So I'm moving to LA, rent or HH?

Question

Hello BP!

So I just found out I'm relocating to LA for a job with my SO. I've house hacked two times on the east coast, one in a high COL area, so I have some experience. Not moving until summer/fall of next year but we want to get a jump on housing. Also we will stay about 4 to 5 years and then leave back to the east coast.

I've done some research on LA, my SO is more familiar with LA than me. I've done quick searches on redfin to see prices and 2-4 units and I see how it could work. Obviously commute is a huge thing and so looks like we're staying anywhere between Culver City and just west of downtown.

My SO is already sending me townhomes for rent in the 3k range that would work for us. One we found was perfect and had two months rent concession so 2500 for the year which seems too good to be true.

I'm not sure on what to do. Obviously there's a lot of factors such as our income, location and commute, down-payment etc. I'm trying to keep this as short as possible. Any opening opinions? I'm continuing to research on BP and I know I found an amazing thread or post on BP Facebook group and trying to find it again. Thanks so much!

Jon Schwartz · Answer

Mark,

Rents are low for longterm tenants because of LA rent control, which has capped annual rent increases at 3% or 4% per year for the last decade. There's no vacancy control, though, so vacant apartments are renovated and offered at market rents. Hence, you'll find a $3K/month townhome renting down the block from a $1000/month townhome.

Rent control and rent levels play into the buying strategy here. You might find an excellent building at a great price -- the catch being that current rents are very low. It's a complicated landscape, but it makes for some great opportunities.

Google "Los Angeles RSO" to learn about our municipal rent control. I'm also happy to connect on the phone and give you a quick lay of the land.

If you're aiming for a monthly net out-of-pocket of $2500, there are definitely duplex options that will work between Culver City and downtown. As mentioned above, it's a mix of neighborhoods in that swath of LA. Moving from west to east: Culver City is fantastic and expensive; West Adams is gentrifying and hit-or-miss; I love Mid City and Arlington Heights for their growth prospects; Pico Union and Westlake are very hit-or-miss, but are also expected to see a lot of appreciation over the next five years.

The FHA loan might be a problem. LA is a very competitive market, and sellers prefer conventional loans with higher down payments. If you must go FHA, you're likely limiting your pool to properties that don't sell in the first two weeks. You'll definitely need to be handy to take on these projects! And with the eviction moratorium likely in place next summer, your pool is further reduce to properties with a vacancy.

So in the abstract, yes, you should absolutely house hack while you're here. According to the FHFA quarterly price index, the median annual appreciation rate over a five-year hold in LA County is 6.7% (happy to share my research on this). You'll build a lot of equity in principal paydown and appreciation over five years. In practice, though, your FHA loan is going to make finding a property harder.

Best,

Jon

Nadia O. · Answer

House hack is great but if you’re not familiar with LA, I would suggest to rent first. @Jon Schwartz is on point. There are some really nice & expensive areas but there are projects as well. We were thinking of purchasing multi family in LA but we were careful with the areas. There are areas you wanna stay away. Some of the areas are infiltrated with gangs. I don’t want to scare you away but do your research thoroughly before purchasing. Type in gangs of LA in google. It will show you a map to where best to stay away.

Hope this helps

Dan Schweit · Answer

Are you planning on visiting before you purchase?? Or would you be looking from a distance, and possibly writing offers before you come? Los Angeles is very mixed by type of neighborhood, especially in the area you are talking about. I would suggest possibly finding a rental situation like you mentioned above for the first year, and get to know the neighborhoods of LA, then find the situation that fits during that time period. You may find some very favorable rental opportunities and landlords willing to adjust due to covid. Let me know if you have any specific questions regarding LA, I have been here my entire life, feel free to message me, happy to help.

Jon Schwartz · Answer

Mark,

One more possibility to consider:

AirBnb is severely restricted in LA. A person can only rent part of their primary residence.

What's funny is that a lot of homeowners have built rental units into their homes over the years. I see a lot of single-family homes with non-permitted units -- often just a bedroom, bathroom, and kitchenette with a side entrance.

These properties provide a great opportunity for house hacking! Because the rental unit was never permitted as its own unit, it's still part of the primary residence. So you can rent it on AirBnb! With fewer AirBnBs in the city, hosts are able to charge great rates.

So another strategy would be to buy a single-family home with a non-permitted rental unit to rent short-term on AirBnB. You can put 5% down with a conventional loan, which will be more attractive to sellers.

Best,

Jon

Dan Schweit · Answer

@Mark F.

There are certainly landlord/tenant laws that are not in your favor, so there could be some sort of rent control issue that is effecting the rents you’re seeing. I’ll ask if anyone I know has anything specific that cuts to the point. Also, as per my first response, neighborhoods can vary widely from street to street. So you could be looking at buildings in one of the lower rent neighborhoods. Hard to say exactly. If you come across something, feel free to shoot it to me and I can probably tell you what class of neighborhood your looking at.

Todd Rasmussen · Answer

@Mark F.

If you are set on selling in five years and are handy enough that timeline gels with a live in flip, you might get more out of doing that in a larger SFH, than just by reducing living expenses in a house hack. The further you buy from LA, the more fluctuation you'll see if the market dumps at all.

I have a suspicion you are working in or around Long Beach? If so, you might find a commute from the Norwalkish area to be less or similar than your culver city to la corridor. Assuming you can float housing costs in the interim, the right live in flip might end up more profitable than househack. Make sure you figure selling costs into your analysis, run the numbers for all the scenarios you have and pick the best one financially that you can live with.

Mark F. · Answer

Thanks for that info and all i've seen seems to support this. Looks like we'll rent for a year and get the lay of the land then look into buying a multi or SFR with an attached unit for airbnb possibly. I'm in law enforcement so the gang issue would not be good! I appreciate it.

Rick Albert · Answer

Hey Mark,

A couple of thoughts/questions for you to answer as a fellow transplant and 2x house hacker/real estate agent here in Los Angeles:

1. What part of Los Angeles will you be living and what lifestyle do you want?  That plays a role.

2. Some people mentioned the unpermitted guest houses and using them for Airbnb.  As someone who has worked with a developer over the last decade, I would be cautious of this.  First of all, Airbnb might have guidelines against this and if they find out may shut you down.  The second, many use handyman who don't know what they are doing/or just do enough to get by and if one neighbor decides to call the City, you are screwed.  They are liabilities, not assets.  I've actually heard of appraisers give negative value since they assume that it is going to cost money to rectify.  If the City catches wind (low risk but still exists), you would most likely get a citation and need to correct it.  Each inspector is different.  Some might just have you open up a few holes so they can check the plumbing, etc and others might make you tear everything out.  I had a client who converted a rec room (permitted space with 1/2 bath) into a full blown Accessory Dwelling Unit thinking it would be cheaper than from scratch and the City made them do so many changes it cost just as much as if they started from the beginning with the garage.  LA is very different than other parts of the country when it comes to permits.

3.  If you are thinking of selling the property in 4-5 years, focus on growth areas.  We can make certain assumptions about appreciation, but no guarantees.  However you can make some safe bets (such as what is mentioned above).

Happy to chat further if you would like.

Best,

Rick

Mark F. · Answer

@Dan Schweit Thanks for that insight. I've done a quick overview of CA and LA laws to get an introduction. The statewide and city rent control I'm sure would have something to do with it then. Thank you for the info on street to street. Def seems to be a trend mentioned in this thread. I think we will rent for the 1st year then I'll have a better idea how many years I'll be there and the lay of the land.

@Jon Schwartz Thank you for that info, very informative. Here in NJ we have kind of an opposite deal, some rent control (none in my area) but you can't boot tenants at the end of their lease so it's tough to get rents up to market unless people leave on their own accord. I will google the RSO, I know I saw that in my brushing up on LA/CA tenant laws. Thanks for that insight on the neighborhoods. It's a struggle in my head as if we get a rental at only $2500 or so and with our salaries, do I take on a multi or just ride a rental out for number of years. Ah yes, the FHA loan. I can see why that may be an issue especially in a competitive market. I'm def handy in a lot of areas but I'll have to look for other loan options as well. I assume in CA the usual % down is 25% on 2-4 owner occupied loans? My mortgage guy is based out of NJ so I wasn't sure if there was any regional specific owner occupied loans. Thats why I shot out the FHA loan, I've used my VA loan on my current property. That is a very interesting nugget on the airbnb side. I've stayed in plenty of them, so are the SFR with converted units and non permitted considered okay by the city? And are they called ADU's? And I assume they have this listed in the listing? I would consider that if it reduced our mortgage, especially with 5% down.

Mark F. · Answer

I do know where I'll be working, and my SO says I cant rely on google maps to tell me what really is the time. It most likely would be around 10 to 15 miles, which like you said will probably be an hour. Luckily I don't have to worry about parking and I'll have a work vehicle. Yikes, that bad huh? Great.

@Todd Rasmussen Thank you, I'll keep that in mind. I have done a live in flip once and I was lucky (and clueless) and rode the appreciation wave. I am not working near Long Beach, near downtown LA. I assume that's not close in the realm of LA (30 miles away so I figured that might as well be on the moon).

So I'm moving to LA, rent or HH?

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