Is the time right to invest in rental property in Los Angeles? (for sale)

[Thawor]

I've been monitoring rental properties for sale in various locations in Los Angeles for about a year, seeing prices coming down a bit, although not as much as in the owner/occupant market.

Does anyone have an opinion on whether the time is right now to invest in, say, a 4-plex in Los Angeles? I know there are many differet areas to consider, but right now I'm thinking about the timing as such. Rental properties are priced based on their production of income, so with both rents and prices going down, I think the question is where the rental market - and the economy as such - is going in LA. I guess this is also a question of which segment of the rental market we talk about, but generally I would not buy something that I would not consider living in myself. So I'm targeting a midrange market: attractive but not too expensive - people must both afford and want to live there.

In my opinion, the housing market in LA has been inflated, but I could be wrong. Maybe people will just keep on moving to LA, pressing prices up.
Since I'll have to finance this pretty much on loans, I'm looking for properties that will yield a regular, hopefully positive, cash flow. But is Los Angeles there yet?

[JohnG72]

I haven't seen many properties that will produce a positive cash flow as of yet. There are some very inexpensive properties out there, but rents are still declining.

[SouthBayStuff]

Hey Thawor, I am too keeping an eye out for plexes. Just before the market melted down, I was going to invest out of state, but now with the correction in place, I put my focus back in our backyard.
Assuming you are familiar with rental property's formula and proforma, Cap rate here is not very high. Average at 5-6%. The regular formula and numbers doesn't apply here.

Cash flow is tough, but break even is possible. From my own forecast, you will see more foreclosure surfacing on the market - both residential and commercial. I am a Realtor myself, I know I will be busy dealing with Short Sale flooding into the market, but there are more job problems coming our ways too, that creates more foreclosure and that will also trigger many commercial loans to go default possible. On the other note, many commercial loans will reset as well. Plenty of buying opportunities out there - 4-6-8-10plexes you name it.

[Thawor]

Originally Posted by SouthBayStuff

Assuming you are familiar with rental property's formula and proforma, Cap rate here is not very high. Average at 5-6%. The regular formula and numbers doesn't apply here.

Cash flow is tough, but break even is possible. From my own forecast, you will see more foreclosure surfacing on the market - both residential and commercial. I am a Realtor myself, I know I will be busy dealing with Short Sale flooding into the market, but there are more job problems coming our ways too, that creates more foreclosure and that will also trigger many commercial loans to go default possible. On the other note, many commercial loans will reset as well. Plenty of buying opportunities out there - 4-6-8-10plexes you name it.

Thanks for the quick responds!

Follow-up questions:
- If LA has a lower Cap rate than the rest of the country, then why is investing in LA interesting at all?
- How will these new buying opportunities be conveyed? Through the MLS, or directly through the banks?

- Thawor

[SandyCo]

From a renter's perspective, there are still a lot of vacancies out there. The bigger complexes are making all kinds of deals to get people to move in. When I was looking for a place several months ago, there were lots of repeat ads on Craig's List; you'd have to pretty aggressive with the pricing and any "one month free" deal, etc. A duplex was beyond my rental means, as most were being advertised at $1,500 - $1,700. I don't know if those prices have come down at all; I've lived in my new place for seven months now, so obviously I haven't been paying attention.

It's a very competitive market out there right now; do you have deep enough pockets to still be okay if it takes 3-6 months to rent to someone?

[SouthBayStuff]

There are a few factors I would consider.
First of all, what is your investment goal? Quick turn around short term capital gain - like flipping? Cash flow - like beat the yield in the bank? Long term cap gain - like you let your tenants pay your mortgage and in 30 years your property is free and clear??

Just be frank!! Cap rate here is never too attractive. But then I also ask myself why is it so many people here? What is attracting all these people here in LA? Is it jobs? Is it weather? Is it lifestyle? Then, do you think in the next 5-10 years, LA would still be offering all these incentive to attract people to stay and move in? Do you think this financial crisis would last in the next 5 years? If you buy this property today, what is the chance it will go up in the next 5 years?

I am not sure where else have you look to invest. Other areas might have better cap rate, but are you willing to be an absentee owner? How are you going to manage the property? Are you going to hire property manager? Are you a micro manager yourself? etc..

I am still favor of LA is because I believe in the next 5-10 years, LA will still be LA. It doesn't have enough reason for me to believe it will be a ghost town soon. As long as we still have a good number of jobs in LA, we will have good number of people to live here, then they will need a place to live.

In 2010, there will still be foreclosure flooding into the market and those foreclosed ex-howeowners will also need a place to live. Yes, there are a lot of rentals out there, and priced pretty well. But it depends on the area. Some have more than others. As you know LA has many micro-area within a city itself.

There are many sources to find different properties. Are you particularly looking for REO? Yes you can try to contact the bank directly. Likely the bank will still sell their properties through a local Realtor if that's their REO properties. Also go to LoopNet - #1 in Commercial Real Estate Online if you think you are interested in more commercial like property. (Any residential more than 4 units is commercial) If you will be living in one of the units, I suggest you should stick with 4 units or less. The loan qualification will be much easier.

Most of my plexes buying clients already own their homes and they only look for investment, so some of them preferred more units. Let me know if I can include you on a the list, I send out property information to my client periodically.

[Thawor]

Originally Posted by SouthBayStuff

There are a few factors I would consider.
First of all, what is your investment goal? Quick turn around short term capital gain - like flipping? Cash flow - like beat the yield in the bank? Long term cap gain - like you let your tenants pay your mortgage and in 30 years your property is free and clear??

Thanks again for the response!

Basically, my investment goal is long-term, meaning I'm not flipping or buying to sell, so mostly the last category; to have a free and clear property in 25-30 years, but with prospects of producing a small, regular income after, maybe, 5-10 years. However, my pockets aren't too deep, so I hope to find something that I won't have to keep putting money into to make the wheels go round, which I know might be risky. I'm not going to live there, not even in LA (except regular business visits), so I'll need to trust a property manager, I already talked to a couple.

For me, the big question is whether it's possible at all to find a property like that, and which segment of the market that is most likely to balance, i.e. having the shortest vacancies and the best rent/price ratio.

- Thawor

PS: And, yes, I agree LA will still be attractive in the years to come, but the housing market will also be affected by how the major businesses are doing. And, like other posts have pointed out: If LA housing prices get too much out of balance with the rest of the country, many businesses will just find other places to settle. So the LA housing market might, in the long turn, be an indicator of the national economy as such. DS