Does it make sense to rent vs buy a condo/house in Los Angeles?

Question

My rent in LA is currently $1600 a month for the master in a 2bedroom, but I'm sick of renting, interest rates are low, and I desire additional opportunities for passive income so I am looking to buy a property to own and live in. My parents are generously offering to help with paying a chunk of my 20% down payment. We are willing to go up to $800K or so, if the place is worth it and the numbers make sense. I am able to pay the monthly payments on my own.

I'm looking at areas close-ish to West LA with high potential for growth and appreciation. My intention is to stay in LA for at least a few years while living there, and am open to renting it out at some point, before later selling.

I know that appreciation-wise, the order goes like: 1bd condo < 2bd condo < single family residence. Since it is just me, I would prefer a 1bd condo, but would it be a mistake to do so given that appreciation rate is lower and renting out a 1bd is more difficult? Also I hear that HOAs can be notoriously difficult.

Lindsey Iskierka · Answer

Hi Julia!

This is a great question and is definitely common among the first time homebuyer crowd in LA area.  You do have a great price point and with the gift funds towards down payment you really have an opportunity to start building your portfolio and use this property to maximize it.

Would you be open to a house hack?  Perhaps a duplex in the area or a 2-3 bedroom home or condo that you could rent out the other bedrooms?  I helped a client get in escrow on a 3 bedroom townhome in Torrance where her mortgage is about $2700/month but she'll be paying less than $900/month...less than her roommates would pay her in rent.

In LA we're able to utilize the higher rents to find more opportunities to house hack and lower our cost of living.  If you do prefer to be by yourself,I would still suggest at least a 2 bedroom home for future rent or resale value.  You have a great price point to find something great to live in and pay your own mortgage instead of someone else's.

I'm here if you want to chat more about it!

Benjamin Caschera · Answer

I second the house hack idea 💡

Nabil Suleiman · Answer

@Julia Fong

HI Julia, first welcome to BP. Second, there is no wrong place to start in real estate, there is just starting in real estate. Similar to investing in general most people just never get started and the goal of either retirement or generational wealth isn't realize. I myself started in a one bedroom condo, but it needed renovations and I was able to force equity into it. I lived in it for two years, took advantage of not paying taxes on my gains, and moved into the next project (this actually helped split it into more than one). One of the arguments you may also hear is if you are happy with where you live paying 1600 a month, you can utilize your money to provide a higher returns in alternative investments, which can include real estate. AKA investing in real estate, but with tenants whom provide you cash flow, principal pay down and the tax benefits of owning real estate. If you aren't happy with your lower than average LA rental, then exploring the world of condos, townhomes and potentially single family homes should absolutely be on the table. Since you are on Bigger Pockets you can assume that no one here should try and sell you the newer remodeled one bedroom condo listing. You would more or so be shown the townhome or condo that looks like someone has hoarded magazines and car parts for the last 20 years. :)

Anyway, it sounds like you have a great rental price, and also the opportunity to have a gift toward the down payment of your own place. There are lots submarkets of west LA that continue to grow exponentially and have a bright future ahead of them. I am always happy to connect on whats happening around here as well.

Either way, good luck!

Jon Schwartz · Answer

Julia,

It's actually a myth that condos appreciate less than SFRs -- at least in LA over the last twenty years. If you actually look at the FHFA home price indices, condos just slightly outperform SFRs. I believe this is because of the several new urban cores that have been developed in LA; think downtown, Hollywood, Culver City, NoHo Arts District. These ares are all really popular and very condo-heavy.

It's also not harder to rent out a 1-bedroom condo. Where do you get that impression? If anything, I prefer smaller units because tenants are less likely to stay for too long. In a rent-controlled market like LA, you actually want tenant turnover every couple of years in order to keep up with market rent. On average, smaller units have more turnover than larger units, so you're actually protecting yourself with a one-bedroom condo.

It's also a really good time to buy a condo. Over the last year, there was a general trend out of condos and into SFRs. That means the condo market is currently well supplied compared to the SFR market, meaning better pricing right now compared to SFRs. I believe this trend will reverse in 2-3 years when COVID is in the rearview mirror and people remember how great walkable living is.

I think you should find a condo that needs a cosmetic renovation, put 10% down, and put the remaining capital into the renovation. I'd target condos in the densest spots you can find them; the faster these areas open up, the faster the condo values will shoot back to normal.

Best,

Jon

Does it make sense to rent vs buy a condo/house in Los Angeles?

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