction moratorium should be lifted, the backlog should be worked through the court system, and we'll have our normal processes in place again.

More importantly, though, a lot of investors out here are anticipating price declines in 2021. The eviction moratorium's expiration will create an increase in vacancy, and the expiration of forbearance programs in April 2021 will force some owners (of multifamily, not just SFRs) to sell. Put these together, and you get lower valuations across the board. Nobody's predicting a crash, but more like a 10-15% dip. (And none of us has a crystal ball, of course!)

A commenter above asked if you'd really get a better IRR in LA. If you enter the market during next year's softness, I think you will. Real estate is slow-moving and cyclical, and LA peaked late last year/early this year. Next year is the time to jump in.

As far as your options go, if you're serious about LA, I think you need to sell the Nashville properties. Reason being: LA is expensive.

If you cash-out refi at 75% LTV on both Nashville properties, how much capital will that produce?

If you sell both properties and come to LA with $115K, you'll be able to put 10% down plus closing costs on a $1M property, roughly. You're gonna need that money if you plan to buy and live in a fourplex. Finding a $1M fourplex in a decent neighborhood is really tough out here. You might have to settle for a triplex. (And really, duplexes -- including the one I'm househacking right now -- go for well over $1M is really good neighborhoods!)

(Side note: a friend of mine bought a $1M fourplex in a gentrifying neighborhood called Highland Park in 2017 or 2918. He had to fix the foundation and replace part of the exterior stucco. Anyway, now he's getting something like $2500/unit, all 1-beds. LA is a tough, expensive market -- but there's a lot of reward!)

There are a few pockets in LA where inexpensive submarkets border more expensive markets, so you can find a great opportunity in a slightly rougher patch two blocks from a great area. And if you're targeting an area like this, there are some great loan programs sponsored by the government to help you.

I'm a nerd for the LA market; shoot me a message if you have more questions. I'd love to download everything I know so you have a reasonable expectation of what to expect out here.

All the best!

Jon