Should I purchase the home next to mine?

Question

Hey everyone, I have a purchase conundrum on my hands...  I currently have a 2 unit duplex in Echo Park CA that I purchased in 2018 for around $1 mil, renovated for another $75k.  It has been fully rented at $3k per unit for a year now, I manage it myself and things feel somewhat steady. Both of my neighbors are rental properties and one of them is going on the market next month.  It is a SFR for around $600k that is renting around $3k like my units and will be delivered vacant and in updated condition to the buyer.  I was planning on purchasing another property next year but am wondering if this might be something worth stretching for.  It of course depends on final sale price, actual condition, etc...  but it seems like there could be value in having properties that share a fence line from an oversight perspective and event in the future potentially an exit opportunity (especially considering my current property has two APNs with the house on one and backyard on another).  Is there long term value in locking up three contiguous lots or should I wait until I had planned to jump?

Will Barnard · Answer

Having contiguous lots can be a huge benefit now and in the future so if the numbers work, I would say  do it. Based on the numbers you provided, I don't see how they can cash flow positively but cash flow may not be your play here in Echo Park. The area is gentrifying and there are tons of developments and rebuilds going on there. I have several projects I have done in and around this area.

Plus you have the ADU option to add more units (if the lot sizes support it) which adds more opportunity of you.

Don't wait to buy real estate, buy real estate and wait as the saying goes.

Nik Corbaxhi · Answer

@Michael Phillips, do you have a positive cash flow on your $1mil investment? Looking at the numbers, 6k rent on $1 mil, not sure if it is, but if it does, then buying something for 600k which you can rent for the same seems like a no brainier to me.

What I dont like is that your neighbor is selling the property for 60% of what you bought at, but collecting the same rent. did you overpay on your first investment or is the neighbor underselling? 400k difference would raise questions.

Brian Ploszay · Answer

I was driving through Echo Park about 30 days ago.  There is a lot of new construction, which was interesting to see.   When I was in high school in Los Angeles, that area was low income and gang infested.  Echo Park and Silverlake gentrified.  Which is logical as it is on the doorstep of Hollywood and close to downtown.

I am not an expert on zoning, but it seems like you may be sitting on a development site.  The long term prognosis of that area is great, so there is reason to pursue this deal.  I don't know the economics of it, but cash flow for rentals is very meager in Los Angeles.  Plus you have rent control laws now, so you need to become very fluent with all the new laws.  (and strict older ones).  The new tenant laws very much affect gentrifying neighborhoods where some older tenants have locked in low rental rates.

Mike S. · Answer

A lot of positive benefit to buy a contiguous lot as described before.

The negative I would see is the concentration risk: if the neighborhood goes bad or if local catastrophe (flooding, earthquakes, tornadoes, fire...) happens you loose two properties instead of one.

I had the same situation a few years ago and in my case I bought the property as I self manage the properties and the convenience factor was a definite plus.

Nik Corbaxhi · Answer

Thanks Aaron, definitely missed that. If that is the case, the numbers would be a concern, just based on the simple 1% rule.

Aaron K. · Answer

@Nik Corbaxhi the OP bought a duplex, the neighbor is selling an SFR that is why there is a 40% difference

Theresa Harris · Answer

The fact that you can get a similar unit for 60% of the price is interesting.  As Nik mentioned, it the one you bought overpriced or the other underpriced.  You already know the area and it works for you.  Talk to your neighbour and see if you can get it before it goes on the market.  It will save him realtor's fees and you might be able to get a better deal.

Damaso Bautista · Answer

@Michael Phillips

There is another thread Los Angeles pro density by @Jake Malott He mentioned California SB-50. If it passes it will virtually make sfr zoning obsolete and allow for 5 story buildings to be built.

So having lots next to each other in this case would be huge because I am sure someone is going to pay a lot of money for these lots to put up large buildings. This is especially true where your property is because that is one of the most gentrified areas of LA.

Like stated above if your can pick up the other property and feel comfortable doing so I feel that is the right play.

Good luck! I wish you much success!!!

Aaron K. · Answer

@Michael Phillips if you are looking for something in that range anyway and you have the ability to pull the trigger now, it is probably advantageous to do so.  Will it be easier for you to manage yes, is there potential for development down the line, maybe is it super valuable when you go to sell, not really.

I'd rather buy the perfect property at an imperfect time than an imperfect property at the perfect time.

Should I purchase the home next to mine?

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