Where to start my rental property investing?

Question

Hey Everyone, I am not new to bigger pockets as a reader and podcast listener, however I am new to the actively looking for property aspect. Here is my situation and I would just love any feedback on what you think is the best option for me starting out.

I currently live in Los Angeles with my girl friend as she works in the entertainment industry. I am officially out of all debt and beginning to save to start buying multi family real estate for rentals and I am trying to decide where to begin. As I currently rent an apartment in Hollywood I have been considering saving enough money to buy a 3-4 plex in/or around LA where I can get an FHA loan and live (rent free) in one apartment while fixing up and renting out the others.

My question for everyone is based on the price of housing in Los Angeles, I will be looking at Atleast an 750k-1mil. Property investment if I take this route. Even at $2500/month I pay currently for rent would it be worth it to take on this venture or should I look out of state where I could conceivably buy several properties for the same price even though I’ll lose the FHA and have to do the full 20%? Just trying to consider how much not paying rent real my affects me long term or should I just bite the bullet for another year or so while building a portfolio elsewhere?

Thanks for your insight, I’m eager to hear some of your thoughts.

Dan Portka · Answer

You can find a property manager to manage rehabs for you. I've done it both ways, find and manage a contractor yourself or have your PM do it all. Like everything there's pros and cons to each, but your PM should already have a solid network of contractors to do the job for you. They might charge you for the oversight, but in the end it will cost less than going the turnkey route.

Sam Sala · Answer

Yep, but you'd still have have to line up your contractor, property manager and other.. as opposed to using a turnkey provider

Stephen Brown · Answer

I would go out of state. It's much easier to scale and there are good properties to buy in good neighborhoods if you have an agent that knows the area well. You can do well in a cheap market with a declining population as long as you have a good property. It will cash flow and you can build up in that area.

Sam Sala · Answer

Great input thanks, so you basically find the properties and then rehab and assign a PM all remotely?

Dan Portka · Answer

@Sam Sala i used a TKP for my first property and learned the hard way. At the time I was scared to not use a TKP and do what i considered to be "on my own". The last 3 properties I've either purchased through an agent or wholesaler and have had much more success. I'm not saying all turnkeys are bad there are reputable companies, but you need to do your own due diligence and run the numbers. Many TKPs will say either repairs or capex don't need to be included because you have a completely renovated property, i whole heartedly disagree. Others will seriously underbudget those expenses. Some other costs you need to consider which are commonly missed from turnkey proformas - turnover/rent ready costs, "hidden" property manager costs, closing costs, and lawn care/utilities/pest control/hazard insurance (if applicable).

Sam Sala · Answer

Hi Daniel,

Do you use a turnkey provider? for your OOS investments? you also said their pro forma's are bogus so what do you normally do about that?

Dan Portka · Answer

@Tim Adams Using FHA for 3-4 unit properties in LA isn't feasible unless you find an AMAZING deal (i have yet to see it happen). For 3-4 units FHA requires the property to pass its self sufficiency test. I've spoken with different lenders and they all perform the test slightly different, but the rent you receive needs to cover the PITI payment. In simpler terms, the property needs to cash flow while you live in one of the units and thats nearly impossible in LA.

The self sufficiency test is only applicable for 3-4 unit properties. So you can still buy a duplex with a FHA loan and take advantage of the low FHA down payment. OR you'd have to save up 20-25% down payment and go the conventional route.

With all that said, house hacking can still be a great option in LA. You mention currently paying $2500/month - you could end up saving a lot of money on rent while getting all the benefits owning real estate - appreciation, loan paydown, tax advantages, etc. Your house hack returns are going to depend on a few things - which area you want to live, how many units you're looking to buy, whether you are willing to rent by the room, and how much down payment you can afford.

I have an out of state rental portfolio and am now considering to do a house hack in LA. There are a lot of pros and cons to consider when buying out of state. In my opinion, many new investors underestimate the monthly expenses required to maintain and manage OOS rentals and nearly every turnkey pro forma you look at will be bogus. That said, I still plan on growing my OOS portfolio in the future (just put in another offer last week!). Happy to share more of my experiences with you.

Lee Ripma · Answer

Don’t confuse living in RE with investing in RE. I don’t think the MF house hacking thing in LA is not suitable for most aspiring investors due to rent control. You can do it with a SFH and rent out the rooms. Or you can just get going on building your rental portfolio out of state. That’s what I did and many others living in high-priced markets have done.