Will the Housing market in L.A start rising again?

[curiosa]

I've documented my home search during the past 2 years by keeping all of the listing flyers. I have noticed that prices in the west L.A area for 2-3 bedroom condos have dropped by 15-20k for the exact same properties listing just a few years ago. Interest rates are rising however it will be interesting to know which way prices go being the california economy seems to be heading downward due to more job cuts being handed out. 800 to possibly 1000 city workers to be handed out pink slips due to city council job cuts.

[DowntownVentura]

Originally Posted by SOON2BNSURPRISE

I was reading an article that had to do with the relative cost to rent or buy a similar home. The author noted that a good comparison happens when you take the sale price of the home and devide that by 20. If the end result is the same or close to the yearly cost of renting a home then prices are about even. The lower the number the cheaper it is to buy, the higher the number the cheaper it is to rent.

That method is called GRM or Gross Rental Multiplier. Top notch "A" properties usually have a GRM higher than "D" properties. 20 is too high these days. I just put in an offer last week with a GRM of 8.3. It is an A- property.

GRM is only a high level initial scan sort of measure. It doesn't factor in costs so different calculations are used to see how profitable a property will be.

[SOON2BNSURPRISE]

Originally Posted by DowntownVentura

That method is called GRM or Gross Rental Multiplier. Top notch "A" properties usually have a GRM higher than "D" properties. 20 is too high these days. I just put in an offer last week with a GRM of 8.3. It is an A- property.

GRM is only a high level initial scan sort of measure. It doesn't factor in costs so different calculations are used to see how profitable a property will be.

Thank's for mentioning that. I am still learning how that all works. As you can tell I couldn't give that great of explanation or had the knowledge to understand how it works. I did notice that in the North End of Oxnard where I live we could purchase a similar home with a GRM of 12. I was thinking that was good. We also love the home and the area it is in.

[Mr. Fantastic]

The prices in LA will rise when people want to lose their entire life savings again.

[DowntownVentura]

Originally Posted by SOON2BNSURPRISE

Thank's for mentioning that. I am still learning how that all works. As you can tell I couldn't give that great of explanation or had the knowledge to understand how it works. I did notice that in the North End of Oxnard where I live we could purchase a similar home with a GRM of 12. I was thinking that was good. We also love the home and the area it is in.

GRM of 12 is indeed good especially in a nice area such as north Oxnard.

The reason GRM's are only a high level indicator as they do not factor in costs. In a condo, most of the costs are neatly packaged in the HOA dues and the calculations are easier. But even with a house, it is important to factor in all the short and long term costs when calculating your profits.

What is customary is to take your annual profits (called Net Operating Income) and divide it by the purchase price getting your Capitalization "Cap" Rate. It is easiest pictured if you pay cash for the property, the Cap Rate is simply your return. If you buy a property for $300,000 and clear $24,000/year, your cap rate, or return is 8%.

So while the GRM is purchase price divided by gross rents (lower is better) the cap rate is profit divided by purchase price (higher is better).

There are two other ways to make money in real estate investing

1. The property appreciates. This normally follows inflation. I understand the last few years have been pretty wild but if you do long term trending against inflation, you will see the pattern. There is lots of talk these days about how prices will plummet because of this and that (whatever reason, it doesn't matter) . They may all be good reasons for the short term but it will always go back to inflation. The cost to build a house is from materials and labor that both adjust for inflation. When the cost of existing houses becomes less than the cost to build a new house, people stop building houses. At some point you get housing shortages and prices start going back up. (this presumes that people want to live in the area). This is being felt in the multi-unit dwellings now.

There is an additional point to make regarding this. Land factors into the costs quite a bit. In areas where there is limitless land (parts of Texas, the Inland Empire, etc) the value of a house should not go much beyond what it costs to build because the land does not have much value. In areas where there is limited land and people want to live, the value of the house can greatly exceed the cost to build a new one. It might only cost $200,000 to build that $5,000,000 on the sand in Malibu.

2. There are tax advantages. Not nearly as good as they once were but they are still there. In the example of the $24,000 profit above, about $11,000 of that would be deductible. So you would really only be declaring $13,000 as (passive) income and $11,000 is tax free income.

The example I described is all very good. 8% immediate return (4.33% taxable and 3.67% tax free). Plus a hedge against inflation as the value rises with inflation. In practice, in California, it is hard to get 8% Cap Rate now, 6% or so is a good target.

[scarling]

L.A City council has just announced a 3% rent hike for apartment buildings constructed before 1978 that have six or more units between now and Oct. 31 regardless of rent control. This may be a good indicator of housing market prices as well later this year.

[drshang]

Originally Posted by scarling

L.A City council has just announced a 3% rent hike for apartment buildings constructed before 1978 that have six or more units between now and Oct. 31 regardless of rent control. This may be a good indicator of housing market prices as well later this year.

It isn't a required 3% increase, it is simply an option for rent controlled apartments to increase rent by the "normal" 3% they are normally legally permitted to.

[DowntownVentura]

Originally Posted by scarling

L.A City council has just announced a 3% rent hike for apartment buildings constructed before 1978 that have six or more units between now and Oct. 31 regardless of rent control. This may be a good indicator of housing market prices as well later this year.

Originally Posted by drshang

It isn't a required 3% increase, it is simply an option for rent controlled apartments to increase rent by the "normal" 3% they are normally legally permitted to.

I haven't been following this too much but I see it on the Los Angeles news. From my understanding on the ordinance, the city decides how much the landlords can raise the rent, between 3% and 4%. (used to be between 3% and 8%) Now they want to say, well, between 3% and 4% except when we think it should be less than 3%. If inflation goes up 10% a year, will they say to the tenants, the 4% ceiling is too low, we authorize a 10% increase this year?

One of the landlords brought up a good point, if they prevent the 3% increase, the market value is reduced. Therefore it should be reassessed and lower property taxes will result.

This is all politicking, and nothing to do with what is right. Here is the best quote

“Tenants have been subsidizing the costs of landlords and keeping their businesses alive for far too long. Now landlords may have to actually do their jobs and figure out ways to use money wisely instead of raising rent to solve their problems,” Blainey said.

from LA City Council sends rent control ordinance back to committee | 89.3 KPCC

Say what?? Tenants aren't supposed to keep the business alive? Why doesn't LA set the prices that retail stores can charge for products. After all, consumers have been keeping businesses alive for far too long.

I have never seen rent control work. If landlords can't make a profit, they will do the minimum amount of upkeep as required by law.