Mutifamily Tri in Los Angeles. Deal or No Deal?

Question

Hello BP community,

I could use your help on a potential property purchase in Los Angeles. All responses welcome (yes/no response & detailed responses). The property is a triplex with converted garage (unpermitted) into a one bedroom with kitchen and 1 bathroom. I plan on co-habitating one house (3+1) and renting out the rest.  My current rental cost ($1,750/month), own zero properties, wish to stop paying rent, and purchase my first rental property.  Cash-flowing properties in LA are nearly impossible to find.  Do you think this is a good deal in the LA market? It seems like a good deal from the perspective of paying minimal rent ($185 out of pocket rent).

Accepted price: $700,000 in City of Commerce. Combined Rents: $5,000/month (based on 3.9% int rate). Property mix is 3+1, 2+1, 2+1 & converted garage (1+1).

Monthly Expenses:

• P & I (based on 10% down): $2,958
• HO insurance: $130
• Mortgage insurance: $394
• Property tax: $741
• Vacancy and property management: 5% of rents (managed by me): $290
• Repairs: 1% of purchase price per year: $6,300 ($525/mo)
• Various city expenses: (trash, water, etc) $150

P&I (plus PMI): $4,220

Total expenses/month: $965

Monthly rents of $5000 - $4,220 - $965 = cash flow per month -$185 (this is my rent while co-habitating one house. total rents will come up to $5,700 when I move out).

What am I missing? Is this a good long term deal?

I appreciate everyone's feedback!

SA

Lee Ripma · Answer

@Sergio Avina

Make sure you dial in the expenses of water and garbage (I made some assumptions). The units may not be submetered so you might have to pay more utilities than you're thinking, make sure you account for that. If you self manage and the place is fully rented with a 5% vacancy you have a positive cash flow of $638. So if you take off that 1+1 you'll have -$562 in cash flow. If you take off that 3+1 you'll have -$1,162. If I were you I would live in the smaller unit and maybe airbnb it when you're out of town. You could also think about making one of the 2+1 into an airbnb if you think you can get more than 1500 a month and you don't mind managing it. You might be able to get longer term airbnb folks in there, maybe someone who needs the place for a month or two and then you can get a lot more for the unit then if it were long term. The appraisal will likely come back at whatever you're paying for the place, so 700k (appraisals are total BS if you ask me).

You say you want to get out of renting BUT you're going to have to plunk down at least $600 a month in CapEx and repairs (make sure you're saving it, could be even more than that, folks on here will say in SoCal its 400/mo/unit). If you live in the unit that you want to live in then you'll be negative $1162 a month. Your 70k in down payment amortized over 5 years is an additional $1166. So you're losing $2,929 a month to buy in place in LA and your rent is far less than that without the hassle (and may even be subject to rent control). So unless you have appreciation in this deal then it doesn't make a whole lot of financial sense. It might make emotional sense. You want to own something, you want to learn how to remodel yourself, it feels good to say you own a house, etc. The tax deductions won't add up to that difference between your current rent of 1750 and 2,929 a month (1179 a month or 14k a year). The math I just did about is why I pay 2800/mo to rent an apartment in a nice neighborhood in LA and buy rental properties in Kansas City.

Property in CA and LA is not the same as in other parts of the country. We are in an appreciation market. So do you see good things in this area? Do you see more demand for rentals in the area? Do you believe in the City of Commerce? If you're willing to bank on that appreciation, then this could be a buy.

I have the BP analysis this is based on but it's in a pdf which it isn't letting me link. PM me and I'll send it to you.

Lee Ripma · Answer

@Sergio Avina

There is a push by the City of LA (not sure about the City of Commerce) to get unpermitted units legal to provide more housing. There might be a problem renting out that unpermitted space and there might be a problem when you go to close or down the line. The City can legally make you take it out. Could you live in that space instead and rent out all the legal units? Just a thought.

You'll probably self manage but if you want PM use 14%. 8-10% is the fee that they take of your gross rents but the costs are higher. Vacancy is probably fine at 5% in this area.

I think east of LA has a lot of potential for appreciation. Is there rent control in the City of Commerce? Have you thought about making at least one of those units a short term airbnb?

How much are you putting down, 10%?

Is there any value add?

Are there any renovations needed?

What is the rent on each unit? Could you up that rate by doing short term?

Susan O. · Answer

https://caanet.org/rentcontrol/

Above: Here's a good resource for updates

https://www.nmhc.org/Content.aspx?id=7244

It's being pushed harder into Los Angeles and Santa Monica wants newer laws.  Contact your local reps state/city

Walter Roby jr · Answer

Don't combine the Vacancy and PM as 5%. They are two separate costs that should be accounted for individually. Sorry but to clarify, is the property permitted as Triplex without taking the garage into consideration? And is there a way to separately bill back each unit for utilities? (sub-meter)?

Account Closed · Answer

Is there any room for future appreciation here? What does the rest of the neighborhood look like? Multis or SFRs?

In general, considering the small amount that you'd pay out of pocket, I'd go for it. Many options here. Get that unpermitted area permitted. Even if not, as other pay down the debt, the PMI can be refinanced out. Good opportunity to get your feet wet as a property manager. Good luck!

Sergio Avina · Answer

@Lee Ripma: Thank you, for providing a ton of beneficial feedback!  Your analysis has me reconsidering the deal.  There one more bit of info I may have left out -- I'll be house-hacking the first unit with two co-habitants who will each pay $500/room. Perhaps I should get BP Pro to analyze the deal with the analytical tools on here. I'll PM you in a short sec. Thank you very much for taking the time to provide feedback and taking the added step of analyzing it with the BP tool!!

Sergio Avina · Answer

Hi @Susan O.: thank you, for sharing the resources !

Sergio Avina · Answer

Hi @Lee Ripma, thanks for your feedback. It's good to hear the City of LA is making positive move toward expanding housing. This property fell out of escrow a couple of months ago due to loan issues with the potential FHA buyer. However, it had gone through appraisal, which process was completed.  I'll have a copy of the appraisal this week. It seems that escrow could close fine with the unpermitted unit -- hoping its not an issue down the line.  I'd be willing to make a sacrifice and live in the unpremitted unit for a short while (12-18 months).

Appreciate the explanation of PM rate.

The City of Commerce is a unique city as it's predominantly made up of industrial/commercial businesses.  There's no rent control.  I hadn't seriously considered airbnb, but i'll definitely consider it. I think it's a good neighborhood for it as its a quiet, private/safe street.

The down payment will be between 5-10%.

The value add could be adding a restroom to the 3+1 unit and expanding the converted garage into a 2-bedroom unit as there are two single car garages next to each other. The second garage has been used as storage and it already has drywall.

Only reno needed are replacing two water heaters, painting one unit, and replacing one window.

Rents are: 3+1 ($1800)

2+1 ($1500)

1+1 ($1,000) or 2+1 ($1,200)

Mutifamily Tri in Los Angeles. Deal or No Deal?

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