All Forum Posts by: Daniel Haberkost

Jason,

You're asking all the right questions. As an Angelino who decided to invest in LA, lemme share some thoughts.

Firstly, I don't mean to sound like a Socal supremacist, but you really have to take advice from out-of-staters with a huge grain of salt. Midwesterners have no idea what the LA market is actually like. They look at our prices and rent control and think, "No way!" In reality, LA's pricing and rent control create incredible long-term investments. I would much rather hold a property in LA for ten years than in almost any other city in America (and other investors agree, which is why the pricing is what it is).

Also, before getting to the meat of it, I gotta tell you that my main goal is very much like yours: I've set a goal of "retiring" in 10 years and living off my rental portfolio (until I start pulling distributions from my retirement accounts, too). I've been maxing out my IRA accounts (I have a SEP IRA as an owner/sole employee of a C Corp) for the last four years, and now I'm focusing my savings on real estate.

So the first thing to state about the LA market is that it's expensive. If you can't afford a down payment in Los Angeles, there's no choice but to go out of state. That said, the median home price in LA right now is $794K, and the minimum down payment on such a home, owner-occupied, would be $28K. So if you have the funds to invest out-of-state, you have the funds to househack in LA -- and I think househacking in LA is a fantastic first move.

Why? Because LA's longterm annual appreciation rate is 6.3%. Even if you bank on half that, utilizing leverage, just househacking in LA is quite profitable.

The best approach for a neophyte (I hate the word "newb") investor in LA is to househack a fixer-upper, either a SFR or a duplex. For contrast, if you buy a fixer-upper in a Midwest market to turn into a rental, you might spend $30K on rehab and increase the value of the home by $40K. That's a $10K gain in equity -- woohoo! But if you buy a fixer in LA and spend $30K on the rehab, you'll likely increase the home's value by $60K or $80K. Because LA property is expensive, improving it creates more gain.

Personally, I chose to househack a duplex outside of Hollywood. I renovated the building before moving in to force some appreciation. Now my tenant pays most of the mortgage, I live for much less than I did before, and I'm building lots of equity for down the road. My plan is to build equity in LA for several more years before redeploying it in out-of-state, cashflowing assets.

Oh! And that reminds me of an important point about househacking in LA: you can't use the same metrics as Midwesterners! Househacks don't cashflow in LA, but that doesn't mean they're bad investments. Rent is SO HIGH in Los Angeles that if you can cut down your living expense significantly, you're way ahead. What's better for your bottom line: an investment in the Midwest that provides $300/month in cashflow or a duplex househack in LA that saves you $700/month in living expenses?

So let's answer some of your questions specifically now:

I "left" LA during my research phase in pursuit of a "more promising" market, but the math behind the numbers led me back to LA. I considered several promising markets in the Midwest and Southeast, even took a four-day trip to check out my favorite market at the time, Fayetteville, AR. But as Brandon Turner has said, "Cashflow gives you freedom, but appreciation gives you wealth." Since you're already earning a good income, I suggest you invest for wealth.

Luck securing an entry property... It's not luck, Jason! I do a couple of things to find properties that work: I use Census data to confirm my research into LA submarkets; when you're househacking, you want to live where you want to live, but it's good to have data backing your hunch as to what neighborhoods are appreciating faster. I keep several maps handy for that. I also run the numbers extensively, including modeling out projections for years down the road. I haven't found a good online calculator specifically for househacking, so I built my own and update it often.

Words of wisdom for finding a deal: believe it or not, if you're househacking in LA, there's no place better than the MLS. I'm on several wholesaler's email lists, the their offerings are really only appropriate for pro flippers. (I can't explain more if you'd like.) I also did a mailing of my own before finding my duplex on the MLS. I got a very good response rate, but because I was househacking, I was picky. Too picky. So for me, it's a numbers game. The task is to underwrite every listing in the area that you're considering. Run the numbers on everything to find a better "paper deals" -- that is, the few deals that actually make a lot of sense as an investment. Then dig deeper into those listings to find additional sources of equity creation, like: a garage that can be converted to an ADU down the road, a decrepit but easily improvable facade, a large 2-bedroom that could be converted to a 3-bedroom down the road, etc.

Where in LA do you live and work? What neighborhoods interest you here?

Best,

Jon

Hello everyone,

So this is just kind of a fun discussion piece that was spawn out of curiosity. I’m currently waiting on a deal to finish up so I can invest in a flip in Florida . In the meanwhile I’ve come across what I think to be a great deal. It’s a 300k property estimated 50k rehab sitting on 4.7 acres in an area that houses just don’t sit on an acre much less 4+. There’s not a lot of comparable because of this but the house is a decent size 4 bed 1 bath (rehab estimate includes adding another bathroom). Unfortunately I’m not able to do this deal myself right now but I do know two great investors so if they wanted to jump on board I know they would allow me a piece of the action. So I pitched it to them, but I also told them that I believe we should have the land surveyed splitting it into 4 parcels. The property is allowed 1 unit per acre. Also there’s a lot of new house development popping up in the very close vicinity. I suggested we rehab the house split the land up and sell the 3 remaining parcels of land and then of course the house on the 4th parcel. I’m currently going back and forth with them right now to see if we can do this deal. I would play the role as project manager basically doing everything considering they’re out of town. However my entrepreneurial investor mind is reeling now, I’m wondering what if we built on the 3 parcels brand new homes. Just one street away there are brand new communities popping up selling new homes (with no yard space typical neighborhood) for the mid to upper 200s. I’ve never studied new construction. I’m just wondering in Florida what is the average cost to build a new home via contractor? Obviously I know these numbers vary immensely on a lot of variables but I am curious into this side of investing.

Thank you