(L.A.) Rental Property Purchase w/Tenants

[Allen Yang]

Looking to purchase multi-family properties in Los Angeles. Seeing a lot of properties that have current tenants that would come with the purchase - thoughts on this?

[Jon Schwartz]

Originally posted by @Allen Yang:

Looking to purchase multi-family properties in Los Angeles. Seeing a lot of properties that have current tenants that would come with the purchase - thoughts on this?

Allen,

Most properties on the market will be fully tenanted. You'll see some with a vacant unit or two, and only a handful that are fully vacant. These properties come at a premium -- and you'll soon understand why.

Rent control in LA makes navigating tenancy here different than the rest of the country. Long story short, we can't evict tenants unless they stop paying rent (or breach the lease in some other manner), and we can't raise their rents more than rent control allows (which has been 3-4% per year for the last decade).

So the downside to inheriting tenants is that, if they've lived in the unit for a couple of years, they're probably paying below-market rents, and you won't be able to catch up with market rents so long as they stay.

The upshot to inheriting tenants is that they're more likely to be good tenants and pay on-time. Nobody wants to lose a below-market-rent apartment!

Investing in multifamilies in LA is really about realizing that market rent potential. Some investors take the aggressive route of immediately negotiating buyouts (ie, "cash for keys") with existing tenants. This allows you to quickly renovate units and put them back on the market at market rents.

My approach is to target buildings that meet the following criteria: cashflows at purchase, even if just barely; significant upside to market rents; in a gentrifying neighborhood; smaller bedrooms counts as they experience more tenant turnover (which you want in LA, believe it or not!); and solid ADU potential or large units that could accommodate adding a bedroom.

I also really dig into submarket data. With numbers from the Census Bureau's American Community Survey, you can literally map the parts of LA that are seeing more move-ins, as well as the average length of tenancy in different submarkets.

I'm happy to discuss submarkets anytime you like! With LA's rent control, the profits are in the details, and I love digging deep into them.

All the best!

Jon