Primary residence considerations

[Minh Nguyen]

Hi,

I'm considering buying my first home in LA as my primary residence. I will probably live in it for a couple years then rent it out and hold for long term. I'm looking at central LA for the most part, from Culver City to Silverlake and everything in between and around the 550-650k price range. I'll also be looking to pick up rental properties out of state after this purchase.

This seems to make more sense than renting at the moment with the interest rates and tax advantages. However, everything I've looked at so far is cash flow negative. I'm sure there are great deals out there but I'm not sure if/when I'll find it - and at some point, there will probably be diminishing returns on my efforts.

A couple questions to help me understand when I've found something good enough:

1. Do I just need to dig deeper or is this pretty much how it is in LA for the time being?
2. Can I take a little weight off the cash flow numbers since I'll be living it in for a few years?  Or is it an absolute sin to pick up something  that isn't at least cash flow neutral? I expect rents to continue to appreciate over the years, but what do I know.

[David Faulkner]

If you define a deal as something that has high cash flow on day 1, then you will never buy anything in LA, and that would be a mistake in my opinion. I assess a deal based on the discount to ARV that I can get, the forced appreciation I can create, and the long term historical average rates of market appreciation in that neighborhood for both prices and rents. I plug all those numbers and a few more into an IRR calculation to get an estimate of the long term return. This is for 10+ year hold periods ... who knows what the market will do in the next 1-2 years, so I just make sure I can afford to hold in the short term no matter what, which is where the forced appreciation equity bump helps. It is a competitive market, so deals are hard to find no matter how you define them, but stay at it and be disciplined about it ... strong supply & demand fundamentals cut both ways; that which is hard to buy in the short term is generally easy to sell or rent and tends to appreciate in the long term. The exact opposite tends to be true as well.