After years of living in Los Angeles, many long-time locals decide to deepen their roots and put money into an investment property in the City of Angels. Buying an investment property opens up alluring opportunities for passive income and potential appreciation.
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Buyers purchasing a single family home to rent out or creating a portfolio of condos and multi-family properties have to prepare for the nuances of investing in real estate.
To help aspiring real estate tycoons investing in the Los Angeles housing market for the first time, the team at Prevu Real Estate has outlined the tips below to help their investing journey.
Layout your real estate investment goals
Not all investment properties are the same, just as each LA investor has different reasons for entering the real estate market.
A first-time buyer may consider a multi-family building over a condo or house as they can live onsite while the income from the other units service the mortgage. Whereas, some Los Angeles homeowners might simply purchase an investment property in pursuit of appreciation over the long term.
Experienced and novice buyers alike must ask if they want a turn-key property ready for renters or if they will rehabilitate a fixer-upper. Other investors will purchase real estate to fix and flip a building for resale or fix it with the intent to increase rental prices after construction.
In addition to maintain cash reserves for renovations, these buyers generally need construction expertise when inspecting the bones of a home. Buyers can rip up the carpet and refresh well-preserved hardwood floors to increase the value of a property and increase rents. But missing out on corroded pipes in an aged bathroom can wipe out investors if the pipes burst and there is not enough money budgeted to cover repairs.
Start budgeting early
The allure of buying an investment property in Los Angeles is apparent on the financial statement. One or two units service the debt, while other rentals generate extra passive income.
Regardless of the unit type and long-term goals, LA locals can hamstring themselves if they do not budget enough capital before closing a deal. Through proper budgeting, buyers can prepare themselves for all costs incurred at closing and those generated after the transaction.
For instance, someone buying a property all-cash still has to account for closing costs and have money aside for expected renovations, but a buyer using financing must prepare differently. Financed buyers have to budget for a down payment, closing costs, a renovation budget, and renovation contingencies.
Unless you have the skills, many real estate investors must budget for the services of a reliable contractor. Units need refreshing after each tenant requiring property owners to form a tight relationship with a reliable GC.
Owners have to budget for their labor, supplies, and an extra cushion of cash for emergencies. Create a fair payment plan and maintain the relationship, as any delays or sloppy work on their part can result in the loss of thousands of dollars.
Buyers considering financing have to keep carrying costs in mind when there are no tenants in a unit. Utilities, property taxes, and homeowners insurance must all be paid throughout this time, so buyers must have a general budget prepared.
Buyers can confidently refine their investment goals by knowing the "back of the envelope" math, as it provides a template showing if a listing fits their price range.
Work with brokers that provide a commission rebate
Building up reserve capital for an investment into a parcel of Los Angeles real estate is no easy endeavor. Buyers pursuing multi-family buildings need to save up funds for repairs, renovations, and any other emergencies that may arise.
LA real estate investors can save money by shopping across mortgage lenders to find a loan that fits their investment. But Los Angeles buyers can also save money by working with the right broker.
As buyers interview different agents, they should ask what neighborhoods they operate in, how many deals they’ve handled, and if their brokerage offers a commission rebate when a deal closes.
Commission rebates are legal in 40 states, including California, enabling a buyer’s agent to pass along portions of their commission to the clients they represent.
Buyers can net sizable savings by partnering with brokers that provide commission rebates, providing much-needed funds for future repairs or additions to a property. These funds can also bolster budgets as owners become real estate investors.
Figure out financing
First-time buyers purchasing an investment property they will live in qualifies for different financing than buyers purchasing a second property that is purely an investment. In general, mortgage financing for investment properties is at a slightly higher interest rate than mortgage rate quotes for a primary residence.
First-time buyers can use FHA financing to minimize the size of a down payment and secure a reasonable interest rate. Buyers using a conventional loan will need to put more money down at closing to secure a lower interest rate on monthly mortgage payments.
Once a buyer nails down a reason for getting into the market, investors have to learn about the particulars of each distinctive LA neighborhood they target.
Monitor the LA market before buying
Whether you invest in a condo near Downtown Los Angeles or find a multi-unit building in Santa Monica, research helps buyers discover good investments in an ideal LA neighborhood.
Savvy real estate investors must understand the average property prices and have a pulse of the rental market. Monitoring the market means buyers have to think of appreciation potential, community development around businesses, and general access to the region. Buyers can pour through listings, study descriptions, and use the available photos to discern whether a potential purchase requires fixing up or is immediately ready to be leased out. Rental properties require occupancy to remain profitable, and every day spent on repairs is a loss of income.
From there, take a tour of the neighborhood via street view to check out the location of local groceries, shops, and boutiques in the region. Investors want to be in the details so they know when the perfect Los Angeles property hits the market.
Compile a pro-forma financial model
After budgeting for expenses after finding a property, buyers can tally up what to expect in rental income if they close on the building. A pro-forma is a financial model buyers can use to create quick projections of income and costs over time depending on different inputs.
First time investors should ask their broker to walk them through a sample pro-forma. Fledgling investors should also ask agents to explain how to account for the value of a portfolio and the cash-on-cash yield. These models will help buyers determine rental growth, vacancy and collection loss, loan and mortgage terms, rates, and other variables.
Nothing is set in stone when you purchase a property. The nearby amenities fluctuate in upkeep and neighborhoods wax and wane in popularity. Investment properties are illiquid compared to residential owners who can list their homes and move out with ease.
A pro-forma can help guide investors on how to capitalize themselves ahead of issues like wear and tear in a unit, a tenant not paying rent, insurance and taxes going up, and municipal problems with water or sewage.
While it can not divine the future, a Pro-forma will help buyers prepare for disaster scenarios that may or may not happen years out.
Get ready for property management
An income property is not like investing in a stock, bond or mutual fund. You can’t easily log in to your online account to check on a property’s performance. If an air conditioning unit goes down, owners need to work fast to get the HVAC unit fixed up for tenants baking in their hot LA dwellings.
Buyers stepping into the Los Angeles real estate investing space stand to generate sizable capital from rentals, but that income comes at the expense of property management. Each buyer approaches upkeep differently. But all buyers should lay out a plan as they organize their long-term goals for the property.
Investors that live onsite have to maintain the property by taking out the trash and mow the lawn if there is one. There will be a lot of time spent interfacing with renters, and if one moves, an owner will need to turn the unit around quickly for showings. Investors that have a handyperson on call that you can trust comes in handy.
Conversely, investment buyers generally hire a property management company. This company manages the above mentioned tasks for a fee based on the fixed percentage of rent rolls or a fixed monthly fee. But building the right network of local experts requires interviewing a variety of service providers and contractors to pick the most reliable workers.
Purchasing an investment property is a great way to generate passive income, and it is possible for first-time buyers and experienced property owners alike. Owners can easily get a return on investment, then unlock the value of a home by reinvesting income into renovations, increasing the appreciation of the building.
Interested in buying your first investment property in Los Angeles? Browse listings and learn how much you can save with Prevu’s Smart Buyer Rebate.
Prevu Real Estate, Inc. is a licensed real estate broker in California, license number 02134758.
I'm an experienced real estate professional with a deep understanding of the Los Angeles housing market and investment properties. Having spent years navigating the intricacies of real estate in the City of Angels, I can provide valuable insights and advice for both novice and seasoned investors.
Now, let's delve into the concepts mentioned in the article:
Layout Your Real Estate Investment Goals:
- Investors should define their goals, whether it's generating passive income, long-term appreciation, or a mix of both.
- Consideration of property types like multi-family buildings, condos, or single-family homes, each with its own advantages and considerations.
- Decision-making regarding turn-key properties or fixer-uppers, understanding the importance of construction expertise for renovations.
Start Budgeting Early:
- Emphasis on the need for proper budgeting before closing a deal.
- Different considerations for all-cash buyers versus those using financing.
- Budgeting for renovations, maintenance, and the importance of forming a relationship with a reliable general contractor.
Work with Brokers Providing Commission Rebates:
- Exploring ways to save money, including commission rebates from brokers.
- Importance of researching and selecting the right broker, asking about their experience, and whether they offer commission rebates.
Figure Out Financing:
- Distinction in financing for first-time buyers living in the property versus those purchasing a second purely for investment.
- Exploring financing options, such as FHA financing for minimizing down payments.
Monitor the LA Market Before Buying:
- Researching and understanding the specific neighborhoods in Los Angeles.
- Considerations for property prices, rental market conditions, community development, and overall access to the region.
Compile a Pro-Forma Financial Model:
- Creating a pro-forma to project income and costs over time.
- Understanding cash-on-cash yield, rental growth, vacancy and collection loss, loan and mortgage terms, and other variables.
Get Ready for Property Management:
- Recognizing that managing an income property is different from other types of investments.
- Exploring property management options, including maintaining the property personally or hiring a property management company.
- Importance of building a network of local experts and service providers.
In summary, successful real estate investment in Los Angeles involves careful goal-setting, budgeting, financing consideration, market research, and proactive property management. Engaging with experienced brokers and utilizing financial models can further enhance the investment journey. If you're considering buying your first investment property in Los Angeles, exploring listings and potential savings through Prevu’s Smart Buyer Rebate could be beneficial.