Los Angeles vs New York City: More saturated market?

Question

I was having an interesting conversation with a friend the other day. We are both investors in the NYC area (rehabbing and flipping), and his family is moving to California, more specifically Los Angeles. He has spent years here and knows the market well. What prices to pay in which areas, how much houses will sell for in areas, built up numerous contacts within the industry and has become very successful here.

He knows he will be overall happier in Los Angeles and really wants to move there but will have no idea where to start. His fears are:

1- The LA market is more saturated. I have no idea how the LA market is, but I know that Queens, Brooklyn, and Bronx (our main areas of investment) there is FIERCE competition. Anyone have any idea of how the LA market compares?

2- He has no idea where to invest. I don't know too much about it but I've heard the Long Beach, Compton, Watts, Pico Union area is where a lot of the investors are?

What are your guys thoughts? If anyone in the Los Angeles area has any input or advice I would really appreciate it, thanks!

Mike McKinzie · Answer

If you buy a house for $50,000, put $20,000 into it, and sell it for $100,000, you don't make $30,000 and would be lucky to make $20,000.  (Lot's of Inland Empire homes sell in that $50,000 range)  If you flip homes that you buy for $300,000 or more, then you could make a profit of more than $50,000, but even Will can tell you that that is getting harder and harder to achieve.  And putting $20,000 into a house is nothing.  I just had a tenant move out last summer, and just passed $20,000 in repairs (carpet, paint, new bathroom, new kitchen, new roof, and more)  My property manager told me it would take "around $5,000" to fix it up, the roof alone cost over $6,000.  Point being that $20,000 doesn't repair much.

California is a different animal when it comes to Real Estate.  We had homes that sold for over $500,000 in 2007 and sell for less than $100,000 today.  And they will sell for less than $100,000 three years from now.  Right now, supply is HIGH, lots of foreclosures, and demand is low, 12% Unemployment in California.  In the first quarter of 2011, 70 companies in California that had a workforce larger than 1,000, left the state.  In today's paper, it was reported that the reason that Orange County had a "drop" in unemployment is that over 13,000 folks stopped looking for work, most of them having left the state.  Our real estate market has a huge hole to climb out of.

Mike McKinzie · Answer

I know that another BP poster, Will Bernard, flips in an area called "Santa Clarita Valley." This is an area north of the Los Angeles Area and a bit closer than the Inland Empire. It is just off the 5 Freeway heading north from Los Angeles. While there are literally thousands of investor/flippers here in Southern California, there are also hundreds of thousands of foreclosures, either available or coming available over the next few years. The most important thing is networking here. Get to know bankers, realtors, title company folks, etc.... Most flippers are making only $10,000 to $20,000 with an occasional home run, north of $50,000. Many flips actually lose money with under estimations of repairs. California has some of the strictist disclosure laws as well, so everything has to fixed and documented and usually verified with a Home Inspector.

There is money to be made out here, but there are full blown corporations, with hundreds or even thousands of employees, who do nothing but flip houses. My daughters boyfriend works for one and they usually buy 20 to 30 houses a week for flipping, all in the Inland Empire. And they are happy with a $5,000 profit on one house.

Like Mitch said, it is like sea gulls at a dump, but this is a very LARGE dump.

There is money to be made out here, but there are full blown corporations, with hundreds or even thousands of employees, who do nothing but flip houses.  My daughters boyfriend works for one and they usually buy 20 to 30 houses a week for flipping, all in the Inland Empire.  And they are happy with a $5,000 profit on one house.

Like Mitch said, it is like sea gulls at a dump, but this is a very LARGE dump.

Brian Levredge · Answer

Geographically speaking, "Los Angeles" is a huge place with literally hundreds of sub markets.  There is also a ton of money out here from both Asia and the Middle East.  They buy at auction and overpay for a property and stick a renter in it earning an ROI of under 5% because they think the market is going to be back to its 2006 high sometime in the next five years.  That ain't happening.  That's not to say you can't buy at auction and be successful because there are people here that do it as well as some people I know personally outside of this site.

Pico Union, Watts, and Compton are war zones.  I personally witnessed a gang shootout in the middle of the day in the Pico Union when I was working on an apartment building while I was in college.  You can make money in those areas, but I think you would have a limited pool of buyers due to the rampant crime there.

Long Beach actually has many nice parts to it, but it also has plenty of bad ones.  Nice ones/decent ones would be close to the beach, Los Altos, Bixby Knolls, Artcraft Manor, and pretty much the whole East side of Long Beach up to the 405 freeway.  Avoid north Long Beach as it is basically an extension of Compton.

I've actually heard decent things about parts of Pomona, Chino, and Chino Hills.  Home sell at decent price points and there is a strong buyer's pool.

Having said that, I agree with Mike's comments regarding the economy out here.  Businesses are fleeing in droves and the State seems to be doubling down on stupid by creating even more taxes and increasing what is already an almost crippling regulatory environment.  Be prepared to start figuring out how much carbon your operations put out because that is coming down the pike.

Steve L. · Answer

I would imagine both markets are similar in terms of excessive competition, investors willing to work on small margins (and do volume to make up for it).

Your friend will have to re-learn this market and find a niche/connection that will make deals happen.  I think he could be successful here.

I think it is near impossible to make the comparison you are trying to make without knowing a lot of details about your friend (how much cash he as, where his experience is, what kind of volume he does, etc).

I believe that successful people generally find ways to be successful (especially when you look long-term).

Anthoy James · Answer

Mike, when you say they make 10-20k on a flip, do you mean assigning a contract, or after purchasing and renovating it? That seems really low for the latter!

I'm intrigued by how big LA and the surrounding areas are. Are you guys familiar with all the different prices in the areas or do you guys go based on comps alone? I feel like it would take him years to really get down the prices in all the different markets over there!

Herm M. · Answer

Mike, $10,000-$20,000 profit? And an occasional home run of 50k? Those numbers sound very low.

Mitch Kronowit · Answer

Oh no, no, no. A 2 hour drive from LA will take him clear through Riverside out to Victorville, Palm Springs, or Temecula. 80% of the market will be closer to him than that.

Of course, traffic makes things worse, but the beauty of living near the coast and working inland is you're going the opposite direction of most commuters! While your friend is traveling eastbound on the 10 in the morning, he's going to see 30 zillion inland residents on the other side of the freeway heading into LA. Then he'll see the opposite when he's done for the day.

Anthoy James · Answer

He is willing to travel up to 60-75 minutes for work, possibly more. I guess he just thought that Inland Empire was about 2-3 hours away, but I guess there are closer areas he could go to... The problem with driving such a far distance for him is going to every house for a couple hours a day, in different neighborhoods would be a little difficult. In NY, we can go from Queens to Brooklyn in about 10 minutes sometimes. For him to go from Beverly Hills to Riverside to Orange County, etc may be a little time consuming, but he'll have to make it work.

I never realized just how big California really is!

Mitch Kronowit · Answer

The Pico Union area is actually very close to Beverly Hills, between 5 to 8 miles depending on where you're counting from. But like any big city, even 1/4 mile can make a big difference in neighborhoods and you won't find many contrasts as strong as Beverly Hills and Pico Union! Long Beach will be the furthest of those 4 cities, about 20 miles south on some very heavily traveled freeways, and the closest cities in Riverside County will be about 35-40 miles due east, straight shot on Highway 10 (Santa Monica Freeway), which is also heavily traveled.

If your friend is interested in flipping and is hands-on, i.e., at the work site daily either working or supervising, then yes, going to the Inland Empire every day is going to be a drag, but if that's where the deals are, that's where the money is. I have a friend who lives in Orange County and travels out to Murrieta/Temecula (a 45 minute drive) every day when he's rehabbing a home. If your friend can find better deals nearby Beverly Hills, great, but if there's more money/profit to be made by traveling further, then he has to factor that into his numbers.

Anthoy James · Answer

Mitch, thanks for the reply. Very much appreciated. You were right about my definition of saturated. For instance in Queens and Brooklyn you will find 10-15 legitimate investors bidding on a property. Knowing the prices better (and thus willing to bid more than someone who doesn't know them as well) and having available cash as you said will put some above the others. I guess my friend is just afraid of being a small fish in a big pond. He will need at least 6 months - 1 year of just learning the areas/prices before he starts to invest IMO.

Secondly, like I said he really has no clue about the LA real estate market. I don't know too much about California's geography but I'm assuming he named those areas because they are somewhat closer to LA (he will be moving to the beverly hills area, not sure how close that is to the areas your mentioned) whereas the Inland Empire would be too far for him to travel? Again if I am wrong, please correct me as I don't know California at all.  :oops:

Los Angeles vs New York City: More saturated market?

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