New To Investing

[Pearse Cafiero]

Hi Everyone, 

Trying to figure out the best way to go about getting my first rental property. Ideally was thinking a duplex, triplex, or quadplex to get started and use an FHA loan but I also have a private lender that can possibly help with up to $200k worth of a down payment. I want to find something local (Los Angeles area), move in, do small renovations to possibly build up more equity, do a 1031 exchange, and find something better.

Thoughts? Suggestions?

[Jonathan Greene]

LA is a tough market for that. Now, with the ADU rules, developers are buying anything close with some extra space so there may only be scraps left that wouldn't pass FHA or would price you out. I would not want a private lender on the downpayment because you would be starting your first investment with two loans. Look up Barbara Isabel on social. She knows all the nooks and crannies of LA multifamily.

[Jesse Rivera]

If you're doing FHA, I'm sure you know you have to live in one of the units. And doing 3-4 units FHA is tough unless you have a huge down payment. Self sufficiency rule makes 3-4 units almost impossible. Duplex is ok.

Riverside might be doable, if you're ok with that.

Happy to get on a call and answer questions.

[Rick Albert]

The challenge with the FHA guidelines is the self sufficiency test. Basically 75% of the total rents need to cover all the bills. The numbers don't really work. This only applies to 3-4 unit properties.

I think you are on the right track, as this is an equity play. There are a few different avenues that my clients have been exploring, including getting unpermitted units actually permitted. I had a house hack client do that a while back where the 2-bed unit wasn't permitted. It cost about $100K, but it would have cost around $200K if she were to do it from scratch.

[Wale Lawal]

@Pearse Cafiero

When starting out with your first rental property in Los Angeles, I'd recommend exploring FHA loans or private lending options to get your foot in the door. Look for properties with value-add potential, plan renovations carefully, and use tools like the BiggerPockets Rental Property Calculator to analyze deals. Getting pre-approved, networking with local investors and agents, and understanding LA's market challenges will set you up for success.

Good luck!

[Nathan Gesner]

Quote from @Pearse Cafiero:

You want to borrow money to buy a house, but you don't have the downpayment. Your solution is to borrow the downpayment, as well.

This is referred to as "over-leveraging" and it's not wise. If anything goes wrong, the entire deal comes crashing down. If it crashes hard enough, it impacts your personal finances, your relationships, and even your mental/physical health.

With the exceptions of politicians and so-called charities, building wealth typically requires sacrifice and time. Increase earnings, reduce expenses, save up, and invest.

[Brittany Minocchi]

Would not recommend borrowing $200k for the down payment, especially on your first investment property. You're financed at 100% and would be in big trouble if (when) ANYTHING went wrong....would the property even cash flow enough to service all of that debt? 

[Robert Reynolds]

Hi Pearse,

I would love to talk further about this offline, but house hacking and doing a live in flip is my favorite combo. It can be done on a multifamily, but I usually recommend people start with single family. I believe single family homes will appreciate the best, and when you are young you are ok with doing rent by the room to friends or family to assist with the costs. I just had a client close on a 4 unit on Friday in LA, using a 5% conventional loan. This is an ideal live-in-flip scenario and they will do great with the property, but these are hard to come by. Let me know if you'd like to hear more about the deal and other possibilities. 

[Andres Murillo]

Quote from @Pearse Cafiero:

Hi Everyone, 

Trying to figure out the best way to go about getting my first rental property. Ideally was thinking a duplex, triplex, or quadplex to get started and use an FHA loan but I also have a private lender that can possibly help with up to $200k worth of a down payment. I want to find something local (Los Angeles area), move in, do small renovations to possibly build up more equity, do a 1031 exchange, and find something better.

Thoughts? Suggestions?

 Hey Pearse! This is one of the most common challenges in the LA County community on BP. "How do I get started in CA?" The answer is based on your goals.

Short-term goals are tough. AB 968 will make it more difficult for first-time investors to "flip" our quickly "house hack" homes since anything resold within 18 months. There aren't many "short-term, get rich quick" type investment options in SoCal today. 

If your goals are long-term - this market will offer a ton of appreciation and steady renter demand. I helped a client purchase an SFH fixer with a detached garage. We renovated the SFH and converted the garage to a 2-bed ADU. The ADU will bring in around $2800 net per month. That brings his payment down from $4300 to $1500. Very affordable for him and his girlfriend. When they move out they'll rent the SFH for at least $3500. He'll have at least $2k per month in positive cash flow and tons of equity when it's time to find the next home in some years. For less than a $250k investment he'll cash flow about $24k/year down the road. That house was purchased for about $750k and is likely worth about $900k now that the ADU is up. Tons of equity. Long-term cash flow.

[Dan H.]

Quote from @Andres Murillo:

Quote from @Pearse Cafiero:

Hi Everyone, 

Trying to figure out the best way to go about getting my first rental property. Ideally was thinking a duplex, triplex, or quadplex to get started and use an FHA loan but I also have a private lender that can possibly help with up to $200k worth of a down payment. I want to find something local (Los Angeles area), move in, do small renovations to possibly build up more equity, do a 1031 exchange, and find something better.

Thoughts? Suggestions?

 Hey Pearse! This is one of the most common challenges in the LA County community on BP. "How do I get started in CA?" The answer is based on your goals.

Short-term goals are tough. AB 968 will make it more difficult for first-time investors to "flip" our quickly "house hack" homes since anything resold within 18 months. There aren't many "short-term, get rich quick" type investment options in SoCal today. 

If your goals are long-term - this market will offer a ton of appreciation and steady renter demand. I helped a client purchase an SFH fixer with a detached garage. We renovated the SFH and converted the garage to a 2-bed ADU. The ADU will bring in around $2800 net per month. That brings his payment down from $4300 to $1500. Very affordable for him and his girlfriend. When they move out they'll rent the SFH for at least $3500. He'll have at least $2k per month in positive cash flow and tons of equity when it's time to find the next home in some years. For less than a $250k investment he'll cash flow about $24k/year down the road. That house was purchased for about $750k and is likely worth about $900k now that the ADU is up. Tons of equity. Long-term cash flow.

You cannot calculate rent by subtracting off the rent of the ADU.  That does not include any expenses, vacancy, etc.

similar rent minus PITI does not equal cash flow.  If you use 50% rule, rent/2 - P&i equals cash flow.   When including maintenance/cap ex, vacancy, pm, misc he will have little, and possibly negative, cash flow.

if he invested almost $250k to add less than $150k of value (assume some of the current value came from the home appreciation), there is no cash flow until the initial negative equity position is recovered.  so he has an initial negative equity in excess of $100k.

so -$100k / (a very small cash flow when properly allocating for expenses and vacancy) equals years before there is any cash flow.  This negative equity position is one of many reasons that adding ADUs in a single family zone is not typically a good RE investment.

OP whatever you decide to invest in, make sure you do thorough and conservative underwriting. 

good luck

[Andres Murillo]

Quote from @Dan H.:

Quote from @Andres Murillo:

Quote from @Pearse Cafiero:

Hi Everyone, 

Trying to figure out the best way to go about getting my first rental property. Ideally was thinking a duplex, triplex, or quadplex to get started and use an FHA loan but I also have a private lender that can possibly help with up to $200k worth of a down payment. I want to find something local (Los Angeles area), move in, do small renovations to possibly build up more equity, do a 1031 exchange, and find something better.

Thoughts? Suggestions?

 Hey Pearse! This is one of the most common challenges in the LA County community on BP. "How do I get started in CA?" The answer is based on your goals.

Short-term goals are tough. AB 968 will make it more difficult for first-time investors to "flip" our quickly "house hack" homes since anything resold within 18 months. There aren't many "short-term, get rich quick" type investment options in SoCal today. 

If your goals are long-term - this market will offer a ton of appreciation and steady renter demand. I helped a client purchase an SFH fixer with a detached garage. We renovated the SFH and converted the garage to a 2-bed ADU. The ADU will bring in around $2800 net per month. That brings his payment down from $4300 to $1500. Very affordable for him and his girlfriend. When they move out they'll rent the SFH for at least $3500. He'll have at least $2k per month in positive cash flow and tons of equity when it's time to find the next home in some years. For less than a $250k investment he'll cash flow about $24k/year down the road. That house was purchased for about $750k and is likely worth about $900k now that the ADU is up. Tons of equity. Long-term cash flow.

You cannot calculate rent by subtracting off the rent of the ADU.  That does not include any expenses, vacancy, etc.

similar rent minus PITI does not equal cash flow.  If you use 50% rule, rent/2 - P&i equals cash flow.   When including maintenance/cap ex, vacancy, pm, misc he will have little, and possibly negative, cash flow.

if he invested almost $250k to add less than $150k of value (assume some of the current value came from the home appreciation), there is no cash flow until the initial negative equity position is recovered.  so he has an initial negative equity in excess of $100k.

so -$100k / (a very small cash flow when properly allocating for expenses and vacancy) equals years before there is any cash flow.  This negative equity position is one of many reasons that adding ADUs in a single family zone is not typically a good RE investment.

OP whatever you decide to invest in, make sure you do thorough and conservative underwriting. 

good luck

You’re right in that the level of underwriting I presented wasn’t institutional level - but for your average person just starting out, institutional grade analysis often makes the thought of investing overwhelming. That’s why the BP community is filled with would-be investors. I like the concept of making investing accessible and achievable. 

These are some of the best investments moving forward in SoCal. The Private Equity and Institutional investor is playing the ADU game - I'm working with them. Currently underwriting 35 SFHs being purchased as a portfolio by a PE Firm in order to push rents via ADU developments. They aren't balking at a "negative equity investment" when finding such great cash flow from the ADU investment.

[Dan H.]

Quote from @Andres Murillo:

Quote from @Dan H.:

Quote from @Andres Murillo:

Quote from @Pearse Cafiero:

Hi Everyone, 

Trying to figure out the best way to go about getting my first rental property. Ideally was thinking a duplex, triplex, or quadplex to get started and use an FHA loan but I also have a private lender that can possibly help with up to $200k worth of a down payment. I want to find something local (Los Angeles area), move in, do small renovations to possibly build up more equity, do a 1031 exchange, and find something better.

Thoughts? Suggestions?

 Hey Pearse! This is one of the most common challenges in the LA County community on BP. "How do I get started in CA?" The answer is based on your goals.

Short-term goals are tough. AB 968 will make it more difficult for first-time investors to "flip" our quickly "house hack" homes since anything resold within 18 months. There aren't many "short-term, get rich quick" type investment options in SoCal today. 

If your goals are long-term - this market will offer a ton of appreciation and steady renter demand. I helped a client purchase an SFH fixer with a detached garage. We renovated the SFH and converted the garage to a 2-bed ADU. The ADU will bring in around $2800 net per month. That brings his payment down from $4300 to $1500. Very affordable for him and his girlfriend. When they move out they'll rent the SFH for at least $3500. He'll have at least $2k per month in positive cash flow and tons of equity when it's time to find the next home in some years. For less than a $250k investment he'll cash flow about $24k/year down the road. That house was purchased for about $750k and is likely worth about $900k now that the ADU is up. Tons of equity. Long-term cash flow.

You cannot calculate rent by subtracting off the rent of the ADU.  That does not include any expenses, vacancy, etc.

similar rent minus PITI does not equal cash flow.  If you use 50% rule, rent/2 - P&i equals cash flow.   When including maintenance/cap ex, vacancy, pm, misc he will have little, and possibly negative, cash flow.

if he invested almost $250k to add less than $150k of value (assume some of the current value came from the home appreciation), there is no cash flow until the initial negative equity position is recovered.  so he has an initial negative equity in excess of $100k.

so -$100k / (a very small cash flow when properly allocating for expenses and vacancy) equals years before there is any cash flow.  This negative equity position is one of many reasons that adding ADUs in a single family zone is not typically a good RE investment.

OP whatever you decide to invest in, make sure you do thorough and conservative underwriting. 

good luck

You’re right in that the level of underwriting I presented wasn’t institutional level - but for your average person just starting out, institutional grade analysis often makes the thought of investing overwhelming. That’s why the BP community is filled with would-be investors. I like the concept of making investing accessible and achievable. 

These are some of the best investments moving forward in SoCal. The Private Equity and Institutional investor is playing the ADU game - I'm working with them. Currently underwriting 35 SFHs being purchased as a portfolio by a PE Firm in order to push rents via ADU developments. They aren't balking at a "negative equity investment" when finding such great cash flow from the ADU investment.

What i am seeing from the most experienced So CA RE investors is the opposite. The industrial buy and hold buyers have virtually dried up in San Diego. I am seeing little buy n hold because the cash flow is not there. The ADUs that the most experienced are adding leverage bonus density program or other such rules to add multiple units and for the most part they exit. Even the smaller more experienced flippers are typically not adding a single ADU. I find single ADUs are mostly being added by people with minimal RE investment experience often without a clue as to the value that will be added by the adu addition. Many times they do not realize the adding of the adu makes their existing unit rent controlled. Basically they often are added by people who do not do thorough and accurate underwriting.

The value of commercial MF has fallen nationally. This is because the dwindling cash flow due to the increased rates has resulted in higher cap rates. Note it often is not a result of significant NOI change (excluding some markets where a lot of new units have been added).

3 recent studies show it is cheaper to rent than own in virtually all of the largest US markets.  Owning has advantages that LL does not such as no vacancy, typically lower maintenance/cap ex versus being occupied by tenants, and often property tax breaks. 

What this implies to the typical RE investor is obtaining significant cash flow is a big challenge right now and relying on other RE profit sources (such as a value add and not doing a value subtract) may be a more certain path of generating returns.  

Good luck