Originally posted by @Marc Cohen:
So big wide world of real estate investing is giving me many ideas and options but I thought no better place than Bigger Pockets so get real insights.
Currently live in Los Angeles and have a SFH rented locally and a property in London (my hometown). The LA market is so hot but rare/unable to make more than 0.5% yield or exceed 4% cap rate.
I have gone back and forth on mfh v sfh, out of state, yield v appreciation etc... You all know the drill. I have cash deploy so the key element is to do it effectively as part of an overall strategy.
Appreciate any advice or thoughts
Marc,
I'd invest in LA if I were you!
LA and all of California gets dragged through the mud on BP. Midwesterners attack our low cap rates, but the reason our cap rates are so low is because our real estate is so desirable. Anybody here who has the capital to invest here does; everybody who doesn't have the capital to get into this market writes it off and blames the cap rates or rent control or liberal state legislature, etc.
Current yield matters in your typical Midwest market because there's no rent control and barriers to new construction are few. So most buildings are already generating market rents (and if not, they're the unicorn-like "value add" opportunity), and the game is to find good yield and ride it out until another part of town is more popular. Midwesterners probably wouldn't describe their investment strategy in such terms, but who are they kidding?
In LA, current yield is secondary to the future value of the building, not just in terms of natural appreciation but in terms of rental upside. It's not uncommon to find a building with rents 50% below market. Because of our low cap rates, when market rents are achieved, the building will be worth 2, 3, even 4 times what you paid.
New development is also very difficult in LA, and all of the buildable land has been built. These aren't bugs, these are features!
This is what you should do with your $1M:
Buy a commercial property in a gentrifying LA submarket. Metro LA has a population of 13M, more than the entire states of Arizona and Nevada combined. LA is not a market; it's 1000 different submarkets. I focus on identifying which submarkets demonstrate the most promise for rent growth and appreciation.
Next, hire a "cash for keys" negotiator. Yes, these people exist in Los Angeles. Your negotiator will be able to reach mutual agreements with some of your tenants to move out. Especially in COVID times, when many tenants are behind on rent and facing an eventual eviction, offering them money to move now might be exactly what they want. And LA's rent control ordinance regulates this negotiation, so it's actually impossible for you to take advantage of a tenant.
Next, renovate your vacated units and re-rent them at market rents. Your building will be significantly more valuable than when you bought it.
If you're aggressive, sell the building and 1031 into a new one. If you want to be less aggressive, refinance or open a HELOC to recoup some capital to put toward your next investment.
That's LA investing in a nutshell. Happy to discuss in more detail with you, too!
Best,
Jon
