How are you guys investing in Los Angeles

Question

Native Angeleno looking to invest in Los Angeles and discuss some strategies that actually works for this market.

Any stories and experience are appreciated.

Thank you,

Alex

Jon Schwartz · Answer

Alex, welcome to most interesting real estate market in the country!

The first thing to confront is that LA is generally an appreciation market, not a cashflow market. Properties can cashflow, and there are more aggressive strategies to force cashflow, but the wealth builder here is the appreciation.

I noticed on your profile that you're looking for properties that meet a 1% or 2% rule. You won't find those in LA!

Speaking broadly, I think the best investment strategy involves finding properties that aren't fully utilizing their income potential.

At a more sophisticated level, that might mean buying a fourplex of large two-bedrooms, making relocation agreements with the tenants, remodeling the units into three-bedrooms, and then renting them out at market rents. I'm invested in a property near the Grove that's executing that business plan now.

At a simpler level, that might mean buying a house with a garage, converting the garage into an ADU, and renting out the ADU.

I think a super solid first step to get into the LA market is to househack a home or a multifamily. The property won't cashflow per se, but your housing expense will decrease while your equity in the property grows thanks to principal paydown and appreciation. I wish I had started my journey with a househack. Instead, just last year, at the age of 38 and with a wife and kid, I househacked a duplex in Hancock Park. I'll tell ya, I love running the numbers...

Oh, I just realized something! This is all from the point of view of a buy-and-hold multifamily guy. Another strong avenue in LA is flipping. It's a lot of work and very competitive, but it's a living.

I see you've been a member of BP for years. Are you invested out of state? What are you attracting to in the LA investing landscape?

Best,

Jon

Allen Tracy · Answer

Here's my story and strategy that could be a possibility for anyone living in LA.  I purchased my first primary residence which was a 2 bedroom townhome out in the valley.  I rented out the second room.  It didn't even cover half of my mortgage but it still helped.  I purchased it for $405k and four years later I sold for $530k plus I had paid down the loan and kept that rent money.  I took that money and purchased a larger single family home further out in the valley, it made my commute longer but I listen to Bigger Pockets audio books now to pass the time.  I rent that home out to filming companies which nearly covers the mortgage.  After a few years I took a HELOC out on the property and purchased two duplexes out of state in Columbus.

Dameka Rowe · Answer

This is a similar strategy I did, minus the renting out the room. I bought my first condo in 2017, lived in it until 2022, started renting it out (it cash flows!). I purchased my second property in 2023, it was a fixer, so after renovation and refi, PMI was removed:because of interest rates and the market, does not cash flow but the rents cover most of the mortgage and it’s been a solid equity play. Now looking to buy my third. Hitting roadblocks, so may have to change up my strategy/look out of state etc. LA is not an easy market, especially these days!

Miho Y. · Answer

@Matthew Forrest cool!! I called when the state passed the law. It was not as streamlined as now and the building department people were kind of skeptical and not helpful (surprise). Thank you.

Matthew Forrest · Answer

@Miho Y. You should check out the 2020 state ADU legislation, but off the top of my head I recall two ADUs for 2-4 unit properties and a max quantity of attached ADUs equal to 25% of existing units for 5+ units.

Jon Schwartz · Answer

Miho, how long ago did you call? New legislation passed in January allowing ADUs on multifamily properties.

Miho Y. · Answer

@Matthew Forrest Matthew Forrest are you sure you can add ADU to multi unit? Last time i called the city inquiring whether garage conversion if triplex was allowed, I was told only SFR’s was eligible for ADU addition. Maybe they changed the regulation?

Matthew Forrest · Answer

@Alex Ko The ADU construction capital getting locked in the property at this time doesn't necessarily mean it doesn't work. It definitely boosts cash flow! I would also say that going through the ADU process is a good (but expensive) education. At this point I think the best ADU strategies are applied to 5+ unit multifamily properties where the lenders look at rental income for property valve.

Alex K. · Answer

What type of home actually works for an adu project ?  Does anyone have any experience with this. It seems from what I have been reading in regards to ADUs, the appraisers / LA market has not giving it the value it caution air quotes " deserves. "

Alex K. · Answer

@Jon SchwartzSchwartz yes it seems like maybe the ADU idea would be awesome. I live in Los Angeles my whole life so for my first investment it makes me feel more at ease to know that I'll be near by my property i.e. knowing all the good and bad neighborhoods makes me feel safer investing my savings.

No investing experience in real estate as of yet. But, investing out of state seems tempting.

How are you guys investing in Los Angeles

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