How much cash flow (per unit) would be a 'good deal' in LA?

Question

I understand cost paid per unit can vary greatly by the location in which you are buying.  I live near Los Angeles and have an opportunity to buy a 4-plex building that I would REALLY appreciate feed back on from seasoned investors.. is this a 'good deal' or not?  I have heard Brandon Turner say he wants to hit $100 per unit in monthly cash flow, for property in/around Los Angeles, is that a good target?

Here are the facts that I'm needing advice on...

4- 2bed/1 bath units.   (no immediate required repairs, all units rented).

$656,000

owner pays:

electricity - $60 per month

Sewage/water - $320 per month

Insurance - $125 per month

Taxes - $500 per month

Garbage - $60 per month

P & I - $2570

At these variables, (not including assumptions such as vacancy rate, capital expenses & maintenance/repairs) that is 8.23% cash on cash return with $924. monthly cash flow.  I don't know how to consider 'depreciation' ...

Any thoughts from anyone on this would be a good starter or not?

THANK YOU!

Ali Boone · Answer

I think I'm totally missing it....did you list the rental income somewhere? Can't do the calculations without that. And as far as including vacancy and repairs and such, you definitely should because those will happen, no way around them. But if you are still getting $100/door with those included, you're doing pretty well for LA. As far as expectation in LA, I'd consider any positive cash flow good. It's hard to even find that. If you do find it, and if it's freakishly minimal (likely), don't forget about the tenant laws in CA which can end up costing you, the landlord, a lot of money.

If you are set on buying in LA, you have to look for at the appreciation play because cash flow isn't much of a thing around here. I've always bought out-of-state because of it (I live in Venice). But if cash flow is your game, you're going to be hard-pressed here.

If you want to shoot over the income numbers (unless I'm totally overlooking them...possible), I'll run  some calculations for you and see what I come up with.

Adam Phebus · Answer

Hey Account Closed said, our property tax in LA is about 1.25% Ad Valorem, meaning it's based on the value of the transaction. Your figure seems low, so maybe it's the tax the current owner pays which will be reassessed upon transfer, or perhaps there is some tax incentive such as historic preservation?

Here is a link to the IRS page on rental property depreciation: https://www.irs.gov/publications/p527/ch02.html

Consult your CPA to understand what impact this will have on you specifically.

Good luck!

Account Closed · Answer

thanks for the replies !!

Tim, $60 a month of electricity is what the landlord pays (4 outside lights that come on at night and the electricity in the laundry room for a washer & dryer).  all units have their own gas/elec meters and they do pay their own utilities.

In my request for advice, I realize now I didn't state my question very clearly.  The current income on the building is $4600 total.  (Each unit varies a bit, but totals $4600).

If I include 3% vacancy, 5% maint/repairs, and 3% Cap Exp... My monthly cash flow could be as low as $100 per unit.

If $100 per unit cash flow isn't such a good deal (even when funding vac, maint/repairs & cap ex, what is the per unit/per month $ I should be looking for?  I won't be needing to 'live' off the cash flow from this building and I have zero experience with what depreciation will do for us...??

Bram Spiero · Answer

Assuming the numbers you provided are representative of reality (specifically the taxes) and adding my more conservative assumptions for vacancy, repairs and capex (10/10/5). This place would still cash flow as long as you don't put property management in place. Once you do, you're likely to be under water.

Manolo D. · Answer

3/5/3 is too low for LA. You'll have appreciation anyways (if market rises) if you have 100/unit or even break even.

Tim W. · Answer

How is electricity only $60/month in California? When tenants dont pay utilities, they rarely care how much they use.

Maggie W. · Answer

1. My experience as a landlord here in L.A. is that your maintenance and repairs will be an average of $100 per unit per month (on an old property like my duplex). Some months or even years, nothing: then $1,000 or even $9000 all at once. It will vary depending on whether they're at market rent or enjoying a low rent rate (they ask for more piddly repairs when paying high rent. My tenants who I could charge more, they try to fly under the radar and don't ask for much).  Anyway, never assume you'll have no repairs, it's the road to ruin.

2. Check your tax estimate. I pay $500 a month in taxes on a property I got for a lot less than $656,000. Isn't the tax here 1.25% with a 1.25% raise per year? even at 1%, your tax based on the purchase price would be more than $500.

3. 8.23% ROI before vac, cap ex and maint. is a risky margin. But your other benefits might make it worthwhile, in your particular case, as you mention. Ask your tax lady. And ask her this too, remember all the depreciation benefits you take over the years, you have to 'pay back' when you sell the property. I learned this to my chagrin this year.

Good luck!

How much cash flow (per unit) would be a 'good deal' in LA?

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