What kind of investors buy real estate in LA?

Question

It's well known that finding cash flow positive multifamily is difficult in LA. I'm starting out and since I live in LA, I thought I'd practice analyzing deals on redfin.

The numbers don't even come close. But these multifamily units are bought and sold everyday. So what kind of people buy these multifamily units, if not for cashflow? When does it make financial sense to buy any of these units?

One scenario I can think of is for people who have > $1million in cash, because with a big mortgage it's likely to lose money every month. But if you have that much cash, why wouldn't you invest it anywhere else that is likely to return more than an old multifamily unit in LA? For some of the deals I've seen, cash on cash return seems likely to be far lower the risk free rate.

For the units I've seen, they don't look like a place someone with >$1million in cash would buy for emotional reasons.

Why would anyone buy?

Jen Day · Answer

Hi Woojin, I'll speak from my experience buying a 4 unit multifamily property in LA in 2021. I bought a property that needed many repairs and some renovation, but not falling apart. I took an owner occupy loan to house hack for the first year and put 25% down. I was careful to buy in an area without rent control, and to investigate the situation with the tenants I would be inheriting. All tenants were paying far below market rent, but they were paying on time and wanted to continue living there. Their complaints were that many repairs were needed and not getting taken care of. When analyzing this deal, I knew that I was playing the long game. I knew it would take quite a bit of cash & time to do all the repairs, and that I would have to cover many expenses while they were being done. I analyzed this deal in three stages 1. What would my monthly out of pocket costs be for the first 6 months while renovations/repairs were being done and I did not have full occupancy (while I was living in one unit), 2. What would my monthly out of pocket costs be for the 2nd 6 months when I was at full occupancy AND raised the rents 30% (while I was still living in one unit), 3. What would my monthly cash flow be in year two once I moved out and had all units rented out at market rent. This turned out to be an amazing investment because I had a plan going in and was able to accomplish it. There were several challenges along the way of course, but because I was able to weather the storm at "the beginning", I am now cash flowing over $1000/month in Los Angeles! It is more challenging to make the numbers work now because interest rates are higher, but the there are several loan programs like the CA Dream for All and NACA that offer down payment assistance. To my knowledge, you can pay off the amount owed for CA Dream when you refinance, and the prediction is that interest rates will be lower next year. If you were to buy a multifamily property now, take care of any repairs/rehab to add value, and get the tenants paying market rent (since eviction moratoriums have ended), you would be in a fine position to refinance next year with the new appraised value, and you could then move out and have all units rented. This could be a strategy to get you cashflow by year two. Of course, you would have to be able to weather the storm of the first year. With small multifamily rental units in LA, if you play your cards right there is a pot of gold waiting for you. I specialize in small multifamily properties in LA, so if you'd like to continue the conversation give me a call, I'm happy to share & help in your search for a great investment. Best of luck!

Rick Albert · Answer

The last four properties I sold were to investors here in the Los Angeles area (one was Riverside). The reality is investors who know LA want to stay in LA. They don't like the perceived risk of buying out of state (especially if they are self managing). They understand the appreciation aspect, so even if the cash flow is horrible today, they know that generally it will go up. Because of Rent Control and the popularity of Southern California, inventory remains low, thus higher prices. The only reason why my ADU took a month to rent out was because we did extensive vetting. The winning tenant applied within the first two weeks.Investors are also looking at the equity play. So even if the rents aren't great, investors can leverage the properties to buy other properties, tax benefits, etc.For me and my clients, we generally house hack. We have to have a roof over our head, so even if we aren't living for free (which frankly doesn't happen in the beginning), we are still ahead by renting other units or rooms. Then later on they move and convert it into a long term rental.

Dan Portka · Answer

@Woojin Joo Despite all of the bad press about people leaving CA for other states, it continues to be a desirable location for many. In LA, we have some of the best beaches in the nation, some of the best weather in the world, proximity to mountains/snow/national parks/forests, anything you can think of is within a few hour drive of LA. We also have a robust job market. For these reasons I'd consider LA to be a "low risk" market for long term investing. If you have access to short term funding, house flipping can be very profitable here. Wholesalers, real estate agents, property managers, etc all benefit from high priced homes and rents. On the rental investing side, the average investor might be priced out of the LA multifamily market due to many properties being multiple million$. Cash flow won't happen unless you put down more than 20%. For those willing to house hack, you can leverage an owner occupant loan to get in with under 20% down while lowering your net monthly housing payment. Most of my clients have been interested in house hacking for this reason... Buy a duplex with 5% down and own a $1M appreciating asset. It doesn't take much math to realize how much money you're making on appreciation alone, total returns are likely greater than what you can get in other markets as a standard multifamily investment. For those looking to scale - If you buy right, after a couple years move out of the house hack, rent out the unit you were living in, be slightly cash flow positive, rinse and repeat.Try running some numbers as a house hack. Happy to chat any time about it.

Andrew Tyree · Answer

My wife and I house-hacked in Highland Park and it's been working fantastically. We bought it in 2017, fixed it up and live in one side. The place has almost doubled in value and we've been paying about $300/month for our mortgage, as the renters pay the rest. There are still very good deals if you house-hack them especially if you know where to look. I'm an investor/realtor.

Peter Mckernan · Answer

I know a lot of investors and one that has a portfolio of 500 units, he has done really well and over the years it has gotten harder and harder to manager there. I would say that he wins because he has done such a good job running it like a business and knowing the ins and outs. A lot of people that know LA love the business there and do really good, and the outsiders (people that do not know it or the accidentally landlords) are the ones that get stuck with a troubled property and tenant. If you do something in CA you need to know the rules or work with A PM that knows the area well to make sure you can run the business/properties like a business. As Rick Said, there is a lot of benefits outside of LA even though you are still in CA. The pluses are that the counties outside of LA do not have as strict of guidelines as the LA County laws do. The landlord has a little better ability to get the tenant out without paying them off. Look, the case goes for any other region in the US, you should not be looking for an area that you tell yourself I'm going to be evicting these people and I am going to be having problems. You need to go into knowing that there will be problems as a landlord and what is the best line of defense? Doing your due diligence, same goes for finding a home. If you completely disregarded the inspection report when buying a rental property, this needs to be done for sure with a property that you are buying and the tenant that you are placing.

Russell Brazil · Answer

In markets like LA your asset price and rents grow substantially faster than in markets with high cash flow. With patience, youll end up with far more cadh flow in a low cap rate market than you get in a high cap rate market.

Andres Murillo · Answer

Why people buy LA?- Growth, stability, tax benefits. We might have lost a high number of residents recently (plenty were homeowners), but the people coming into the city are all renters to start. Combine that in migration with the massive renter base already present and you get some of the easiest real estate in the world to rent out. Property values continue to climb. High-priced properties mean greater tax write-offs for investors who have high tax bills. Who buys in LA?- Established investors and syndicates might be the people who haven't thought about. Both appreciate the stability of their investments and how reliably they perform over time. If you're the head of a PE company, you may not need to hit home runs with every investment in order to keep your investors happy, but you definitely can't strike out.

Jason Ascencio · Answer

I ask myself the same questions. I would love to meet them and understand their process. Its crazy, how people or investors are buying these properties unless they are putting a good down-payment more then 20 %. I recently came across a property in San Fernando Valley. Lot size :6800 sq , 3 Homes : (2) 3 bed 2 bath and (1) 1 bed 1bath for 1.3M.